In Canada the banks have been one of the biggest winners since the market lows, outpacing the market during strong periods and holding value better during the pullbacks.   The ability of the Canadian banking system to survive the 2008 downturn better than any other banking system gave it a strong leg-up on the competition.  But the latest financial results from the group, though ahead of expectations, failed to lift the sector as it has in the past few years.  Moreover, the robust dividend growth at Canada’s major banks is expected to be significantly less in the quarters ahead.  The opposite may be true in Europe and the U.S., where the payout party for investors may be just getting started as many of the major financial institutions saved by taxpayer bailouts are gearing up to boost dividends after five intense years of repairing their decimated balance sheets. For the first time since the financial crisis in 2008, investors are optimistic that a number of European banks, such as Barclays PLC and Deutsche Bank, are set to hike their dividends.  Ditto for a handful of large American institutions, such as Bank of America, Wells Fargo, and Citigroup, that saw U.S. Federal Reserve bless with the ability to pay higher dividend yields.  After wrenching workouts involving write downs and asset sales, wary regulators are expected to maintain the conservative zeal with which they force fed these institutions bailout loans to help rebuild their battered balance sheets.  We can’t forget that if the single most effective way to build capital is achieved by keeping dividends low, then the financial regulators will not abandon their goal to boost bank capital in the near term, no matter how much healthier balance sheets may look right now.  But, at least for now, banks are finally starting to look less like ‘basket cases’ and more like the type of sector that lead the stock market from 2000-2008.

In each of the last three years we have seen strong starts for the stock market and the economic data in the first quarter, only to give way each time to a 2nd quarter downturn in growth and a subsequent sell-off in stocks.  In each case we did also see stocks rally again into year end on stronger economic data.  Will this be the pattern again in 2013?  One key chart to watch on this matter, shown below, is the Citi Economic Surprise Index. (falling line indicates economic numbers falling short of expectations).  While the index has been rising since the middle of last year, many worry that we will see a repeat of the slowdown pattern we have seen around this time in each of the last 3 years.

Economic Data Beating Expectations in US

We don’t expect such an occurrence again this year.  Europe appears to have come off the bottom, Japan has a new ‘pro-growth’ government in place that is pushing hard on economic reforms, China has re-achieved their 7.5% growth rate and the U.S. economy continues to be supported by the housing recovery, which is in its very early stages.  Putting it all together it seems that global growth is on a clear recovery path and we don’t expect any ‘growth problems’ again in 2013.

1 2 3 4