In terms of the stock market, we are focusing on those sectors most levered to global economic growth, particularly technology, industrials and basic resources.  Our biggest position in technology is in U.S. where we have equal positions in the major players in the wireless communications market, including Apple, Google, Qualcomm, Broadcomm and Microsoft.  That market continues to grow globally and the companies all have high gross margins and generate substantial excess cash.  We also own Intel, Cisco and RIM for their attractive valuations.

Energy also continues to be an overweight sector.  The focus there is on the oil stocks, particularly the oil sands companies such as Suncor, Canadian Natural and Athabaska Oil Sands.   These companies all have long-lived reserves at low costs.  Another extremely attractive group are the energy service (drilling) companies.  Shale oil drilling has lead to the first gains in US oil production in over 20 years, with the US rig count at over 1300, the highest level since 1986. While growth continues, the valuations of the drilling stocks have dropoped dramatically in the past few months with many trading at 3-4 times current cash flows.  We also like the uranium stocks.  Nuclear demand is growing again with even Japan talking about restarting some facilities to deal with electricity shortages.  Uranium prices have stabilized in the low 50’s and the long-term price remains above $60 per pound.

Within the Basic Materials group we have a slight overweight in gold stocks (Osisko, Kinross, B2B Gold, New Gold and Yamana are the key mid-sized companies we hold).  While gold itself continues to be volatile due to some recent strength in the US dollar, the gold stocks themselves are trading at all-time low valuations.  While a good part of this may be the permanent removal of the premium that gold stocks used to trade at due to their scarcity, many are now trading below net asset value.  This should also lead to higher levels of corporate takeover activity as it becomes cheaper for the companies to grow by acquisition than through the drill bit.  The same could be said many other resource stocks including the natural gas companies, coal, copper and agriculture.

Overall we continue to be bullish on the outlook for stocks even though we are somewhat surprised and disappointed that the cyclical stock markets, such as Canada, have lagged so many other markets so far in 2012, even though the global economic data continues to support expansion.  If China is the main worry for the global economy, we don’t think that the results will end up supporting those bearish views.   That economy will continue to lead global economic growth as their long-term expansion plans remain on target.   Given that the U.S. economy is showing positive signs as well and that our view is that  Europe have already seen its worst economic numbers in this cycle, the global economy could go back to ‘hitting on all cylinders’ over the next 12 months.  This should lend support to stock prices as will strong corporate earnings, increased corporate takeover activity, active stock buybacks, rising dividend payouts and the continued ‘easy money’ policies of most of the world’s major central banks.  Investors have spend most of the last few years getting out of stocks and into bonds or cash following the dismal record of stocks over the past twelve years, which included two major bear markets, numerous trading scandals that undermined the public’s faith in the system and a near collapse of the U.S. banking system in late 2008.  But investors need to look beyond those past events and the chart below is one which we have used before to remind people that investing after such a period of negative developments has historically proven to yield better returns than investing when excitement levels are high.

Emerging from the Worst Decade in History

As Rudyard Kipling wrote in his 1895 poem, “If you can keep your head when all about you Are losing theirs……Yours is the Earth and everything that’s in it.”  Maybe a bit melodramatic but I’m sure you get my point.

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