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Annual Report 2011

January 30, 2012 • Print This Article

The Markets

The past year was one of extreme turbulence. European debt issues caused investors to seek the shelter of US Treasury Bills. China's economic growth slowed. The US credit rating was downgraded as the country faced a technical default on its debt as Congress and the House of Representatives became mired in partisan politics. The Mideast went from the euphoria of the Arab Spring to concerns of potential radical Muslim governments, potential civil war in Syria and Iran's muscle flexing.

The main economic and market moving story of the year was Europe. Austerity measures implemented in Greece, Spain, Portugal, Italy and the UK, in an attempt to reign in government spending, caused a severe contraction of economic activity in the Eurozone. As a result, recessionary conditions now exist in much of Europe, threatening the recovery as debt levels continue to rise, and interest rates jump on default fears. This coming year Europe should continue to be an influence on global equity and bond markets. However, recent bond auctions by Italy and Spain indicate that the situation may be a stabilizing. Intervention by China and other BRIC nations through the IMF would be a welcome development. If the debt crisis can be contained and interest rates can be kept at reasonable levels, given time austerity measures might work. We are also seeing more of a focus away from Europe and to strengthening US fundamentals.

The economic slowdown in Europe impacted major exporting countries, especially China. The slowdown in Chinese growth led to a fear in the second half of 2011 that China might be heading for a hard economic landing. This concern impacted commodity prices as China is a major importer of oil, base metals, coal, potash and other raw materials. Fortunately, it is becoming increasingly likely that internal growth and urbanization will offset weak exports. The latest annualized growth figures were 8.9% with slowing inflation. This gives the Chinese government room to lower interest rates and provide liquidity to stimulate the economy. Growth in China should support commodity prices in the coming year.

The US economy exhibited moderate growth which did little to lower unemployment rates. As a result, the housing market remained depressed. Consumer spending remained constrained. The political gridlock in Senate and Congress caused a near default of US debt and led to a downgrade of the US credit rating. US companies took advantage of this gloomy backdrop to close inefficient plants and negotiate substantial wage concessions. This retooling of industry has led to a repatriation of some manufacturing from previous low cost countries and improved profitability. Capital is flowing back into the US and although housing prices remain at extremely low levels, there are indications of stabilization as home resales begin to rise. Consumer confidence is increasing as more workers find jobs. Economic indicators are beginning to improve.

A wild card in the global recovery story could be the Middle East. Although developments are becoming increasingly troublesome, there is little chance that either Iran or other countries will risk economic devastation and resulting social unrest by disrupting oil exports, their only source of income.

Canada appears to be a bastion of stability. Global events are playing into Canada's strengths. The uncertainty in the Middle East should make North American energy security an urgent priority. Continued Chinese growth should be supportive to commodities. One negative for Canada is that corporate efficiency continues to lag that of the US and other trading partners. The relatively high Canadian dollar is partly to blame. However, the relatively high wage environment compared to areas such as the US "right to work" states makes it difficult for Canadian industries to compete. A difficult manufacturing and labour environment in Central Canada should be offset a buoyant economy in energy-rich Western Canada. The migration of economic power away from Ontario to the west is an ongoing theme.


We believe that it should be a constructive year for equities in both the United States and Canada. It is becoming increasingly likely that a double dip recession in North America will not occur. The S&P, which normally trades at 15x earnings, is trading at 12x anticipated earnings. Canadian banks, which usually trade at 15x earnings, are trading at between 9.75x and 11.4x forward earnings. A stable economic background and positive earnings momentum could lead to a P/E expansion and higher equity valuations over the next several years.

We believe that equity markets will out perform both bond and money markets. We remain biased toward dividend paying equities as we believe that dividend increases will be forthcoming as earnings improve.

The Andras Group

Filed under: Uncategorized

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.

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