Here’s What We’re Thinking
The Investment Committee of the Portfolio Advisory Group meets weekly to formally discuss markets, sector allocation and investment recommendations. Below is a brief synopsis of our current market view.
- Equity markets rallied last week on the promise of resolution of the Europe-saga combined with generally positive U.S. economic data which further indicates the U.S. will be able to avoid a “hard landing”, or recession.
- Recently appointed ECB president Mario Draghi made comments suggesting that if eurozone leaders reach agreement on a so-called “fiscal union” in Europe, including commitments by all members to enforced deficit and debt limits, that only then might the ECB may consider greater policy action. Many observers are hopeful the ECB will intervene in the European bond market to help stem the rise in interest rates in the region and stabilize the local economy.
- Unfortunately, capital markets are largely on hold for the balance of this week as investors await the outcome of the European leaders’ summit in Brussels on Friday, December 9 although German Chancellor Angela Merkel last week attempted to minimize expectations surrounding the meetings.
- Yesterday rating agency Standard & Poor’s placed the debt ratings of 15 eurozone members on credit watch negative while citing regional “systemic stresses” and threatened a rating downgrade in the event of failure to reach a conclusive agreement at this week’s summit.
- This week had started on a positive note as investors were encouraged by Italy’s new Prime Minister Mario Monti’s announcement of an austerity budget plan which includes substantial tax increases, spending cuts, pension restructuring, and some “growth” initiatives.
- Although we remain confident this euro-crisis will ultimately be resolved, time lines remain uncertain and we expect stock market volatility to continue, resulting in equities trading in a range for the foreseeable future.
- If there is a positive resolution achieved at this week’s summit meeting, markets would likely trade higher initially, despite the 14% rally in the U.S. market since the recent bottom on October 3, 2011.
- Ultimately however we would anticipate a market pullback, but downside might be mitigated by the anticipated holiday season slowdown in market activity.
- For trading oriented investors we recommend selective profit taking as certain stocks have demonstrated significant outperformance recently.
- Many high quality dividend paying stocks at current levels do not offer much capital appreciation potential but will provide investors with the most downside protection if the market retreats, and investors are “paid to wait” in the interim.
- As stated previously, fundamentals will matter again at some point, and with a slowly improving outlook for the U.S. economy, prospects for more economically sensitive sectors, particularly for copper and energy, are brighter and not fully reflected in current valuations.
- Crude oil prices (WTI and Brent) remain elevated due to rising tensions between Western nations and Iran. In addition, Syria’s refusal to bow to international pressure has marginally increased the likelihood of military intervention. A worsening of these two somewhat related situations would inevitably push crude prices higher and present downside risk to equity markets.
- Commodity cyclicals and industrial stocks offer the most upside potential in the event equities rally again, but they also will likely continue to exhibit the greatest volatility.
- Gold’s multi-year rally has paused of late but we recommend adding exposure on further weakness; gold bullion and gold equities should perform well in the current environment.
- For fixed income exposure, the current low rate environment offers little value in the mid to long end of the curve and we recommend investors remain short duration at this time. From a sector weighting perspective, investors should be underweight Canada’s and overweight provincials, municipals and corporates. The recent narrowing of high yield spreads leaves us at a point of indifference on these credits. With the Canadian dollar expected to outperform most major currencies over the coming year, we recommend Canadian investors remain in Canadian dollars for their fixed income holdings.
For more information on how these ideas pertain to your investment portfolio, please contact Danielle or Bev.
Summarized by Steve Uzielli – Director, Portfolio Advisory Group
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