How does all of this play out for our current strategy on financial markets?  While the market will face some headwinds and uncertainty for the balance of 2012, we think that the major economies of the world are on a recovery path, which will support continued earnings growth.  Add to that the attractive overall level of valuations, the expectation that interest rates will remain low for the foreseeable future and the overall negative sentiment of the investing public, and we still build a case for higher stock prices over the next year.  The chart below shows how stocks in the U.S. have been out-performing bonds (indicated by a rising line for that ratio) over the past year despite the fall in bond yields to all-time lows.  Despite the recent softness in stock prices and worries about the election and global growth, stocks are attractively priced relative to bonds.

US: Stocks vs Bonds

Within our Balanced funds, we are carrying a stock weighting 20-25% above normal levels, with about half of that coming from reduced bond weights and half from lower cash levels in those portfolios.  In our Hedge Fund, we have a 70% weight in cyclical/resource based stock ETFs, 30% in the Gold commodity ETF, 20% in U.S. Financials and a short position in the Euro against the U.S. dollar (this has the same effect on the portfolio as holding Gold in Euro terms).

Within our Equity funds, we have overweight position in the Energy sector, Basic Materials (primarily copper, coal and gold, but not agricultural), Technology and Industrials.  We are moving towards a market weight in the Financial sector, with an emphasis on U.S. banks and Canadian lifecos.  We remain substantially underweight in the key defensive sectors of the market, including utilities, telecom, consumer staples and health care.  While those sectors continue to grow, their valuations are well above historical levels and leave little room for upside in the stock prices.

While the investing world never leaves us without a long list of potential worries, the stock market is a ‘forward-looking’ market and we think that the bottom line is that the economic problems that resulted from the 2008 financial crisis are starting to recede.  One third of the global economy (the emerging markets) is on a long-term growth trajectory that will see ‘above-average’ economic growth levels for at least the next decade.  The problems in Europe will never really go away but Europe has not been the centre of growth for the global economy for a long time, and won’t be in the future.  We do think that we are seeing the worst of the European numbers right now and that region will begin to recover in 2013.  The U.S., on the other hand, has started to return to normal operating levels.  Employment continues to grow, consumers have reduced their debt levels somewhat and the housing market has clearly seen its lows.  Meanwhile, corporations are flush with cash and generating higher profit margins than any time in their history.  Stocks, in our view, are a bargain at current prices as they trade well below their intrinsic values and don’t reflect any potential for growth in the future.

 

1 2 3 4