However, despite conventional wisdom, US dollar appreciation does not have to be negative for resource stocks.  When the dollar is appreciating due to superior US economic fundamentals, commodity stocks can rise on improving demand and reflation.  1993 and 2005 are two recent examples when the trade weighted US dollar appreciated (1993 = +6%, 2005 = +13%) and Canadian energy and material stocks rallied (1993 = +14%, 2005 = +15%).  In fact, a higher US dollar should help mitigate some of the price weakness in commodities for Canadian producers as their revenue is based on commodities priced in US dollars and their costs are in Canadian dollars (or other international currencies).  Take oil for example, the Edmonton spot price for Syncrude is down 5.9% year over year in US dollar terms, however in Canadian dollars it is up 2.2%.  Bearish investor’s sentiment (particularly international investors) has reached extreme levels again despite valuations trading at a 10% discount to their book value (see below).

Over the last 5 years these have been excellent buying opportunities and we have seen very strong rallies from these levels.  Furthermore, with three global central banks all easing monetary policy; Japan (Abenomics), Europe (about to start Quantitative Easing), China (targeting credit growth), global liquidity should increase over the next few quarters, which will ease deflation fears and benefit commodity prices.

Sept14-05

 

All of this should support earnings growth for globally-oriented companies.  We continue to see attractive buying opportunities in the cyclical and growth stocks even though investors remain wary.  With the world economy projected to grow between 3% and 4% this year and next, the global expansion that started 5 years ago remains intact.  The stock market sell-off that began in September appears to be just a mid-cycle correction, clearing out bullish sentiment and setting us up for the next move up.  The portfolio is overweight cyclical stocks (energy, materials and technology) and underweight defensive sectors (utilities, telecom and consumer staples) to take advantage of this cyclical rally.

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