Our view continues to be that stocks will outperform bonds over the next five years as economic growth continues to expand, companies focus more on profitability and investors begin to increase their ability to take some higher level of risk.  Another sign that this may be starting to occur is within the stock market itself.  Over the past two years in particular, most of the money going into stocks has been to the higher dividend paying names and the more defensive sectors of the market, such as consumer staples, utilities, telecoms and REITS.  Cyclical sectors such as energy, basic materials, industrials and most technology have lagged the overall market.  This can be seen in the chart below which shows the relative price movements of cyclical versus defensive stocks; a falling line indicates that the ‘risk-off’ trade is winning and that defensive stocks are doing better while a rising line suggests that the resource and economically-sensitive stock groups have taken the lead.

Are Cyclical Stocks Ready to Resume Leadership?

After leading the market higher off the bottom in 2009, cyclical stocks peaked out in March of 2011 and have sharply lagged the defensive group since.  That was why the Canadian stock market has done so poorly on a relative basis over the last 7 quarters; the pre-dominance in our index of resource stocks has caused us to lag the U.S. as well as the European markets.  However a change appears to be in the wind recently as the cyclical stocks are starting to resume a leadership role again.  The 20% recovery in the Chinese stock market over the past two months (after being one of the worst performers in 2011-2012) could be another sign that the cyclical (or ‘risk-on’) trade is coming back into a leadership position.

This is a big week for Research in Motion as RIM unveils its new Blackberry 10 devices on Wednesday and follows with a global marketing roll-out, including advertising on next weekend’s Super-Bowl game.  We saw early demonstrations of the new BlackBerry10 device and its associated QNX software last spring in a group meeting with new CEO Thorsten Heins.  We were extremely impressed with the totally operating system, the true multi-tasking that is enabled on the new devices and the overall simplicity of the user experience.  The browser is amazingly fast and can stream video.  Google searches on the device were performed as fast as on a PC.  The new server also allows other devices (Android, Apple) to run thereby allowing firms that want to offer BYOD (bring your own device) programs can do so and not leave the Blackberry fold.   Most importantly for this release though, is the fact that the global telecom carriers are basically all on board with this release and will be pushing hard on the Blackberry products.  This included Sprint, AT&T and Verizon in the extremely important U.S. market.  Although Verizon initially was lukewarm to the BlackBerry10, their enthusiasm has increased.  In total, over 100 global carriers are set to participate in the BB10 launch.

While there should be a huge ‘refresh’ market for devoted Blackberry users who have not seen a substantial new product offering in over 18 months, the big question is whether the BB10 can gain any traction in the consumer market as well as stop the deterioration of RIM’s strong business base.  The stock has almost tripled off the lows of just over C$6 last September so we think that a lot of success has already been priced into the launch and the company will now have to deliver the results.  Also, earnings will continue to be under pressure.  Since the BB10 system is ‘internet based’ rather than on the Blackberry network, the company will not collect network fees from the carriers and that will reduce profit margins.  We also expect the ‘mother of all marketing blitzes’ to support the release which will also add costs.  Our strategy in the past week has been to ‘sell the hype’ and we have reduced our weighting in the stock although we continue to hold a position.  This is an extremely good quality product and it will be very interesting to see how the marketing is done and how the early reviews come in.  We like what we’ve seen so far but the stock is no longer the bargain it was a few months ago when it was basically priced as if it were no longer a viable entity.

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