2012: First Quarter Financial Review

This is an overview of the year so far but I'm always available to discuss this information or any of your financial or investment questions any time. 

Equity markets rallied in the first quarter despite continued uncertainty in the Euro-region, above-average unemployment levels in the U.S. and the rising debt levels in Canada. The S&P/TSX Composite was up by 4.4 percent, while the S&P 500 Index ended the quarter higher by 12.6 percent. The MSCI Emerging market index was also up by a whopping 16 percent.

As equity markets surged, Canadian bonds dropped by 0.2 percent this quarter. According to IMF Managing Director, Christine Lagarde, the global economy is in better shape than it was even three months ago, however the issues mentioned above still need to be addressed sooner rather than later.

Housing Employment Pensions

In Canada, the unemployment rate dropped to 7.2 percent in March, down from 7.4 percent a month prior. Increased employment may add to household spending which has been rising at a faster pace than expected.

This rise in spending may in turn increase household debt, which has been a cause for concern in the nation. In other news, the Federal budget was released a few weeks ago which included major changes to pension, industrial research and other areas that would amount to $5.2 billion in annual cuts over the next few years.

Taxes and Balanced Budgets

The government’s mandate is to balance its books by 2015 without raising taxes; however achieving this deficit reduction plan is dependent upon revenue growth over the next five years to average roughly 4.7 percent. In company news, earlier this quarter, RBC and TD bank raised their quarterly dividends by six percent each after reporting profits that topped analysts’ estimates.

In the U.S., economic data, especially weekly jobless claims numbers have been steadily declining, indicating that the U.S. economy may be recovering. The Federal Open Market Committee (FOMC) acknowledged that the labour market has gained some strength and strains in global financial markets have eased.

The Global Picture

Ben Bernanke, chairman of the U.S. Federal Reserve, noted that the unemployment rate is still elevated and significant downside risks remain. He also stated that it may be necessary to continue with accommodative monetary policy in order to make further economic progress and thus it is unlikely that the Fed will raise interest rates before 2014.

Policy makers in Europe made noteworthy progress in order to stave off a disorderly default of any of the debt-ridden countries in the 17-nation European Union as they agreed to provide capital for the planned permanent bailout fund faster than estimated. Finance ministers from the region concluded that they would inject 500 billion euros in fresh bailout funds in addition to 300 billion Euros already committed to European rescue programs.

EU Fragility Continues

Euro-area governments want to complete the capitalization of the permanent bailout fund by 2015, which is a year ahead of schedule. In other news, private bondholders in Greece tendered 85.5 percent of their Greek bond holdings, exceeding the required 75 percent participation rate, in order for the nation to receive its second bailout package. Also, Greece’s credit rating was revised up four levels to B- from a restricted default and the country was given a stable outlook by Fitch ratings.

EU leaders are now prodding Spain to make deeper budget cuts, as borrowing costs in the country are climbing and the unemployment rate reached a record high of 23 percent in March. In other news from the region, and slightly on the brighter side, a report towards the end of the quarter showed that German investor confidence jumped to a 21-month high after the ECB flooded the financial markets with cash.

Precious Metals and Commodities

Commodity prices rose for most of the first quarter and even though gold prices were in the red for March, down by 3.8 percent due to lower demand from emerging market countries like India and China, the precious metal was higher for the first quarter by 6.4 percent and should the crisis in Europe rattle equity markets going forward, we expect prices for the yellow metal to move higher.

Oil prices also ended the quarter on a high note, up by 4.2 percent as uncertainty over restriction on supplies from Iran continued to push prices higher. On the contrary, natural gas prices were down 29 percent for the quarter as demand for the commodity has been lower due to above-normal winter temperatures.

Business Deals and Stock Prices

The frequency of mergers and acquisition deals picked up pace as we approached the end of the first quarter. The first major announcement came from BCE Inc. who acquired Astral Media Inc. for roughly $3 billion in a cash and stock offer. BCE also said Astral Class A non-voting shareholders will receive $50 a share, which is a 38 percent premium to its March 15th closing price.

The second deal announced came from Canada’s largest grain supplier, Viterra Inc., who received takeover offers from PI Financial Corp., Raymond James Financial Inc and Glencore International. Viterra finally chose to hold talks exclusively with Glencore, who obtained support from Viterra’s board when they made an offer of $16.25 per share, valuing Viterra at $6.1 billion.

Equities and Interest Rates

Looking forward economists at Dundee Wealth believe that the Bank of Canada will maintain rates at one percent at their April 17th meeting; however the Bank will be looking out for external developments for potential negative shocks to the Canadian economy.

In the U.S., the Fed Funds Target Rate is expected to remain in the range of 0 percent to 0.25 percent until at least 2014 and there is a strong chance of further stimulus from the Fed. Our economists still believe that there is a high chance of Greece exiting the EU as early as the summer of 2012, and as a result, equities worldwide may take a hit going forward.

I'm here to answer any of your questions and coffee's on me!

Patrick C. Nicol
image: diadeis

2011 in Review

It’s not easy to be an optimist after a year like 2011. Canadian stocks sank more than 8%, led by a 52% drop in information technology. Even Canadian bank stocks offered less of a safe haven than in years past. Around the world, 2011 was a year marked by natural disasters, debt and deficit problems, uprisings and protests. Time magazine asked in its December issue: “Is there a global tipping point for frustration?”

I believe there is. Things that are broken beg to get fixed, and challenges of any kind are often accompanied by opportunities. Here are my observations for the year ahead:

First, bleak points in history are not necessarily bad times to invest. The worst time to invest is often when investors are overly optimistic and asset prices are unjustifiably high. When there’s worry and negativity, stock prices generally reflect that sentiment. Today, I’m finding stocks of many high-quality companies selling at very attractive prices. The way I see it, global markets are offering investors an opportunity to upgrade the quality of their portfolios right now.

U.S. companies have been remarkably resilient. 

Despite a less-than-robust economy, and a host of other problems, U.S. companies continue to rebound. The S&P 500 was up 4.6% in 2011, and American corporate profits are at record highs. When you compare corporate earnings to what government bonds are yielding, it’s hard not to be optimistic about stocks.

Emerging markets are alive and well. Emerging markets have relatively little debt, access to capital like they’ve never had before, powerful technology and a rapidly growing middle class. That’s real growth potential. Many Canadian, U.S. and European companies that do business in emerging markets may also be well positioned, even if their local economies aren’t strong. It’s where a company does business, not where it’s based, that matters most.

Innovation and Growth

Innovative companies around the world are creating new products and solving the world’s problems. I think that’s what makes markets go up over time — it’s the effort of the individual companies solving problems. That’s a reason for optimism, as long as you’re patient.

The biggest risk right now could be over concentrating your portfolio. When we don’t know what’s going to happen, it’s often wise to invest in different types of securities. Many people end up owning too much of a “good” thing, whether bonds, cash or high dividend-paying stocks. My job is to make sure you stay properly diversified, even when the markets make you nervous. As part of your investment strategy, it's wise to check on your financial situation and any changes that may have occurred.

I can help. Let’s talk.

Patrick C. Nicol
image credit: istock