“Nobody can be right all the time,” said Jean-Francois Tardif, former manager of the Sprott Opportunities Hedge Fund. There’s also the potential for all strategies to fail, he said, pointing to the market’s crash of late 2008 after Lehman Brothers declared bankruptcy and virtually all asset classes fell in unison.
And systemic risks have increased. The issues facing investors now are “massive,” Tardif said, pointing to a still-fragile U.S. economy, concerns about European debt, turmoil in the Middle East and North Africa, and Japan battling several disasters at once. “Never in anyone’s career have there been so many problems in the world.”
Tardif, who said he has 50% of his portfolio hedged, believes the equity markets are likely to not only be volatile, but trend downward, pointing to the impending end of the U.S. quantitative easing program, the huge debts that many governments now hold, the ongoing weakness in the U.S. economy, and the market’s two-year run-up.
Those factors also mean that investors should position themselves for both inflationary and deflationary environments. Tardif noted that as quantitative easing comes to an end, deflation is likely, but as governments ramp up stimulus again, inflationary pressures will arise.
To hedge against inflation, he said investors should increase their exposure to stocks–especially companies with strong pricing power–to gold, commodities, emerging markets and farmland. If the huge government debts lead to deflation, then investors should buy long corporate bonds, government bonds from those countries with stronger economies like Canada and Australia, stocks from companies with no debt, precious metals, hedge funds, and farmland. Farmland holds its value in both scenarios, he said, “because everybody’s got to eat.”
“Never, during anybody’s career here, have there been so many issues in the world,” said Jean-François Tardif, who prior to retirement in June 2009 was lead portfolio manager for the Sprott Opportunities Hedge Fund LP. He’s particularly concerned about the potential consequences of massive debt loads in many of the world’s developed countries and quantitative easing efforts in countries such as China and the United States.
“I believe the market is very much at risk, especially now, after living through a massive rally, and also because QE2 is close to its end,” Tardif said. He expects markets to trend lower in the months ahead, while market volatility will likely increase.
Tardif noted that the global economy remains susceptible to both inflation and deflation, both of which will impact client holdings.
“We’re going to have waves up, waves down, waves up and waves down, where inflation and deflation forces are battling against each other,” he said.
To hedge against the possibility of inflation, he said advisors should increase exposure to stocks, commodities, and emerging markets. To protect against deflation, he advised holding precious metals, high quality corporate bonds, and government bonds of fiscally strong countries such as Germany, Canada and Australia.
Other strategies that advisors can use to protect their clients’ portfolios include diversifying their holdings among different sectors and asset classes, and avoiding leverage, Tardif suggested. In addition, he urged advisors to manage clients’ portfolios more actively by trading more often.
“I think you have to change your belief system – we’re in a different world,” Tardif said. “You have to be more opportunistic than in the past.”