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As we reach the mid-point of 2010, the world economy continues to struggle in its efforts to fully emerge from the financial crisis of 2007-2008. Consumers and governments remain weighed down by high debt levels accumulated over the past decade. In turn this results in weakness in demand for goods and services, which ultimately is holding back a stronger economic rebound in the short term. Unemployment levels in developed countries remains high and structural trade imbalances with emerging economies continue. The most dramatic of all events in this quarter, was the $1 trillion bailout of Greece led by the European Central Bank and the International Monetary Fund. Decades of government mis-management and unsustainable social programs have brought the unimaginable to the forefront -a default by a First World country. Fears that such a development would extend to other European nations have weighed heavily on stock markets in the EU. Concerns over sovereign debt have sent the value of the Euro down sharply against the US and Canadian dollar. Gold prices too have risen as investors look to the metal for security. Whatever the final price is that gold may reach, there is simply too little of it to replace the US dollar as the international reserve currency. We should expect stronger exports from Europe as the price for goods and services fall in tandem with a weaker Euro. Governments and central banks are now seeking to balance two difficult objectives: the need to curtail stimulus spending so as not to push debt levels beyond where they are now and the need to ensure that, having spent historic amounts of taxpayer dollars, that their economies don't fall back into recession as a result of this curtailment in government stimulus. Weighed against this sobering reality, are low interest rates and low inflation. Both of these positive factors provide a framework within which economic recovery and growth should improve. Tentative signs are emerging that this is what is happening, where the banking, automobile and housing sectors in North American continue to strengthen. Overall, the outlook for 2010 continues to be mixed and as such we remain of the view that investors are best to continue with a defensive portfolio allocation. This includes government, corporate and high-yield bonds, coupled with yield-generating securities including dividend paying common and preferred shares, pipelines, toll-roads, utilities and real-estate income trusts. If markets trade sideways for the next few quarters, investors can look to these investments to provide consistent, solid returns in the form of interest and dividends. Canadian Equity Funds Reflecting the uncertain picture for the global economy, the TSX Composite is flat for the year, trading within a positive and negative range of 10% of its current level. Weekly reports suggesting that the global economic rebound is strengthening has sent our stock market up strongly, only to have it fall back when a subsequent report indicates the opposite. Demand for Canadian resources remains strong, as emerging economies continue to grow at nearly double-digit levels. This, together with a general view that the global economy is slowly strengthening may push Canadian equities higher in the latter half of 2010. Again, it is our view that holding large capitalization securities with a track record for increasing dividend yields is a more sensible approach to holding stocks in the near term. Global Equity Funds World markets remain flat to negative excluding currency fluctuations, with US stocks faring somewhat better than their European and emerging market counterparts. The balance sheets of companies remain quite strong and the expectation is that the cash will be used to buy-back shares, increase dividends and for mergers and acquisitions. All of these auger well for shareholders in the medium term. Short term however, it is our view that negative sentiment is likely to keep equities trading in a range-bound level for some time. If we are correct is this view, then yield becomes crucial to realizing returns from the equity component of portfolios. As such, we have included funds comprised of pipelines, toll roads, utilities and infrastructure stocks together with real estate income trusts within portfolio allocations. We believe that being paid to wait for markets to move forward is prudent and positions portfolios for gains in sideways markets. Fixed Income Funds Government, corporate and high yield bonds have added to gains enjoyed in Q1, through interest yields and, in the case of high yields, capital gains on the par value of the bonds themselves. The outlook remains good for this defensive asset category, where investors are positioned for steady, predictable investment returns. It is our view that one effective way to maximize investor returns, is to minimize risk. This supports the case for holding fixed income investments in portfolios, particularly where equity markets are expected to remain flat for sometime. World Bank estimates forecast a slower growth economic environment over the next few years. In this scenario income is likely to be a greater component of total returns than has historically been the case. In each of the past 3 recessions corporate bonds have outperformed equities and it is our position that they will continue to do so this time as well. Overall, combining government and corporate bonds within portfolios positions clients for yield returns, while serving to protect investment capital. Archived Newsletters |
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