One of the most attractive stock groups in our view is the Technology sector. Not only do these companies benefit from the surge in productivity enhancement going on globally in the business sector, they are also ‘front and centre’ on the plethora of new products (smart phones, tablets, software applications) being offered to consumers who are more interested in social networking, video downloads and constant access to high bandwidth communications and applications. Surprisingly, the major companies in this industry are trading at substantial discounts to their history valuations as well as to the rest of the market, where it could be argued that the growth outlook is less upbeat. The chart below shows the Price-Earnings (PE) Ratio for the S&P500 index in the US versus that for the S&P Info Tech sector as well as the ‘spread’ (difference) between the two ratios over the past fifteen years. What this clearly shows is that the valuation for tech stocks compared to the rest of the market is lower than it has been since the wide scale deployment of the internet in the mid-1990’s (which could easily be argued was the beginning of the ‘technology boom’). While the Technology sector got absurdly over-valued during the ‘bubble period’ of the late 1990’s, those valuation levels have come down substantially over the last ten years. We have now come to the point where the major tech stocks actually trade below the valuation of the rest of the market, despite the fact that most of these companies have high gross margins, stronger than average growth rates, substantial cash balances and global footprints for their sales.

More mature companies such as Intel, Cisco and Hewlett Packard are all trading at less than ten times forward earnings estimates, despite the fact that all are showing growth in earnings. IBM and Microsoft, which have both beaten estimates over the last three quarters and are showing a resumption of stronger growth, trade below 11 times forward earnings. Even Apple, arguable one of the best turnaround/growth stories in the market over the past 20 years, trades at only 14 times the annualized earnings reported in the last quarter. This is less than the 14.5 forward PE ratio of the entire market! We could also argue that this 14.5 PE ratio for the market overall is low by historical standards, especially given that interest rates remain exceptionally low as well. Typically the market has traded at around a PE multiple of 15 with interest rates in the 5% range. Clearly with earnings still growing at over 10% per year and 10-year interest rates around 3.5%, the stock market could easily support a PE ratio in the 16-18 times range without stocks being viewed as over-valued compared to bonds. We continue to have an overweight position in the Technology sector as well as the overall stock market, despite near-term risks associated with the political uprisings in the Gulf region. Our top picks in the tech sector are those companies that sell primarily outside of North America and which are positioned in the higher growth areas of tablets, smart phones and cloud computing. Apple, Qualcomm, Motorola Mobility, Google and Research in Motion are our top names for growth among the North America tech stocks while IBM, Microsoft, HP, Open Text and Sierra Wireless are all exceptionally cheap on basic earnings valuations and are also showing growth.

One of the more controversial areas of the market recently has been the Gold sector. While many of the skeptics are pointing to gold as being in a ‘bubble’ due to the sharp gains over the past 8 years and the inordinate attention that the recent price move has drawn, we still feel that there is some upside in the price of gold and that it is definitely not in any sort of ‘bubble market.’ While the price of gold has had a substantial gain from the lows of under US$300 per ounce back in 2002, the percentage move has actually lagged the gain in some other commodities. More importantly though, the price move has been supported by the continued weakness in the US dollar (in which gold is most commonly priced) as well as by strong consumer demand for jewelry as well as for investment purposes. Chinese consumer buying has accelerated in the last year as individuals add to their holdings of gold. One of the larger sources of supply and demand over the past few years, though, has been the central banks of the world, including the International Monetary Fund (IMF), which has been one of the larger sellers of gold. The chart below shows the major sovereign/central bank participants and their total gold holdings currently. While the European central banks and the IMF had been sellers, the US central bank has not sold any gold and it remains the largest holder with its gold holdings representing about 20% of its total currency reserves. Selling has generally slowed down and this reduced source of supply has been one of the factors that has helped push gold prices higher. The more interesting story though is the buying that is starting to come from the central banks of the emerging economies, which have typically held only about 2% of their foreign reserves in gold, choosing instead to invest most of their surplus funds in US Treasury Bonds. When the IMF sold 100 tons of gold in 2010, India bought the entire position in a single transaction.

With the central banks that have the strongest growth in foreign reserves now turning into buyers of gold, we expect that demand will remain robust. Mining of gold globally continues to be hampered by rising production costs, so supply growth is constrained, adding further to upward price pressures. Finally, the gold stocks have lagged the move in gold bullion over the past three years by a substantial amount, meaning that the stocks have become even less expensive compared to the underlying commodity. The ratio of the TSX Gold Index to Gold Bullion has dropped to the lower end of the range that it has traded in over the past 20 years, suggesting that gold stocks are not reflecting the current price of gold. Senior gold stocks such as Barrick Gold, Goldcorp, Kinross Gold and Yamana Gold all look exceptionally cheap relative to historical levels. We remain with an overweight position in the sector with gold stocks representing about 15% of total equity exposure.

The bottom line for the stock market right now in our view is that it looks like another strong buying opportunity is being created by the recent turmoil in the Gulf region. The global economy continues to recover from the recession in 2008. Unless oil prices remain above US$100 for an extended period of time (i.e. more than a few months), we don’t see a huge negative impact to overall economic growth. Saudi Arabia has close to 5 million barrels per day of spare capacity in oil right now and they are increasing this production in the short term to offset any loss of supplies from Libya. We think that the oil price will quickly retreat back into the US$80 area as the situation in Libya stabilizes and stops being headline news. We remain overweight the Basic Materials group, adding to positions in the coal, copper, iron ore and agricultural stocks recently. In the US market, we still like the Industrial sector with GE, Cliffs Inc., Peabody Coal and Freeport McMoran being the core holdings. We are also overweight technology stocks in the US and Canada but remain underweight in financial stocks, seeing less upside in earnings growth and valuations. Within our Balanced Funds, we had reduced our overall equity exposure to about 110% of Benchmark levels. However, we would look to increase this back to the 120% on any further weakness in stock prices.

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