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

Nicol and Associates | Living By Numbers

There's more than what you may read, hear or see in the media.

My passion is helping my clients enjoy today, grow their wealth and ensure a healthy financial future. The news and opinions in the media and throughout the social networks can be distracting. So with that in mind, I thought I would go over some of the numbers for you.   

There were mixed results on global capital markets during the second quarter of the year. Bond prices rose, while stocks in general pulled back. Even then, markets such as Germany and Japan made gains, while China and North America were down.

The performance of Canada’s S&P TSX Composite Index was notable in that by mid-June; it had experienced a technical correction – broadly defined as a decline of 10% or more. However, Canadian stocks rebounded at the end of the quarter, and the index registered a decline of 5.2% for the three months and a slight gain of 0.2% for the year-to-date. U.S. stocks have fared better, as the S&P 500 Index was flat for the quarter and up 6.0% for the six-month period (in U.S. dollars).

Market observers point to several reasons for the Canadian market’s lagging returns this quarter. Prices have risen dramatically for fuel, food and other commodities as the global economy recovers, contributing to higher inflation in many emerging markets. Central banks and governments in developing countries have taken steps to cool their heated economies, leading to lower commodity prices, which then affected the commodity-driven Canadian stock market. Markets around the world, meanwhile, were also rattled by renewed government debt concerns in Europe and the U.S., while consumer debt and unemployment levels in developed markets remained elevated.

Despite these concerns, investment veterans such as Gerry Coleman of CI Investments’ Harbour Advisors and Daniel Bubis of Tetrem Capital Management have recently expressed their conviction that equities will continue to outperform other asset classes. These experts point out that equity market valuation remain reasonable and corporate fundamentals are healthy.

The global economy, while not uniformly robust, is still supported by impressive growth in developing economies, low interest rates and strong credit markets. From March 2009, when the stock market reached a bottom during the financial crisis, until March 2011, the Canadian stock market had surged over 90%. Historically, pullbacks of 5% to 10% have been a normal part of such ongoing market advances.

In this environment, portfolio diversification – both geographically and across asset classes – provides a defence against volatility while allowing you to benefit from market growth. During the last quarter, for example, bond prices rose as equity share prices fell. The tendency of returns and risks to vary across different types of investments helps to smooth out the highs and lows in a portfolio over time.

My team and I continue to monitor financial market conditions on your behalf. Should you have any questions or concerns about your portfolio, please do not hesitate to give us a call – we are here to help. A great way to start is simply call my office and we can book a time to grab a coffee on me. I wish you and your family a safe and pleasant summer!

Patrick C. Nicol

image credit: dnjuice