EQUITIES COMMENT- "Don't Worry...."
Be Happy During the first quarter of 2017, Canadian stocks turned in their fifth straight gain and made a new all-time high. The majority of other global equity markets also posted positive returns for the period. Encouraging signs of a synchronized global economic recovery have buoyed the earnings outlook for stocks. The accompanying graph shows the Global PMI (Purchasing Managers Index) which measures the economic health of the manufacturing sector. The underpinnings for stronger global growth do not hinge just on implementation of Donald Trump’s agenda. The recovery in oil is benefitting emerging countries like Russia and Brazil, declining unemployment is boosting confidence in Europe and policy stimulus is having a positive impact on growth in Japan and China. Lower taxes and infrastructure spending in the U.S. would add further support to the economic outlook.
No Trouble . . . Yet Investors continue to scan the horizon for a storm that would douse the budding economic pickup. Is it any wonder? Since the financial crisis, any meaningful improvement in growth has been squashed by unexpected events—U.S. credit rating downgrade in 2011, 2015 oil price collapse, escalation of the European debt crisis in 2012, to name a few. The major cloud on the horizon is the upcoming election in France this month. Le Pen has vowed to hold a referendum in France on EU membership within six months if elected. The race is close. A Le Pen victory could result in a sell-off in stocks.
Investors Are Smiling about Broad Based Gains 9 of 11 sectors rose with only Energy and Health Care reporting declines during the quarter. Technology is less than 3% of the TSX and was heavily influenced by Blackberry where a new strategy geared to software is showing results. Consumer Discretionary was propelled by Canadian Tire and Restaurant Brands, the owner of Tim Horton’s and soon Popeye’s. Energy lagged due to a 5% drop in oil prices and concerns about increased drilling in the U.S. which would weigh on supplies later this year. Health Care continues to be heavily influenced by the meltdown of Valeant—a massive debt load and limited progress with asset sales are weighing on the stock.
When You Worry Your Face Will Frown Worrying about the short term movements in the stock market and trying to trade them (known as market timing) has proven to be a long run losing strategy. Missing out on the one or two best days of the year for the stock market significantly reduces returns.
We think it is important to take a long term view when investing in equities. We focus on high quality stocks that can generate above average levels of profitability over an economic cycle. Hand in hand with that goes careful evaluation of the stock prices using many different tools to determine if they offer good value and are worthy investments now or too expensive and would be more attractive at lower prices.
When it comes to valuing the market as a whole, we take a similar approach. We believe the TSX still offers good value although it is less of a bargain now. Key supporting factors are the low level of interest rates and dividend yields greater than bond yields. The TSX is trying to break into a new trading range that has upside potential to 16,600. We may not see that level until 2018. Downside risk is apparent to 14,500. Risks appear mainly on the political front; let’s hope politics don’t once again derail the growth path of the economy.
Headings inspired by the song “Don’t Worry Be Happy” by Bobby McFerrin and performed by Bob Marley
