Outlook April 2016

Last quarter turned out to be lot better than all of 2015, at least for the Canadian stock market. There was some reversal in US securities, further confirming our theme from the last report that linear thinking is just plain wrong when making investment choices. Oil seems to have found a bottom, at least for now even though threats of greater supply coming from Iran and rest of the middle east persist. There was some noise that some big producers will freeze oil production at current levels. It just goes to prove again that investing in   resources is quite dangerous for your financial health. Our exposure remains well below the market. We are unlikely to change this strategy any time soon.

The more important question is whether all of the fall out from a devastating drop in energy prices has already been discounted by otherwise attractive sectors such as banks, pipelines, utilities and companies with significant presence in Alberta. Calling it done prematurely is not wise as stocks even now are not really what you call cheap. US market as measured by S&P 500 is trading at a forward multiple of 16 which may be revised as the year unfolds, making it even more expensive.

Bond market and interest rates are in uncharted territories. Over twenty countries are currently practicing negative interest rate policy or NIRP, something that hasn't been seen, as some say in a thousand years. This means banks are being charged to keep their money at the central banker accounts. Governments are persuading banks to put money into the economy. A negative repercussion of this is much higher inflation somewhere down the road. This was a major concern of central bankers for many decades. They have been forced to abandon this worry. Because the flip side of inflation is deflation, i.e. dropping prices and that leads to decades of no growth as witnessed in Japan.

We don't really know how all this plays out. Efforts to stimulate world economy by using cheap money may eventually result in a more stable albeit slower growth. There are some signs of this happening as US consumers are spending and most restaurants and shops in major cities even in Canada seem oblivious to an impending slowdown. House prices in Toronto and Vancouver tell us a story very different from doom and gloom. Taking a slow elongated recovery is a lot better outcome than what we saw in the thirties after the then economic collapse. Using it as base case, we build our investment strategies for now.

And that curiously means little change in our strategy of vigilant look out for companies which provide products and services in good times and bad at the same time share their income with us in form of dividends. This is the boring old strategy that has worked for years and there is no reason to change it. It does require vigilance as unrelated events such as oil price collapse can derail what looked like a good thing  as we saw with pipelines and even Canadian banks with western exposure.