• David Cockfield

Still on Track


Despite one of the worst winters North America has experienced in decades, the recovery from the financial crisis of 2008 is continuing. As discussed in past Artisan articles, this period of slow economic growth will continue until the excessive debt created prior to 2008 is eliminated. While the corporate sector is in excellent debt shape and individuals are close to attaining manageable debt levels, many Governments are still struggling to even balance their budgets, much less reduce their debt levels. On the positive side, growth is continuing and predictions of an economic double dip back into recession have faded into the background. Confidence in future prospects is creating more stable financial markets and providing individuals and corporations the incentive to invest and thus further stimulate additional growth. In Canada this winter’s weather has slowed the export of last year’s bumper crop. Although farmers’cash flows will be delayed, they will eventually have significant cash to spend.

The recent decline in the Canadian dollar is a direct benefit, to all exporters. Canadian oil and gas producers will particularly benefit, as will eastern Canadian manufacturing. Canadian real estate markets continue to be firm and our banking system profitable and stable. The Federal Government is well on its way to meeting its objective of a balanced budget in 2015 and in fact may achieve that goal even earlier.

In the U.S. the difficult winter has had an even greater negative impact and created some poor economic statistics in a number of sectors. There is ample evidence however that no permanent economic damage has been done. U.S. employment numbers have continued to improve and the important housing sector recovery is still intact. The political infighting that so disrupted 2013 appears to have faded for now with a Federal Budget passed and an increase in the Debt Ceiling approved.

European statistics indicate a gradual recovery is underway. Germany continues to do well while Italy and Spain have done much better than expected recently. Only France continues to generate disappointing economic numbers. China recently began to cause concern again. As internal cash flows and pools of savings have exploded,the lack of adequate investment market infrastructure and controls has become evident. Chinese domestic banks have sold investment products to investors that were at best inferior, or at worst fraudulent. The Chinese Government has yet to make a decision as to who will suffer the losses. Foreign observers fear a Chinese credit crunch will slow their economic growth to levels well below the 7 ½% projected. While there is reason for concern, predictions of problems in China that would impact world financial markets and did not materialize. This again may be the case now.

Emerging markets have suffered in the past several years as the flow of investment funds from developed economies has dried up. Some of these economies such as Mexico, India and South and Central American countries are now showing better growth numbers and the potential to help increase world growth overall.

Looking beyond economic numbers, financial markets are reflecting renewed confidence in the slow but steady recovery underway. However this does not mean the trauma of the financial market collapse in 2008 has been forgotten, but at least the focus is more centred on what is actually happening rather than what might happen. One need only to think back to market sell offs experienced since 2008, including the Greek financial crisis market sell off amid predictions of the demise of the European Union - despite the fact that Greece represented only 2 to 3% of the GDP of the E.U. Over the past six years, at various times, psychology rather than fact has ruled markets. In recent months, however, Canadian equity markets have been less prone to panic. The ongoing Ukrainian situation, which a year ago would probably have sent equity markets down sharply, has had little impact so far. Investors are waiting to see what actually happens, rather than expecting the worst. Investors should also recognize that some individual investors, and many hedge funds, make money by selling stocks (or “shorting” as it is called) that they do not own and then buying those stocks back at lower prices. These investors will quickly jump in at any sign of market weakness and sell, putting further downward pressure on stock prices. Until short selling begins to generate losses, as it did in 2013, it will add to market volatility. Recent less volatile equity markets in Canada may indicate short sellers are no longer a significant market factor The first quarter of 2014 has been a positive one for Canadian equity investors. The TSX has outperformed the U.S. Dow Index in the quarter by 6% but this outperformance was largely offset by the decline in the Canadian dollar versus the U.S. dollar. The Canadian dollar seems to be holding at the 90 cents level versus the U.S. dollar and any future outperformance will favour Canadian equities over their U.S.counterparts.

Fixed income markets have been relatively stable considering the U.S. Federal Reserve has begun reducing its monthly security buying program. While interest rates are likely to rise, the increase will be very gradual as Central Banks fear any sharp increase will derail the ongoing economic recovery.

As a firm, Northland Wealth will continue to source the best investment opportunities on behalf of our clients in both the traditional and alternative asset classes. We utilize our size and scale to access managers whose minimums require a significant commitment, while remaining vigilant about negotiating advantageous fee structures with these external alternative managers for our clients. Many of these alternative investments employ strategies such as unconstrained active management or direct lending (which produces a high income stream) with the objective of providing equity-like returns with lower levels of volatility. On the public equity side, a greater emphasis will be given to high quality dividend-growth stocks, given that the risk environment has improved.

Looking ahead, 2014 is shaping up to be a good year for investors. While we can expect an equity market sell-off as we have not experienced a correction in almost the past 2 years, we believe the overall trend will continue to be upwards. We will still maintain our focus on protecting capital and meeting clients’ long term objectives.


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