The world’s largest sovereign wealth fund is planning to take on more risk as it seeks to exploit its role as a strategic investor, in a move that could mark a new trend for conservative publicly-owned investment funds. The Norwegian oil fund, which has more than $600 billion of assets under management, also believes it could be more opportunistic when markets dry up, as was the case during the financial crisis.  The fund can exploit its nature as a long-term investor by being a provider of liquidity in periods when there is a lack of liquidity.  The new approach will be closely watched outside Norway as the size of sovereign wealth funds in the Middle East and Asia, forcing managers to rethink their investments strategies. Given that Canada’s resource sector has proven to be a popular target for these kinds of funds, we expect that our market should get a lift from this type of investment.

What’s happening on the economic front to support stocks?  Interestingly, ‘Economic Surprise Index’ (shown below) is doing the same thing in 2012 which it did in the prior 2 years, which was to fall during the first half (economic numbers coming in below expectations) and then recover in the second half of the year and finish strongly.  The biggest impetus to the upside in the U.S. has been the improvement in the housing market.

Economic Surprise Index Rising Again

The implications for the stock market are somewhat mixed from this data though; on the one hand, better economic data is always better for earnings and therefore for stocks.  On the other hand, a good part of the recent global stock market rally has been the belief that central banks will once again come to the table with even easier monetary conditions and more buying of bonds.  If the economic data improves further in the 2nd half, then this stimulus might be ‘taken off the table’ which could lead to a fall in stocks.  This is one key reason that we continue to watch the sentiment and technical conditions of the stock market to see how this rally unfolds and how long it can be sustained.

Another interesting insight on the economic front comes from the CEO’s of some of the major mining companies, where we have seen more optimism recently despite the cutbacks in capital expenditure programs announced recently by the major sector players.  Rio Tinto Chief Executive Tom Albanese said ” we have been signaling for some time that markets would remain volatile and we have seen challenging conditions in the first half.  Although sentiment remains negative in Europe and the U.S. recovery is still fragile, our order books are full and we expect Chinese GDP growth to be around 8% in 2012.   We expect to see signs of improvements in Chinese economic activity by the end of the year.”  Fortescue Metals and Anglogold Ashanti supported this sentiment saying that the “long-term prospects for commodities remain intact.  The most important thing we have to remember is that the world is short of commodities and so for the mining industry, that’s good news for the long term.”  The challenges facing the commodities industry include getting access to “new ground,” or unexplored terrain, which is becoming increasingly difficult, and that means new sources of metals will be scarce.  Adding in the cutting back of some capital spending programs suggests that commodity supplies will remain tighter for longer than many investors expect and that this should also lead to continued firmness in commodity prices, another point in favour of the Canadian stock market.  We continue to have overweight positions in the Basic Materials and Energy sectors, both due to the attractive valuations of the stocks as well as the belief that resource prices will remain firm.

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