The uncertainties surrounding US election is now over and
the results are not any one expected. Even worse, the future looks even more
uncertain. So you would think that stock markets would
react negatively as most pundits predicted. They were all wrong at
least so far. Last quarter was nothing short of spectacular. For
2016, on a total return basis (including dividends and interest income) US stock
markets (S&P 500) returned 12% in
local currency and 8.1% in Canadian funds. TSX performed
the best in the world at 21.1%. Early rise in resources stock prices
made Canada
standout. Unfortunately the bond universe did quite poorly in Canada at a
mere 1% for short bonds and 1.7% for long bonds. It is important to note that
most analysts were expecting the long bonds to much worse. Poor bond market had
a negative impact on balanced portfolios. For example
a portfolio composed of 50% stocks and 50% bonds would have returned
approximately 11% in Canada
and 7% in US.
So this was not a period for conservative value oriented
investors. This was the year to
abandon all worries and plunge headlong into stocks, not what anyone expected a
year ago. But in times of mania, this happens often. If you look at a
little longer time period such as five years, much of TSX performance is not
from resources but sectors such as banks, telephone companies, utilities and consumer products. Will the next five
years be much different? History says resources have a few great years in the
sun but it is the solid dividend paying companies that beat the averages, not
each year but definitely longer term.
The prospect of higher interest rates has spooked many
income investors and some dividend paying sectors like telephone companies,
pipelines, real estate trusts and utilities have not been as strong
as banks, financials and of course gold and oil. This shift is premature as
high debts both at the government level and consumer levels will keep a lid on
rates for years to come. Last time the financial fiasco such as the
one in 2009, back in the thirties, rates stayed low for over thirty
years ( see US Fed graph below). Granted we had a depression followed by a world war but
the political environment today is not smooth either.
Many European countries are in dire straits. Growth in US and
perhaps China and India is
insufficient to propel rates much higher.
So, we continue to stay with our strategy of investing in
dividend paying stocks with a bias towards those which benefit from slightly
higher rate like banks and insurance companies. This strategy may not
produce higher capital gains in the near term as
euphoria continues but it won’t suffer much when the music stops
either.
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