The tide turned on safe-haven assets during November as investor sentiment shifted from fears of a global economic recession to a more optimistic assessment about the prospect of the US and China achieving phase one of a trade deal.

Traditionally defensive assets that benefit from a risk-off environment, primarily gold, US treasuries, and the Japanese yen, all experienced sell-offs, while the risk-on investment attitude buoyed cyclical stocks, emerging markets, and base metals. Gold declined almost $100 during the first half of November, settling close to $1 450, while ten year US Treasuries added ten basis points, reaching 1.83% by mid-month.

Meanwhile, emerging market stock markets have been rallying, with the MSCI Emerging Markets Index now up 9% since the beginning of October. Investment into emerging market exchange-traded funds exceeded $1bn for two consecutive weeks in November.

Fund managers have also been switching from cash into stocks because they are fearful of missing out on a stock market rally, according to a Bank of America Merrill Lynch survey, which represents 230 managers managing $700 billion of assets.

Also underpinning the swing towards riskier assets is the ongoing accommodative monetary policies of the US Federal Reserve Bank and other central banks around the world. Low to negative, official interest rates are likely to remain in place for some time until there is firm evidence that the global economy has turned the corner.

Recession is not looming yet

Although fears of recession have predominated for much of this year, growth remains in positive territory in the developed world, with consumers holding up the gross domestic product numbers and manufacturing weighing them down. Germany, which was expected to enter a technical recession in the third quarter, experienced marginally positive growth of 0.1% instead. The International Monetary Fund downgraded its global growth forecasts at its annual meeting, but the world is still expected to continue growing.

With current risk-on sentiment hinging predominantly on progress in trade talks, there is a risk that any setback will see a rush to safety and, thus, a sharp sell-off in cyclical assets. US President Donald Trump shook confidence when he mentioned that he had not agreed to cut back on tariffs on China. However, White House chief economic adviser Larry Kudlow buoyed investor sentiments on Friday when he said a trade deal was close.

The global economy is by no means in the clear yet. According to Bloomberg, the term premium, a measure of the difference between the benchmark longer-term US Treasury and shorter-term Treasuries, are flashing warning signals for bond traders. The last time the indicator rose above 80 basis points, the most significant sell-off since the aftermath of the global financial crisis ensued.

The Canadian economy is increasingly at risk of a global financial market and economic deterioration. The Bank of Canada is one of the few central banks that has not been cutting rates of late but is considering reducing rates as economic statistics confirm that growth is slowing. Insolvencies are on the rise, Canadian jobs and housing starts were lower than expected, and the Citi Economic Surprise Index is on a downward trend.

Patience runs out with profitless tech darlings

While investors are showing a greater appetite for risk in some spheres of the financial markets, their patience with profitless companies, many in the technology sector, is drawing thin.

Uber’s share price declined by more than a third in the third quarter after the ride-hailing company delivered its first results as a publicly listed company, showing a loss of $1.2bn during the third quarter. CEO Dara Khosrowshahi expects the company to move into the black by 2021. In contrast, competitor Lyft inched closer to profitability in the third quarter, delivering results that exceeded expectations. However, the company remains firmly in loss-making territory for now.

Indeed, investors have been feeling the pain from the sour results of several high profile companies that have recently entered or considered entering the public markets. For example, WeWork has inflicted material damage on investors after shelving plans for its IPO.

Energy offers investors opportunities

Crude oil prices gained ground in the first two weeks of November on the more upbeat economic backdrop, with the North American benchmark rising 5% to $57.9 a barrel from $54.4bn at the beginning of October. Year to date, the crude oil price has risen 23.2%.

Hopefully, now that the elections are over and the Liberals in power with a minority government, Canada will be able to unlock the potential offered by the crude oil reserves in Alberta. Investors are watching to see when and if there will be any progress on building key infrastructure projects to transport crude oil out of Alberta. Chief amongst these projects is the Transmountain pipeline.
The fossil fuel industry is under pressure in a more socially conscious world. Several pension plans and endowments have made plans to divest all their investments from coal, oil, and gas.
There’s no doubt that the next few years of transition will be challenging for many industries as the push toward renewable and sustainable means of production gathers steam. Nonetheless, these changes will create opportunities for investors, irrespective of their stance.

For now, the demand is still there for fossil fuels. Companies in the energy industry that can figure out how to meet demand while reducing the impact on the environment will be better positioned for the future. The same is true for car manufacturers, textile producers, and a host of other industries.

Our approach to investing sustainably is to recognize that the quality of a company’s operations and the willingness to do the right thing dictate its long-term prospects. We believe that companies that strive to do the right thing from a social, environmental, and governance perspective are more likely to be sustainable in the long-term. These companies are, therefore, higher quality and have a lower risk profile. Our investment process always has and will continue to focus on higher-quality companies and to buy these companies when valuations are reasonable.

From a broader perspective, investment managers will need to balance the allocation of capital to sectors and companies that are “doing the right thing” and those that produce meaningful returns for investors, which are not necessarily mutually exclusive considerations.

Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 20 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at