Sunday, January 8, 2017

Q1 Outlook 2017

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.

Would we ever change our strategy? Yes when we see another wash out and more of a sustained global recovery. At this time, that looks far away.

No comments:

Post a Comment