• David Cockfield

This Time Is Different


A familiar phrase often heard in money management circles when the markets have surged ahead and a correction is overdue. In this instance, the reference is to the economic recovery underway in North America. Typically economic recoveries at some stage are marked by several quarters of strong growth that quickly bring unemployment down and set the tone for future improvements. This time around it is a very different outlook facing investors. The U.S., our most significant trading partner, is still recovering from the twin blows of a banking system and real estate collapse. The U.S. government rescued the banking system but the U.S. housing market has yet to bottom.

Canada should really not have had a recession. Our banking system was and is in excellent health and out housing market was not loaded with sub-prime mortgages. Psychology mirroring what was happening south of the border, caused Canadians to act as if we too were facing some problems. When the realization eventually dawned that we were not in the same predicament as the U.S., the Canadian economy quickly recovered. Employment has returned to pre-crisis levels and our real estate markets have bounced back.

Unfortunately we are too closely tied to the U.S. economy to escape unscathed from their ongoing problems. The damage done to the U.S. consumer housing markets and financial system will take years to repair. No quick rebound can be expected but instead it will be a slow laborious grinding recovery marked by set-backs and fears of a return to recession. Progress is being made. Consumers are rebuilding their balance sheets by paying down debt. U.S. corporations are in excellent financial shape and continue to show good profit growth. However, U.S. governments, both Federal and State have yet to address large and growing deficits. Faced with cutting staff and reduced payrolls they have balked at raising taxes. They will eventuallyThe picture for Canada is considerably brighter. Our Federal deficit is manageable and we should be back to a balanced Federal budget by 2015. Most provincial finances are in reasonable shape but Ontario has considerable work to do to bring its financial affairs under control. Canada’s resource base including energy, forest products, minerals and food is proving to be a blessing in world markets now dominated by such high growth nations as India and China.

The future we presently see before us is more of the same. A world where the U.S. and Europe continue to struggle with damaged financial systems and government deficits. Growth in the Western world will be minimal and halting. One positive will be low interest rates as long as growth is slow. The commodities needed by the emerging economies will remain in strong demand. We hope we are overly pessimistic and would quickly change our forecast if better progress became apparent.

Our investment strategy in this environment is to continue to focus on corporate equities that provide steady cash flow to investors through dividends. Dividend paying resource companies and those who service them are desired investments. Low or no dividend equities that must produce capital gains may be used on occasion but sparingly. Good quality corporate bonds may be used but given the uncertainties of government debt markets, only shorter term bonds would be considered.

Investors should be prepared for market volatility as markets in these uncertain times will be more driven by psychology than fact. The fears of ―what if‖ will dominate investor’s minds and unfortunately the ―what ifs‖ are likely to be quite frightening. The alternative for investors is to sit out these markets till the future is clearer. This however, could take years and returns on the short term investments are close to zero. While it may be a bumpy ride, 4% to 5% dividend returns with some opportunities for growth in a low inflation environment is the best course of action for investors. It will be up to the investment manager to ensure the dividends are secure and corporate quality is maintained.


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