While the broad consensus is a goldilocks scenario for the US and Canada, Lewis is quick to remind us of the substantial risks out there on the market. Geopolitics, he says, takes a preeminent role. The US election, the ongoing conflict in the Middle East, and the push by Saudi Arabia to regain share in global oil markets point to myriad sources of instability. Lower global oil prices, for example, may be a headwind for a resource-driven economy like Canada.
“I think the longer markets stay stable, the more instability is created under the surface,” Lewis says. “It makes me nervous when I see markets very steady and calm, you don’t need much to spark a more abrupt movement.”
Lewis says that his team are actively protecting their portfolios against the resurgence of market volatility. At the same time, he argues that asset managers would do well to take a long-term view. There is still a great deal of money sitting in cash and money market instruments, sitting in defensive positions while markets have done very well. Lewis argues that investors should be looking to deploy that capital, though not in the narrow band of US tech stocks that have dominated. He argues for diversification across subsectors and styles, looking for small cap value names that have a lot of valuation ground to make up. He argues that active management, too, can be a serious returns driver.
“Increase diversification and revisit the level of cash. You have to be cognizant of the risks, but don’t go too defensive,” Lewis says. “Even if we get volatility, central bankers have given themselves a very substantial buffer to adjust to monetary conditions. As painful as all those rate hikes were, this creates an environment where we can face political turmoil with more ammunition to respond.”