Market Watch Weekly for Friday, January 13, 2012.

Issue 2 Friday, January 13, 2012

Two weeks into the New Year and general market activity is beginning to return to normal. Volumes have picked up to near normal levels as people return from Christmas holidays. Market tone continues to be somewhat positive, but cautious.

The Canadian economy remains strong, and earlier this week reported a national trade surplus for the most recent monthly reporting, November 2011. This added strength to our currency, and our outlook is that the “Loonie” remains strong throughout the year, averaging right around parity with the US Dollar. This valuation that hasn’t happened in over 25 years, and up until last year our dollar has traded at a discount to the US Dollar since 1975.

With Stats Canada reporting a trade surplus, primarily due to energy exports, we would expect to see continued strength in the currency, resulting in the Government of Canada Bond yield remaining low throughout 2012 and into 2013. Currently 10 year Government of Canada bonds yield 1.9%. This trade report is the last major economic data point prior to the next Bank of Canada meeting on January 17, where it is fully expected that Governor Carney will keep interest rates on hold.

While these record low yields may not be of benefit to Canadians wanting to invest in Government Bonds, it is of great benefit to our Provinces who are taking advantage of record low borrowing costs to raise funding.
The current uncertainty as it relates to the economic outlook not only includes Europe, but North America as well. CIBC government bond strategist, Warren Lovely, also writes that this may become a future concern should our provincial leaders not tackle the deficits and put spending on more sustainable footing. So while we will not make a political comment with respect to BC’s fiscal policy, suffice it to say, that we are one of the provinces who need to see deficit reduction sooner rather than later.

Staying with the Government Bond theme, we hop across the pond to the EU, where sovereign debt yield in both Italy and Spain declined on Thursday. This is very good news, as investor confidence in Europe’s financially stretched governments is key to contain its fiscal woes. ECB President Mario Draghi was quoted in today’s Globe and Mail, “we are seeing the tentative signs of a stabilization in economic activity, albeit from low levels.”

This is not to say that we are sounding an all clear on Europe, far from it, but what we are saying is that the first signs of stability are a good thing for our economy. Further positive data points from France and the UK this week, indicate that the threat of a strong recession in the Euro region may be easing. While a recession is still likely, a mild one would impact us far less, when it comes to the ripple effects we will experience.

As for investing in Europe, we are not stepping in just yet outside of a particular REIT that operates fully in Germany. If we were to make a comparison, we see the investor climate in the EU similar to how we saw the US in 2009. So we are staying out of Europe (again with the exception of the Dundee International REIT) and would expect to remain on the sidelines for a similar amount of time, ie: a couple of years. Just as we are only now suggesting to look at the US in particular sectors, we wouldn’t suggest investing in general Europe through next year.

Rather when it comes to investing in Europe our recommendation would be to finance it directly by taking a family vacation. The Euro should be expected to remain low, and with their economy weak, you should get a great deal.

Courtesy of The Dekker Hewett Group