With this short essay we will summarize market developments since the start of the year and share our thoughts for the period ahead. First though, a quick recap of the first half of 2013.
In late May, the US market reached all-time highs. Then at a press conference on May 22, Federal Reserve Board Chair Ben Bernanke made a low-key suggestion that a stronger outlook for US economic growth would lead to a gradual reduction in bond purchases. That policy had helped keep interest rates low. The prospect of an end to the record-low interest rates shocked markets, leading to declines in the next six weeks. As we write this in mid-July many of these losses have been trimmed and the US had actually exceeded its previous highs reached in May.
Some things worth noting about the first half of 2013:
- Even with the declines after Bernanke’s announcement, MSCI reports that the US was still up 17% for the year as of mid-July.
- The strength in the US is a continuation of the trend of the past three and a half years.
- In spite of continuing headlines about Cyprus, Greece and Portugal, European equities showed solid gains in the first half. The worst case scenarios built into equity prices failed to materialize.
- Canada continues to under-perform not just the United States but virtually every major developed economy.
Will America pick up the global growth baton?
Like every other country today, the United States faces serious issues. The US is plagued by reports of political dysfunction, burdensome regulation and slipping competitiveness. However, there are some positives being reported. A recent Globe and Mail article titled The Star Spangled Recovery pointed out a long list of positives for the US. There are signs of improvement in the budget situation. There is growth in housing and auto sales. Stronger job growth is being fuelled in part by the return of manufacturing from overseas, and small and mid-sized businesses are flourishing.
In April, The Economist published a special report on America’s competitiveness. The shale oil and gas revolution is changing the dynamics of the energy industry and provides America with the prospect of energy self-sufficiency. America’s innovation engine is once more operating at full speed – research and development as a percent of the economy has reached the previous record set during the space race. In a world where technology is playing a growing role, the United States is home to 27 out of the world’s top 30 universities for scientific research.
None of this is to say that the United States doesn’t face issues around regulation, infrastructure, education and entitlement spending. But as we look forward, there is a strong case that the United States’ recovery will help fuel economic growth around the world – and with that growth we’ll see the prospect of solid performance by equity markets.
What this means for you
Here are some guiding principles in building your investment portfolio for the future.
1. Time to re-balance: Adhering to your plan
In light of equity valuations and the risk in fixed income, you may want to increase equity weights to the upper end of your accepted risk range. Given strong equity performance since the mid-point of last year, that strategy has worked out well.
2. Diversifying portfolios
When building equity portfolios, we’ve always advocated strong diversification outside Canada. This helped throughout most of the 1990s, then hurt in the decade after 2000, then helped again in the past three years.
Going forward, we have no idea whether the Canadian market will do better or worse than global markets, but we do know that Canada represents fewer than 5% of investing opportunities around the world. In addition, because of our resource focus Canada’s market will tend to be more volatile over time than those of the US and Europe. For those reasons, we continue to recommend global diversification.
3. Focus on cash flow
The final principle relates to the role of cash flow from investments. Amid the uncertainty surrounding economic growth and equity returns, we continue to place priority on the cash yield from investments.
Thank you for taking the time to read our summary. We strongly recommend you seek the services of your financial advisor to ensure that these principles are implemented according to your goals and risk tolerance.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.