Summary
The major Canadian equities market index, the S&P/TSX Composite Index, is up 5% YTD (up 25% since March 9th, 2009) ; with the overall value traded down 27%, and volume up roughly 18% compared with the same period last year on a year-over-year basis. The number of transactions is up 26% YTD vs. the same period last year. The TSX Venture exchange (which consists of micro and small capitalization companies) is up 24% YTD. The consensus among institutional investors in Canada, as elsewhere around the globe, remains divided. A few things likely need to occur before the majority of the naysayers move toward the other camp, such as; a visible and sustainable improvement in the global economy, a broad-based recovery in corporate earnings, a steady and meaningful increase in the prices of commodities, a slowdown or reversal in the recent rate of increase in the unemployment rate, more balanced conditions in the housing market, and a significant positive shift in consumer confidence.
Analysis
A recent survey published and released by Merrill Lynch suggests that global fund managers have finally turned bullish after months of record pessimism. The survey indicates that most of those managers surveyed are “reluctant bulls”, and thus not ready to dive head first back into the water, but believe that the worst is over and behind us. This same survey arrived at a consensus of a global growth outlook which is at a 5 year high, along with commodities regaining appeal across the board. Canada's trade sectors are affected by the large exposure to the U.S. economy, currency volatility, and commodities price volatility. To that end, the sentiment largely remains, that out of all the major commodities, oil remains among the most undervalued. Accordingly, most market professionals believe that oil will rise to within a range of US$55-$70 per barrel by October of this year.
An undisputed fact and that essential to Canada’s recovery: The United States remains far and away Canada’s largest and most important trading partner, with close to 80% of good and services exported going to Canada’s neighbour to the south. As such, so long as U.S. businesses and consumers continue to face strong headwinds, the Canadian economy and hence Canadian capital markets, are unlikely to rebound quickly in sustainable material fashion. U.S. consumers, which have been a key driver of past recoveries, are facing onerous and record debt levels, thus past experience may not be as valid this time around (at least as it pertains to what brings “us” out of the current financial and economic environment). Rather, the aggressive fiscal stimulus packages by Government’s around the world, including the U.S., will help, but this will likely take longer than anticipated to filter its way through the global and domestic marketplaces.
One of Canada’s most influential investors (albeit relatively unknown to the masses), Prem Watsa (CEO of Fairfax Financial Holdings), often referred to as the “Warren Buffet of Canada”, is of the belief that the worst is behind us, and at his company’s annual general meeting held last week; indicated that the savage beating of stocks, corporate bonds, bank loans, mutual funds, house prices, oil, and nearly every other asset under the sun, which sent investors piling into government bonds and gold, may be done. As Mr. Watsa mentioned (and that which I happen to agree); risk is not being repriced, it is repriced, and for the first time in a very long time investors are getting paid for taking risk.
Canada’s institutional investors, in aggregate, still remain overweight cash and underweight equities; however, many are now looking at portfolio allocations and weightings with greater scrutiny and increased willingness to implement and make changes, even if in part because they do not want to be caught on the sidelines. Given the recent market rally, some believe that the professionals are already in the market and are waiting for the followers to participate, and in-turn, sell-in to this participation. One thing is likely a safe bet; the value-oriented institutional investors, along with those with a 5 to 10 year time horizon (and more of a buy-and-hold approach) are likely active participants in this market already, and their peers across other investment disciplines can only resist temptation for so long, not only from an absolute, but from a relative performance basis.
The markets will continue to capitulate and may fall again, the recession is not over, unemployment is still rising, corporations are still filing for bankruptcy protection, consumer confidence remains low, etc.; but barring a severe depression, those institutional investors currently sitting on the bench must be wondering more and more if most of the “bad” is already priced in. Thus the question is, regardless if this equities market rally is “real” or not, can institutional investors across the board afford to sit on the bench for much longer?
