Despite clouds banks bullish on markets

  • Aug. 23, 2010 9:22 p.m.

Many in the banking industry continue to believe the global recovery remains on track, but the pace of growth will slow down.

The current consensus is looking for U.S. GDP growth of 3.2% this year and 2.9% in 2011.

For China, growth forecasts stand at 10.1% in 2010 and 9.3% in 2011.

In our opinion, these forecasts will be revised lower. In fact, the momentum in the global leading indicator has already started to weaken, which is pointing towards a slower pace of global economic expansion.

A deceleration in the global economy would not derail the earnings recovery, but it would most likely slow the healing process.

While Canada is currently in negative territory for 2010, we are not alone as most of the world’s major exchanges are lower for the year and global equity markets are continuing their pattern of moving in unison, which has been the case since 2008.

While returns have not been consistent, Canada’s resiliency has been impressive.

While a 35% loss in 2008 is nothing to brag about, Canada was still one of the best performing markets in the world that year and while 2009’s 31% gain paled in comparison to the returns coming from the BRIC nations (Brazil, Russia, India, China), Canada led the returns amongst the G7 industrialized nations.

Once again this year we find the TSX Index to be one of the better performing indexes on a relative basis.

No matter what any market commentators may say, they cannot be surprised by the fact that as stimulus programs and spending start to expire or decline that the magnitude of economic growth is starting to subside.

The eventual decline in stimulus spending worldwide has been well telegraphed and in some cases has been accelerated thanks to the desire for austerity in Europe.

Have GDP growth rates declined? Yes. Have industrial activity data points declined? Yes.

Has employment growth in many countries surprised to the upside? No. Is growth declining to a more normalized level now that countries are weaning themselves off of the steroids known as “government spending’? Absolutely.

So what does this do for equity markets, whether it is for Canada or any country?

We must remind ourselves that stock markets are forward looking indicators. They do not price in what has already happened or what is happening now, but instead will discount expectations for the next six to 12 months.

While developments since the beginning of the year, such as the fiscal mismanagement of some European countries could potentially slow the rate of interest rate increases in Canada if global growth rates are impacted, the bias for rates is still definitively higher.

This also bodes well for the Canadian dollar as higher relative rates to the U.S. normally leads to loonie appreciation.

What is clear is that the Bank of Canada is determined to get our country back on the path to a more normalized level of interest rates which will provide us with greater monetary flexibility if we encounter economic headwinds going forward.

The initiation of rate increases does not always result in an immediate equity market sell off; however, equity investors are still likely to be more cautious in their investment choices as they wait to see what impact a higher rate environment will ultimately have on the broader Canadian economy.

Again, we note that the outlook is questionable but not necessarily negative as the Canadian economy and TSX Index could work through the challenges that lie ahead.

Since there is a high likelihood that markets will remain range bound for the next three to six months, we expect this trend of rotation into defensives to continue. We also expect these sectors to benefit longer term from the demographics we see in the western world where more investors are entering the latter half of their investment life cycles and thus are looking for income rather than growth from their investments.

The key to making money going forward will lie in superior stock selection and the ability for investors to lock in short term gains when possible.

It’s also very important for investors to stick to their long term investment plan along with their asset class, sector, and stock percentage allocations. While the decision to sell or trim “a winner” can be a difficult one, we remind investors that making money is a good thing and that gains are not realized until locked in.

We are bullish for the Canadian stock market over the long term and believe this country will be a great place to invest as the global economy grows this year and beyond.

Brent Keylock, CFP, FMA, FCSI is a Wealth Advisor and Financial Planner at ScotiaMcLeod here in Red Deer and can be reached at 403-356-7032, and one can visit his website at Jean-Guy Turcotte, an accredited mortgage professional with his partners at Regional Mortgage Corporation, will be back next week.