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.
- Equities traded lower again last week on sustained concerns regarding Europe and German Chancellor Merkel’s continued opposition to increasing bailout funds or allowing the ECB (European Central Bank) to increase purchases of European bonds.
- Although we had no expectations in this regard, investors were also apparently disappointed when the Fed did not suggest any plans to invoke another round of Quantitative Easing (QE3).
- On the positive side, jobless claims in the U.S. were the lowest reported since May, 2008, both the U.S. and Spain held successful bond auctions, and this morning US housing starts for November came in at their highest level since April 2010 on improving homebuilder confidence.
- Weak Industrial Production numbers from India, PMI (Purchasing Managers Index) data in Europe, and more importantly China had a negative impact on the economic outlook, which when combined with U.S. dollar strength led to commodity price weakness across the board. We expect further evidence of a slowdown in China will lead authorities there to act quickly on growth oriented policy initiatives.
- Yesterday afternoon, European Union Finance ministers eventually agreed to increase loans to the IMF (International Monetary Fund) by an additional 150 billion euros; they will seek further funding from other G20 members. Importantly, these enhanced IMF resources are meant “to fill global financing gaps”, they are not exclusively for bailing out weak eurozone members.
- We continue to believe the situation in Europe will ultimately be resolved. Between the EU leadership, the ECB, and the IMF, an appropriate resolution will be achieved and they will not allow a Lehman-like collapse of the banking system; however, Germany in particular will not feel compelled to act until there is a bank requiring a bailout and Germany is then able to maximize concessions.
- As we are at somewhat of an inflection point in terms of the global economy and stock market sentiment, we expect stock market volatility to continue, resulting in equities trading in a range for the foreseeable future.
- Our investment outlook remains the same as equities are our preferred asset class as we look out toward 2012; North American bond yields are at all-time lows making higher dividend yielding equities a far more attractive investment alternative.
- 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.
- Despite recent market declines, U.S. equities are still trading at the top end of the narrow range established since early August. We anticipate a further market pullback, but downside might be limited until the New Year due to the expected slowdown in market activity leading into the holidays.
- For trading oriented investors we recommend selective profit taking as certain stocks have demonstrated significant outperformance recently.
- Fundamentals will matter again at some point and prospects for more economically sensitive sectors, particularly for copper and energy, are brighter and not fully reflected in current valuations.
- 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 better in the current environment.
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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