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One of the old adages in the stock market claims that bear markets don’t end until every last bull has thrown in the towel. All I can say is, “are we there yet”? In 2011, market psychology was decidedly bearish with many macro factors leading pundits to lower economic growth forecasts throughout the year. There were Japanese earthquakes, US debt ceiling negotiations mulling the question if China would avert an economic hard landing and last but clearly not least, the spreading European debt crisis.
With these negative macro factors weighing on markets, investors fled from risk assets preferring defensive dividend paying stocks and low yield bonds, driving these valuations up while shedding growth assets and driving their valuations lower.
If the 90’s is characterized as the decade of greed, the period since 2008 can clearly be defined as the period of fear. In much the same way as the decade of greed in the 90’s ultimately created an environment where one was better off being out of stocks all together, I believe the current environment is creating a similar opportunity on the buy side.
The portfolio for the 4th quarter returned 7.67%, while the S&P TSX returned 3.6%.
The best performing groups in the index included Health Care, Industrials and Energy with returns of 15.1%, 14.9% and 11.4% respectively. The worst performing sectors were Consumer Discretionary, Materials and Information Technology with negative returns of -0.5%, -4.3% and -15.5%.
Of interest to the portfolio, materials in the S&P TSX did poorly in the 4th quarter due to the underperformance of gold stocks, in particular, large cap gold stocks. Base metal stocks and bulk commodity stocks faired much better. Of note, the portfolio benefitted greatly when Quadra FNX agreed to a $15 per share all cash takeout offer from KGHM Polska Miedz S.A. which represented a 41.3% premium to the 20 day volume weighted average price of Quadra FNX. Grande Cache Coal was also taken over in the 4th quarter at a price of $10.00/share by China’s Winsway Coking Coal Holdings Inc. and Japan’s Marubeni Corp. at a 70% premium to the previous days closing price.
The portfolio continues to maintain a strong bias towards materials. In particular the base metal and bulk commodities are strongly represented. The weighting of energy is more neutral but is predominently weighted to oil producers and service stocks, and has a very low natural gas weighting.
