3 ETFs to buy for Far East recovery

Equity analyst Don Vialoux says current 'best buys' are Canadian securities or ETFs that will benefit from the recovery in the Far East.

Analyst Don Vialoux says that current 'best buys' are Canadian securities that will benefit from the recovery in the Far East.

As the bite of winter settles in, longtime equity analyst Don Vialoux warns investors against buying into the cooling longer-term economic picture in North America despite the promising glow cast by the COVID-19 vaccines and the US election.

Mr. Vialoux, who lives in Oakville in the Greater Toronto Area, runs the popular seasonality-focused website, timingthemarket.ca, which he founded with his son and fellow analyst, Jon (who also created and runs equityclock.com).

Based on about 50 years of experience as a stock analyst as well as reams of historical data, Mr. Vialoux concludes the Dow Jones Industrial Average as well as the S&P 500 enjoy their strongest performance in the 12 weeks between election day and inauguration in US presidential election years.

Presidential and Santa Claus rallies combine

He notes that the breakneck rallies among major equity indexes since Nov. 3 are consistent with markets' typical trajectories as demonstrated over 16 of the last 17 presidential election cycles. "Investors anticipate that the next president or the existing president will do all kinds of wonderful things."

The 'Santa Claus rally' predicated on such factors as institutional investor trades, favourable comments about next year's market outlook, and the investment of year-end bonuses also tend to lift the S&P 500 and TSX/Composite Index between Dec. 14 and Jan. 6. (The S&P gained in 22 out of the past 30 periods, while the TSX Composite, goosed by RRSP contributions, fared even better, gaining in 25 of the last 30 years.)

After the Georgia run-off elections, where both Senate seats were won by Democrats, they and the Republicans each hold 50 seats. Vice-president-elect Kamala Harris would cast any tie-breaking votes, effectively putting control of both houses of Congress in Democrats' hands and enabling them to pursue a progressive agenda, including higher personal and corporate taxes, higher regulation and higher government control of the economy.

Mr. Vialoux quips, "The last time we had this scenario was in 2008 when a guy named Obama won the US presidential election," quips Mr. Vialoux. "The markets did not like that one iota." Mr. Obama's first victory was the only time in the last 17 elections that indexes did not go up between the vote and the inauguration, instead dropping 17 per cent.

Fortunately, the Canadian markets tend to outperform the American from mid-December to mid-March, so domestic investors may want to rotate their money into holdings closer to home, especially since the dropping US dollar (down about 15 per cent over the last six months) will eat into gains on greenback-denominated stocks.

The analyst says of the US dollar's decline: "It's not because things are so great in Canada." Indeed, he says he expects volatility between now and the widespread availability of COVID vaccines, up or down depending on the headlines of the day. "There's a lot going on in North America with the virus. It ain't over yet."

Go east, young man, Far East

On a more promising note, economies in Far East and Asia-Pacific countries, such as New Zealand, South Korea, China and Taiwan, are in a much better situation. Since their early lockdowns were more effective, their demand for goods and resources are close to the norm. Positive vaccine news should keep their stocks buoyant. Since mid-June, stock trends have split into a "K" shape, with one branch falling (made up of, for example, airlines and entertainment companies) and one branch climbing (made up of companies involved in businesses such as agriculture, mining of precious and base metals and materials in general).

Under these circumstances, Mr. Vialoux advises that the "best buys" are Canadian securities that will benefit from the recovery in the Far East, or even a basket of domestic stocks that would benefit, held within an exchange-traded fund (ETF). The analyst notes that many ETFs are geared towards specific sectors, while others are broader in terms of corporate makeup but specific in terms of geography. The iShares S&P/TSX Capped Materials Index (TSX-XMA) is mainly made up of gold stocks (at about 60 per cent), along with smaller but still significant proportions of base metals and fertilizer exposure. Meanwhile, the iShares China Index ETF (TSX-XCH) and BMO China Equity Index ETF (TSX-ZCH) are well-exposed to Asia's economic leader. Similar ETFs covering other Asia-Pacific economies are also available.

This is an edited version of an article that was originally published for subscribers in the January 1, 2021, issue of Investor's Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor's Digest of Canada.

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