“Despite a very good performance in Q4 2011, the year ended flat to negative for most of the major North American equity indices. Higher beta stocks were hit the most with the S&P/TSX small cap index dropping 18.4% on the year and the S&P/TSX Composite down 11.1%....As we look ahead to the New Year and the uncertainties that we face, all we can say for sure is that most of the things that we feared in 2011 are still very much present in 2012. The Euro zone will certainly remain the center of attention through the end of Q1 2012 as the member countries will meet numerous times before the release of the March 2012 report on further fiscal integration. In the meantime, a number of bond auctions will be taking place, allowing the policymakers to gauge the markets’ trust about the future of the euro zone – France is coming to markets this week on Jan 5. As we have said before, there is hope for the euro-zone provided that structural measures are put in place to radically change (for the better) the economies of the most embattled economies to provide a better future for most of its citizens. The biggest unknown is the willingness of the population to accept the changes.” Stéfane Marion – NBF Economic and Strategy Jan 3, 2012
What are the alternatives for money as we start 2012? Let’s look at different possibilities as we move up the risk spectrum. 6 month Treasury bills at 0.9% or 10 year Government Bonds at 1.96%? Or a 5 year GIC at 2.7%. Today you can buy many equities with dividends higher than these bond yields… and you even get the dividend tax credit which could be a 30% advantage. Many of these companies have had a record of increasing their dividends – so why wouldn’t you just load up? Retail investors in the US have been selling relentlessly. US statistics and the contrarian in me makes me want to be very bullish. Whenever you get substantial outflows from equity like this, you should get a reason to say equities are under owned. Certainly, they are, based on recent statistics but I would say that the trend is still heading lower. One analyst that I read thinks that stocks need to go through a period of being unloved longer than the one we have experienced to this date before the “final’ bottom will arrive. He could be correct. However, if you look at the Fed Model which compares current earning yield to the 10 year Government Bonds, stocks look tremendously cheap.
But what if interest rates rise sharply because of a concern with credit quality or inflation? All of a sudden stocks could look expensive. Then we have a European recession which appears inevitable to me. How can we escape the negative consequences of this without earnings projections ratcheting lower?
Sorry to put a damper on the whole thing but we (the world) have some problems to straighten out. Yes, we always will – it will never be perfect.
We need be prepared at all times for how we are going to take advantage of opportunities as they develop. Right now, it seems like the bond vigilantes are controlling the politicians. As long as that is the case there is likely to be sudden equity downdrafts as one country after another is hit with higher borrowing costs then greater deficits and so on … and so on…. Keep nibbling away during these ‘credit induced” downdrafts. Buy some good quality companies with rock solid balance sheets and earnings that have staying power. Ten years from now you will own some valuable assets. If you do not have a 10 year horizon be conservative – earn a low return for certainty of your capital.
Our suggestion is consistent – do a little of both. Build a balanced portfolio with an allocation to the best performing asset class (equities) that will let you sleep at night and know that the outcome will be bright if you have the fortitude to see your plan through. Our job is difficult as the last 11 years has not given investors comfort that returns will be there. We know returns will be there with a good plan, but we also know that newspaper headlines and investor enthusiasm will be pointing in the wrong direction at the wrong time. Remember to manage your emotions with a good plan.
** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **