Gold, natural gas, and U.S. defense stocks, along with long-term and floating rate bonds, are key areas of opportunity, says renowned global investment strategist Don Coxe, chairman of Coxe Advisors LLP of Chicago.
Speaking Tuesday at a seminar sponsored by the CFA Society of Toronto, Coxe warned of the imminence of rising interest rates in the U.S. and rising global political tensions as an alliance between China, Russia and Iran gathers force. On the positive, side, Coxe is excited by the prospects of Narendra Modi as the new pro-business prime minister of India, after he won a clear majority in a landslide national election last month. Coxe also foresees continuing healthy growth in China.
“Until recently, China saw growth at an annual rate averaging 9% for 30 years,” he said. “There is no precedent in history for that kind of economic growth. Now, growth has slowed to 7% a year, but that’s still huge and is based on a much larger economy. Growth in the U.S. is nowhere near that rate.”
While the U.S. was supposed to have grown by 2.5% in the first quarter, the economy actually shrank by 1%, he said.
> Increase bond exposure
Coxe has been recommending that investors modestly reduce overweight exposures to U.S. stocks and increase bond exposure. He suggested extending the duration of bonds, which he says is a short-term trade, to protect against the possibility of financial market upheaval.
“You need some long-duration bonds to protect against another financial crisis,” he said. “I’m not convinced the U.S. financial industry has totally cleaned up.”
Looking out a little further, he said the U.S. is likely to raise interest rates at some point, providing there is growth in the global economy. To do well in this scenario, he suggested investing in floating-rate bonds, but stressed they must be high quality.
He said the current price/earnings ratio of U.S. stocks, trading around 16 times earnings on average, may be in line with long-term valuations, but current growth rates are low by historical standards and stocks look expensive. If there is any rise in interest rates, the “carry trade,” whereby large financial institutions are able to borrow short-term money and invest at a higher rate in dividend-paying stocks, will no longer be profitable. A resulting reduction in margin buying could trigger a market decline, he warned.
“Increasing margin debt and a rise in the S&P index go together like Fred Astaire and Ginger Rogers,” Coxe said. “The current positive carry, even on low-dividend stocks, is primarily helping only the top 1% in the U.S.”
> Natural gas
While Coxe recommends some gold exposure as a form of portfolio insurance in the case of escalating political and financial risk, his favorite commodity is natural gas, for which he sees growing demand from China and Europe. Rather than owning resource commodities directly, he prefers to play commodity trends by making investments in company shares.
“I don’t invest on the basis of the latest earnings forecasts,” Coxe says, “but choose companies that are building unhedged reserves in the ground and operating in politically stable countries.”
> Putin remains a risk
Explaining his rationale for recommending U.S. defense stocks, Coxe said Russian president Vladimir Putin will likely continue his aggressive moves in the Ukraine. He points to Putin’s past involvement with the KGB, and his tendency to appoint former KGB officers within his government, as a danger.
“Once a KGB officer, always a KGB officer,” Coxe said.
Putin is bad news for human liberty, Coxe added. At the same time, he believes it’s only a matter of time before Iran has nuclear capabilities, and there’s growing evidence that China and Russia are getting friendlier.
“We’ve entered a new era, and are headed toward the authoritarian age,” Coxe said. “Russia, China and Iran are becoming the drivers of global politics and there is growing risk of war.”
Meanwhile, he said, India’s new leader, Modi, has a mandate to modernize India and encourage capitalism. He will be building infrastructure and cutting bureaucracy.
“[Modi] will be investing in toilets,” he said, “not statues.”