In his monthly interview series with SmallCapPower.com, prominent hedge fund manager
Mr. Steven Palmer discusses his outlook on the market, sectors that he favours and companies he finds interesting.
You can view the previous Video Interview with Mr. Palmer here.
SCP: In your last interview, you talked about investors’ bearish sentiments causing the turmoil during summer months. You also felt that institutional investors would come back to the markets as they have sat on the fences for long time. You rightly pointed out that Bank of Canada will take a pause from raising the benchmark interest rates any further this year. What is your outlook for the equity markets for in the near term?
Steven Palmer: I continue to be quite bullish over the next few months, particularly for December, which typically is the strongest month of the year for Canadian small caps. In fact, the BMO Small Cap Total Return Index has only experienced a negative return in December once in the past 25 years.
SCP: The month of November has been so far pretty volatile with equity markets suffering some steep losses recently. Do you think that market volatility will increase as the current year comes closer to the end?
Steven Palmer: Equity markets have had “steep gains” over the past two months so a modest setback should not be unexpected. I believe that this is normal and healthy. I expect December to be a very strong month.
SCP: You seem to believe that seasonality plays a role in small cap investing and for Canadian small caps, Dec to May is generally a good period. Why do you think that is and do you think that the upcoming Dec-May period will likely be a favourable period once again for small cap investing?
Steven Palmer: Seasonality plays a role but should never be considered in isolation. I am bullish for equities over the short term for a variety of reasons and seasonality supports this view. RSP inflows and the end of tax loss selling are likely contributors to this period of seasonal strength for small cap equities. The desire to have equity holdings perform well at yearend to lock-in performance bonuses is another factor that contributes to strong December performance.
SCP: What is your outlook on resource stocks which have done very well again this year? Do you think they will continue to outperform the broader markets?
Steven Palmer: Resource stocks will likely continue to do well over this period but they will not always do well. Unlike most Canadian funds, we don’t focus solely on resource stocks. There are many attractive opportunities outside the resource sectors. Employing a diversified portfolio approach across a variety of sectors lowers volatility and has increased returns historically for us.
SCP: There is a growing concern that fast growing emerging markets like China and India are overheating. Inflation is already high in countries like India and Brazil and to some extent in China as well. These countries are looking to tighten their monetary policies with China announcing a surprise increase to its benchmark interest rate recently. What is your view on these developments and how will they impact equity markets especially resource stocks and commodities prices?
Steven Palmer: This ties into my previous point. When China takes measures to slow growth domestically, it has a direct impact on resources and resource equities. Funds that focus solely on resource equities will have more downside than a diversified portfolio.
SCP: Which sectors and areas you find attractive from risk/reward perspective in next 6-12 months time period and why?
Steven Palmer: In the resource area I have been focusing on the oil, uranium and rare earth companies recently. I find the prospects for oil to be attractive over the short term. Uranium companies have been laggards over the last several years. The uranium price has only recently started to move up in a significant way. There are also several situations outside the resource sector which I am quite excited about.
SCP: Do you have some promising junior companies that you like in these sectors or have liked in the past and can you share your thoughts on them with our viewers?
Steven Palmer: Primary Petroleum (TSX VENTURE: PIE)(CVE: PIE) is a junior oil name which I have mentioned in the past and continue to like. Exploration Orbite (TSX VENTURE:ORT.A) (CVE: ORT.A) is another name we have recently added to the portfolio. We believe the risk/reward on Orbite is very attractive.
Steven Palmer’s Disclosure: I personally and/or my family and/or AlphaNorth Asset Management may own shares of the companies mentioned in this interview.