Jordan Wealth Management Group - ScotiaMcLeod Truro

Emerging markets lead recovery; Sovereign debt weighs down global markets; January in review.

Big picture

Emerging markets lead recovery

Recovery of the world economy will be led by emerging nations such as China, and Canadian businesses must be willing to expand into new and unfamiliar territories to fully realize their growth potential in the years to come, according to the latest Economic Directions report released Wednesday by Scotia Economics. China grew 9% in 2009 and already has helped push commodity exports to roughly half of Canada’s foreign sales. The report says rising incomes in emerging nations will spur consumer spending, which is an opportunity for Canadian exporters.

A record 580,000 patents were issued in China in 2009, up 41% from a year earlier. China rejected U.S. pressure to alter its monetary policy, even after U.S. President Obama vowed to get tough, claiming that artificially low prices on Chinese goods put the U.S. at a huge competitive disadvantage. Amid signs of recovery, the Bank of England ended its bond buying program but still held its key rate at 0.5%, and the European Central Bank also kept its rate policy unchanged. Canadian building permits were up 2.4% in December, 32.6% higher than last year.

Markets

Sovereign debt weighs down global markets

On Thursday, the TSX erased gains from earlier in the week, as global stock markets posted significant losses linked mainly to debt problems in countries such as Greece, Spain and Portugal. Oil dropped below $75 a barrel as rising crude inventories reinforced weak energy demand. The price of oil is down more than 12% in three weeks. With profit down 75% year-over-year and concerns of a supply glut, Shell announced plans to cut 15% of its refining capacity and shed a further 1,000 jobs.

BCE reported strong fourth-quarter earnings with revenues up 4.8% versus a year ago thanks to acquisitions of The Source and Virgin Mobile Canada as well as the launch of its new high-speed network, which drew 163,000 new wireless subscribers. Research In Motion won a patent infringement lawsuit in the U.K. brought against it by Motorola. Cisco’s quarterly earnings beat expectations, marking its first year-over-year revenue growth in 15 months, a positive indicator of business spending. Major textbook publishers have inked deals with Apple to adapt their textbooks for the iPad. UPS profit nearly tripled versus a year ago based on solid international business. Potash Corp. shares gained after Russian competitor BPC raised its prices by more than 6%, indicating prices have finally bottomed. Potash prices were in freefall during 2009 as farmers avoided placing orders and used up their stocks instead.

Our recommendation

Pullbacks are an opportunity to add equity exposure

• Equities.  I have been expecting a pull-back for some time now, and look at this as an opportunity to establish new, or add to existing positions of good companies.  This year’s trading activity will be characterized by volatility while global economic data and corporate earnings reports attempt to catch up with and justify market valuations. The market has swung full circle from Greed to Fear at present – this too will pass.
• Fixed income. Anthony Mentor, Associate, Portfolio Advisory Group, highlights the following recommendations: “Term Call – below benchmark duration; overweight cash. Sector Call – underweight Canadas, overweight Municipals and Provincials, and Corporates. Currency Call – recent strength in the Canadian dollar means little upside to foreign currency trades. Alternative Strategies – overweight high yield, overweight Emerging Markets Debt, underweight inflation protected bonds.” I continue to like selected floating rate preferred issues and a few shorter-term debentures.
• Portfolio strategy. Vincent Delisle, Scotia Capital’s Portfolio Strategist, writes “With earnings and U.S. employment visibility set to improve through 2010, we are sticking to an equity overweight/government bond underweight stance.”

The month in review

January: Global economy strengthens, but risks remain

The world’s economies are advancing steadily to recovery, some faster than others. While Britain eked out a paltry 0.1% gain in the fourth quarter, China’s economy grew an astounding 10.7% (annualized), raising expectations that Beijing will lift interest rates soon. But issues still remain that threaten the recovery and these concerns caused markets to slide over the month. Greece is on the edge of sovereign default, Japan’s debt has skyrocketed and the U.S. also faces a troubling fiscal situation while its labour market and housing sector still face an uphill climb.

Canada’s outlook brighter

The International Monetary Fund gave Canada a vote of confidence, raising its GDP forecast to 2.6% in 2010, up from 2.1%. Higher commodity prices for major Canadian exports, such as gold and oil, and further signs of a global economic recovery, are expected to help boost the Canadian dollar in 2010.

Stock markets lose ground

Ironically, the strength of the recovery worked against stock markets in January as it spurred investors’ fears over the removal of government and central bank supports. Further, President Obama’s proposed restrictions on the financial industry set investors on edge. Stock markets worldwide were down between about 4% and 5% over the month, with the S&P losing 3.5% and the TSX shedding 5.5% as oil prices dropped 8.8% on U.S. dollar strength, recovery concerns and higher inventories.

Landmark Asian trade agreement

Six Asian nations– Indonesia, the Philippines, Thailand, Singapore, Malaysia and Brunei– finalized the world’s third-largest regional trading agreement (after the European Union and NAFTA), rendering 90% of goods tariff free.

The auto sector: wheeling and dealing

Magna bought a stake in a privately held lithium mining firm, betting that electric vehicles of the future will run on lithium-ion batteries. General Motors will sell Saab to Dutch sports car maker Spyker for US$74-million. Ford posted its first full-year profit since 2005 and GM predicts a profit in 2010, after exiting bankruptcy just last summer. Toyota shares fell as North American sales and production were halted by a massive safety recall.

iPad unveiled amid recovering PC market

Intel, the world’s largest chipmaker, beat analysts’ forecasts, another indication of a recovering PC market. Research firm IDC reported worldwide PC shipments rose 15% in the October-December period, the strongest quarter in more than a year. After months of speculation, Apple unveiled the iPad, a new touch screen tablet-style computer. Apple also launched its own eBook store, which could revolutionize the publishing industry in the same way the iPod revolutionized the music industry.

At the International Consumer Electronics Show in Las Vegas, Sony showed off nine large-screen TVs capable of displaying 3-D video and will introduce 3-D cameras, camcorders and computers. Google shocked investors by threatening to quit China over hackers and censorship. Although Google currently draws less than 5% of its revenue from China, future potential is enormous.

Mergers and acquisitions

Suncor Energy reported fourth-quarter earnings far below analysts’ estimates, leaving some investors concerned it is struggling to manage its merger with Petro-Canada. Suncor announced it will sell its Colorado natural gas assets to U.S.-based Noble Energy for US$494-million.