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Quarterly Commentary (July 1, 2009)
Is The Worst Behind Us?
2009 Q2 Recap
Improvements in the U.S. housing market, rising consumer confidence and a rally in financial stocks in the U.S. and Canada suggest that the economies have bottomed and the worst of the financial crisis is behind us. Canada benefits disproportionately in a global economic rebound. Increases in commodity prices will boost these sectors and their associated stock prices. Canadian banks have proven to be far more solid than virtually anywhere else in the world. Household balance sheets are in much better shape. The subprime mortgage market is very small in Canada and the ratio of equity-to mortgage-value is much higher than in the U.S.
Stock markets have risen sharply since March 9 as the biggest U.S. banks announced they were profitable in the first quarter. The TSX is among the strongest stock markets in the industrialized world.
The mid-year performance for 2009 of the equity markets is as follows – S&P/TSX Composite Index is up 15.43%*; Dow Jones Industrial Average Index is down 3.75%*; S&P 500 is up 1.78%*; NASDAQ is up 16.36%*, and Canadian Dollar up 4.73%* vs US Dollar.
What’s Ahead
Global credit markets, which were frozen just months ago, have opened up. After a number of blue-chip companies were able to issue bonds, the healing process spread to other markets, including high-yield bonds, equities and real estate investment trusts. With many firms, including major banks, able to raise new money, they have refinanced their debts – leaving them free to focus on their business operations. The markets were not even fazed by the bankruptcies of American icons GM and Chrysler, perhaps because of the widespread recognition that this process is necessary for their continued survival.
While the worst of the credit and financial crisis clearly seems to be over, we must also recognize that the global economic situation is still difficult and that an economic recovery will take time. Record low interest rates are expected to spur economic activity and massive government stimulus spending is already in the pipeline, though many programs have yet to get underway.
The OECD now sees a 4.1% contraction among its member countries this year, versus the 4.3% decline forecast three months ago. Growth is expected to return next year to the tune of 0.7%. Impressively, the OECD’s growth outlook for China was lifted sharply to 7.7% this year (previously 6.3%), accelerating to 9.3% in 2010—stimulus measures in the country are starting to kick in.
With these conditions, it is wise to be prudent. Markets will remain volatile and there will likely be a few more negative economic reports before a recovery can take hold. At the same time, it’s important to remember that equity markets anticipate as well as react to developments, and they typically rebound ahead of the actual turnaround in the economy. The recent rally shows how such moves can occur quickly and unexpectedly.
Emerging Market Update
Expectations for better economic performance have been building in countries such as China, given marginally improved economic indicators. In addition, the significance of strong materials will resume the strong pace seen in years past.
The market continued to rally on the perception of global greenshoots and data showing that China's stimulus spending was starting to filter through to their consumer spending. The auto sector continued to outperform, as total vehicle sales grew 25% year over year in April. Consumer discretionary rallied on the back of improving monthly same-store-sales and further government measures to boost domestic consumption. The materials/construction sector will benefit from the Chinese government's stimulus package and policy moves.
* Year-to-date performance as of June 30, 2009 - Source: finance.yahoo.com, Bank of Canada
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