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
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