Over the past two months, we’ve seen one of the worst starts to the year in financial markets in recent memory. Market sentiment soured quickly as it became clearer that China’s economy is going through some structural changes, which have in turn created negative ripples in many other economies that rely on the strength of Chinese imports for growth. The sudden and massive slide in oil prices also slowed growth in many resource-based economies, Canada being a prime example. Russia, Saudi Arabia, Iran, Iraq, and many other oil producers have dropped revenue forecasts by as much as half. So where do we go from here?
U.S. mesmerized by politics
As far as I can see, the U.S. economy is the only big economy charging ahead, but will that be enough to pull the rest of us along for the ride? Having Donald Trump as a front-runner as the Republican presidential candidate will create some uncertainty, and stock markets don’t like uncertainty.
Despite a move by many Republicans to stop him, Mr. Trump keeps building momentum and winning State primaries. It looks increasingly likely that the November presidential election will be contested by Democrat Hillary Clinton and Republican Donald Trump. Most pundits had thought that Trump could never win this battle. But then most also thought he wouldn’t be the Republican front-runner after Super Tuesday either.
The smart money says this means it would be unwise to write off Mr. Trump until it’s all in the books and Hillary Clinton is moving into the White House. The further Mr. Trump charges ahead, the more uncertainty will come into play. What form this will take is anybody’s guess, but I don’t see many positives as a result, economic or otherwise.
Europe is spending billions on trying to document, house, and integrate refugees into their economies. And with more attempting to migrate in every day, fences/blockades are now going up as Europe says “enough” for now. This is a nightmare for all involved too.
Possible investor action
Precious metals and resource funds have been hit hard by all these events. Obviously, with commodity prices being so low, this creates some great buying opportunities. I think if you have the nerve to jump in while the prices are low, and you have some time to wait this out, these types of funds can see years of 30%-80% increases when the cycle of growth returns.
Be like billionaire investor Warren Buffett and buy when others are fearful. Then exercise sell discipline. If you invest, say, $10,000 and see a few good years, take out $15,000-plus and switch to something more balanced. Recognize that the remaining investment could drop by 30%-50% when the cycle goes south again.
Resource funds are usually not the funds for a buy-and-hold strategy. Buy when they are down (or dollar-cost average by buying a fixed amount on a monthly basis). Then take profits in good years, so you’re playing with “house money” if you decide to remain in the sector at all.
Courtesy Fundata Canada Inc. © 2016. Bruce Loeppky is a financial advisor based in Surrey, B.C. This article is not intended as personalized advice.
