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First Quarter 2012

April 18, 2012 • Print This Article

A period of transition is always uncertain. Economies and nations are currently in transition around the globe. The US economy is transitioning from a period requiring stimulus to one that has sustainable growth. In time, as growth becomes increasingly more entrenched, stimulus should be withdrawn, and North American interest rates should rise. China is transitioning into a consumer society with increased wealth and demand for consumer goods, and the resources required to produce them. Europe is facing an extended period of economic uncertainty as the will of Germany clashes with the needs of poorer countries. The rise of Islam in the Mid East and Northern Africa as a result of the Arab Spring is an emerging issue as well.

Several things have occurred over the past six months to change the investment discussion. Debate changed from deficit funding - deficits in the US are still growing at record rates - to the political theatre of the Republican Primaries. As the US economy continued to grow and businesses began to invest, US equity valuations expanded. Chinese growth started to decelerate. A change in expectations surrounding China led to lower commodity prices and a rotation by "hot money" investors away from Canada.

The TSX had much more moderate growth in valuations. Strength in the financial service sector (especially insurance companies) was offset by weakness in gold stocks and interest-sensitive utilities. With growth in North America it is possible that interest rates will begin to rise as stimulus is removed. This would be seen as beneficial to the profitability of insurers, but detrimental to the earnings of utilities. As economic concerns recede, gold tends to weaken and lose its position as the last resort investment haven. Bonds were changed very little in this quarter.

As Canadian growth becomes increasingly reliant upon energy development, economic and political leadership will continue to migrate westward. The challenge for Ontario and the rest of Canada is the fact that traditional manufacturing is transitioning away from a high wage/secure employment environment. Attempts to create a new manufacturing base on Green technology appear to have been premature. There has been growth in highly skilled pockets (technology, healthcare, financial services).

Europe is acting like an anchor on global growth. Assuming Europe holds together, this could be a long term positive. European economic weakness helps contain inflation, keeps interest rates relatively low and provides time for the non-European banking sector to heal enough to bear the aftershocks that may come. A slow, gradual expansion in North America is required to build the reserve base in US banks. However, the low interest rate environment which is providing ongoing economic stimulus and allowing banks to heal could be creating economic imbalances that will ultimately need to be addressed. As time goes on, the impact of Europe on the global economy and on bond and equity markets outside Europe should lessen.

Although Chinese growth has slowed, it is still very impressive and should continue to drive demand for basic commodities. The US should continue to exhibit slow, steady GDP growth. We anticipate PE expansion in many technology issuers as companies implement overdue technology upgrades. Any discussion about fiscal austerity will probably be put off until after the November elections. At some point the US Deficit will once again top headlines, but for now it appears to have become a background issue. As economies recover, interest rates should begin to rise. Any increase should be gradual, as government deficits cannot handle high borrowing costs. Canadian interest rates should already be increasing and are probably ┬Ż-1% lower than they should be due to the need to limit Canadian Dollar strength. Europe should continue to go from crisis to crisis, but the story is getting old and Europe's ability to roil markets appears to be diminishing.

Although there are several global situations that we must monitor, we still prefer high quality equities to fixed income. We remain focused on finding the best quality investments for our clients.

Filed under: Quarterly Reports

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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