David Rosenberg is out with his investment strategy for 2012 and he’s recommending that investors approach the potential deflationary environment with a SIRP approach – safety and income at a reasonable price. He offers 7 different ways to implement this strategy:
“Many investors increasingly want preservation of cash flow as well as preservation of capital. We concur and have consistently recommended a focus on S.I.R.P. — safety and income at a reasonable price, with a primary focus on stability and prudent risk-taking.
1. Focus on safe yield: High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs). Corporate balance sheets are in very good shape.
2. Equities: focus on reliable dividend growth/yield; preferred shares (“income” orientation).
3. Whether it be credit or equities,focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies.
4. Even hard assets that provide an income stream work well in a deflationary environment (ie, oil and gas royalties, REITs, etc…).
5. Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care — these sectors are also unloved and under owned by institutional portfolio managers).
6. Alternative assets: allocate significant portion of asset mix to strategies that are not reliant on rising equity markets and where volatility can be used to advantage.
7. Precious metals: A hedge against the reflationary policies aimed at defusing deflationary risks— money printing, rolling currency depreciations, heightened trade frictions, and government procurement policies.”
Source: Gluskin Sheff