Jordan Wealth Management Group - ScotiaMcLeod Truro

East sizzles while West struggles; Stocks dive on China and financial concerns.

Big picture

East sizzles while West struggles

After blistering fourth-quarter performance, China is poised to overtake Japan as the world’s second-largest economy. China’s GDP surged 10.7% between October and December (annualized), raising expectations that Beijing will lift interest rates within the next few months. China easily beat its 2009 target of 8%, growing 8.7% for the year. In Canada, declining sales in the aerospace and auto industries held manufacturing flat in November. U.K. national debt surpassed 50% of the country’s GDP for the first time since 1977, as the deficit rose in December – spending was up 9.5% over the year while tax receipts fell 8.5%.

A World Bank report issued Wednesday was upbeat, but warned that the global economy could lose steam as governments pull back stimulus measures. Forecasted world economic growth was revised upwards to 2.7%, from 2%, for 2010, and was unchanged at 3.2% for 2011. The U.S. is expected to grow 2.5% this year and 2.7% in 2011, with the euro area gaining 1% and 1.7%, and Japan up 1.3% and 1.8%. Among developing countries, China is expected to grow 9% this year and next, with India expanding 7.5% and 8%, and Brazil gaining 3.6% and 3.9%. In Russia, the central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves.

Markets

Stocks dive on China and financial concerns

Stocks plunged on Thursday as U.S. President Barack Obamaproposed limiting risk-taking at banks and concern grew that China will do more to cool its economy. The S&P 500 Index sank 2%, its biggest loss since November, with financial shares sliding 2.7%. Despite blockbuster earnings in 2009, Goldman Sachs reported it will reduce compensation and give $500-million to charity. In contrast, Morgan Stanley reported a loss for 2009, but still paid out a staggering 62% of revenues in salaries and bonuses. Wells Fargo posted a surprising profit of $2.8-billion, noting that consumer loan losses are stabilizing.

Kraft will acquire Cadbury for US$19.6-billion to become the world’s largest confectioner. In quarterly reports: Starbucks more than tripled profits; Xerox surprised with earnings of US$180-million versus US$1-million a year ago; and Google also beat expectations, but shares fell 5% as revenue growth disappointed some investors and its future in China remains in doubt. To heighten its U.S. profile, Sun Life bought naming rights to the Miami Dolphins’ stadium in time for the Super Bowl next month. Lenders foreclosed on Whistler resort and announced it will auction the property in front of the world during the hosting of the Olympic downhill ski events after Intrawest missed a payment on a US$1.4-billion loan.

Our recommendation

Dividend income to play a larger role in shareholder returns

• Equities. Equities will be subject to profit taking until investors are more willing to look beyond 2010 and start discounting further economic recovery and profit growth into 2011. As a result, not only will stock selection become increasingly important, but dividend income will also play a larger component of total shareholder returns.
• Fixed income. Term Call – below benchmark duration; overweight cash. Sector Call – underweight Canadas, overweight 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, floating rate preferred shares are attractive as a hedge against eventual rate increases.
• Portfolio strategy. Current equity valuations are now back closer to their historical average of 15x (based on forward earnings). The next equity up leg needs to be supported by rising profits, a continuation of credit spread narrowing and the U.S. employment outlook improving (declining jobless claims). Some important levels are needed to support higher stock levels: US 10 year rates staying below 4.5% and US 2 year rates staying below 1.13%, and  the Yen/Euro cross holding a level of 127.