• David Cockfield

Keep Calm & Carry On


The last month has seen dramatic declines in equity markets around the world. Newscasts and the press have been full of gloomy predictions of impending economic collapse. A common characteristic of all this commentary is that it is about what might happen. However Greece has not yet defaulted, no major European bank has failed and the European Union is still intact. The U.S. and Canada are still showing modest economic growth and China is still growing at 9%. Fear, and in some cases out right panic, has gripped many investors. They see a repeat of the 2008-2009 market sell-off forgetting that investors who stayed in their good quality, dividend-paying equities were rewarded with a significant recovery in market values later in 2009 and in 2010, in addition to having received excellent dividend cash flow.

Economic horizons are by no means clear. The U.S. is undergoing a prolonged period of rebuilding personal balance sheets. Personal debt is being paid down and new debt avoided. This means the U.S. housing slump will continue and consumer spending will be subdued. Since consumer expenditures drive 70% of U.S. GDP, economic growth in the U.S. will remain very modest, falling in the 1-2% range for at least 2 to 3 years. Unfortunately this level of economic expansion is not high enough to provide employment growth capable of reducing existing high levels of unemployment. U.S. governments will be of little help as federal, state, and municipal governments are under pressure to reduce expenditures which means cuts in services and staff. Not a pretty picture but not a disaster.

On the plus side, the U.S. banking system seems sound after the severe shake up experienced in 2008-2009. U.S. banks are now being criticized for sitting on too much cash and being too tight in their loan practices. U.S. corporations are also hoarding cash (now estimated at $2 trillion) and not hiring, so as to accumulate more cash. For investors the best balance sheets are in the corporate sector - a very unusual occurrence in hard economic times.

In Canada the economic picture is somewhat brighter but GDP growth will remain in the 2% range as our largest trading partner struggles. However our political environment is much calmer than in the U.S. and our banking system considered one of the most secure and well regulated in the world. We continue to see excellent export demand for our coal, oil, potash and farm products. Base metals, even though down in price, are still at profitable levels for mining companies, while the gold sector has become even more profitable after recent gold price increases. Demand from emerging economies such as China is helping Canada offset weaker U.S. demand, but only partially. In the interim a lower Canadian dollar helps our exports and low interest rates are keeping our real estate sector stable.

The title of this article (from wartime England) reflects our response to markets beset by so much uncertainty and further distorted by high frequency computer trading. We are focused on good quality dividend paying equities from companies in industries that have predictable long term growth prospects. We are holding some gold stocks or bullion funds as insurance against any major global currency meltdown. We will increase cash positions if markets become extended on the upside, but rarely above 15%. We will hold some fixed income but only shorter terms as we feel any return to more normal annual growth rates will likely unleash inflationary pressures and see interest rates rise. It will be a bumpy ride ahead but solutions to the various problems are available. On a broader prospective the deleveraging problems of the older industrialized economies are being offset by the rapid growth in productivity, living standards and demands of the emerging economies. Those who fear a return to the depression scenario of the 1930s should realize the world has changed and the emerging economies will continue to grow and keep worldwide growth positive.


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