The world is awash with $152 trillion dollars of debt, according to the IMF, an all-time high which sits at more than double the balance at the start of this century.  This debt mountain, as of 2015, represents 225% of gross domestic product (GDP), up from 200% in 2002 and signifies the extent to which increases in borrowing have outpaced economic growth during the period.  While the IMF emphasized that there is no exact science to knowing how much debt is too much, it has urged governments in certain countries to tackle excessive private debt levels The organization has sought to pinpoint where it sees the biggest potential problem areas, saying private debt is high not only among advanced economies but also in a few “systemically important” emerging market economies, namely Brazil and China.  Another recent report from the IMF highlighted the problems brewing in China given rising debt levels.  They say “risks from rapid credit growth are growing as capital has been misallocated and the current growth model is not sustainable.”  It started with a massive 2009 fiscal spending package equal to 12% of China’s GDP.  Debt then grew by over 20% per year over the following six years to reach over 200% of GDP, from 120% in 2007.  Those are levels that were associated with prior financial crises in Spain, Thailand, Japan, Greece, Ireland and Iceland over the past 20 years.

While not wanting to sound too many alarm bells, another problem for stocks now is that they are trading near record level valuations.  When the economy was ‘flat on its back’ in 2008, we felt better about investing in stocks since there was still ample room to reduce interest rates, economic growth was already down and, most importantly, stock valuations were at record lows.  The situation has pretty much reversed today, as shown in the chart below.  While the average PE ratio is still below the ‘nosebleed’ levels seen at the peak of the tech bubble, few believe that we will ever see those sorts of valuations again.   Unless earnings are about to embark on a significant recovery, which doesn’t seem likely given recent commentary from reporting companies, there doesn’t seem to be much of an impetus to any significant gains for the stock market.Price-to-earnings nearing highs

The story is not very different in Canada either.  While the optimists will always argue that stocks deserve a higher earnings multiple due to the low level of interest rates, we believe that most of that impact is already behind us and stocks will need to see an upward move in earnings to sustain further gains for the overall market.  There is probably more potential for an earnings recovery in the cyclical industries such as basic resources, energy and industrials as opposed to consumer staples, utilities, telecom or even the financial sector, particularly the banks. Canadian stocks expensive

1 2 3 4