Wareham Weekly Insights

The big picture

On the road to recovery



The U.S. Federal Reserve delivered a vote of confidence on Wednesday, declaring that U.S. economic activity is “levelling out.” The central bank held its key lending rate at a record low, and signalled it would end one of its stimulus programs (buying U.S. Treasury securities) at the end of October. In Europe, Germany and France unexpectedly returned to growth in the second quarter. Good news also came out of the U.K. – data showed house prices stabilized, and the Royal Institution of Chartered Surveyors now predicts the average house price will rise by the end of the year, reversing its forecast of a 10% to 15% decline.



Global policy makers must secure a rock-solid economic recovery before they turn their attention to exit strategies from stimulus policies, says Canadian Finance Minister Jim Flaherty. “What positive signs we have seen are encouraging, but they are tentative,” he said, referring to car sales, consumer confidence and housing as sources of optimism, versus continued worries about global financial institutions and weakness in the United States, Canada’s biggest trading partner.



Markets

A bumpy ride and the car of the future



Markets were volatile early in the week, and then strengthened on the Federal Reserve’s optimism and a boost in the forecasted demand for global crude oil. The Canadian dollar halted a four-day slide on Wednesday, as stocks and oil prices rose. The U.S. government’s $3-billion “cash for clunkers” program drove 270,000 vehicle sales in two weeks, prompting Ford to hike factory output. General Motors claims its new electric car, the Chevy Volt, will get an unprecedented 230 miles per gallon (100 km/l), four times the mileage of Toyota’s Prius. It will go on sale in late 2010 for US$40,000. Meanwhile Volkswagen announced that it will pay US$4.7 billion for a 42% stake in Porsche as it executes a gradual merger.



Ottawa will not block the sale of Nortel’s wireless assets to Ericsson, but left open the prospect of a review under the Investment Canada Act. Critics argue the sale would put cutting-edge technology in the hands of foreigners. Toronto-based Brookfield Asset Management launched a US$4-billion real estate turnaround fund, which will buy distressed houses and office towers around the globe. In contrast, Canada’s largest pension fund manager, the Caisse de dépôt, announced a $5.7-billion writedown on its property holdings this week. Despite the recession, McDonald’s sales rose 4.3% in July thanks to its new McCafé line and Walmart beat expectations with profits of US$3.44 billion for the quarter, roughly equal to a year ago.



Our recommendation
Rebalance portfolios to buy low, sell high

· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the market trend remains upward in the short term despite economic risks on the horizon. Although market valuations are not excessive at current levels, they are already pricing in a significant rebound in earnings in 2010. A period of consolidation or a range bound market allowing time for fundamentals to catch up with share prices is likely to occur over the coming months. Profit taking would also not be unexpected; recall that September, on average, is the worst month for equity investors historically.

Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights the desk’s current recommendations as follows: Term Call – below benchmark duration. Sector Call – underweight Canadas, overweight Provincials and Municipals, neutral on Corporates. Currency Call – favour the C$, exception being A$ which is expected to outperform; Alternative Strategies – underweight high yield, overweight Emerging Markets Debt, neutral on inflation protected bonds.
Portfolio strategy. When market volatility leads to large shifts in the weights of individual holdings, we recommend clients rebalance portfolios to maintain a discipline that encourages profit taking on strength, while adding on weakness in other positions that may have underperformed.


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ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF

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