Fund Manager
Frank Mersch
After a scary 2008 and early part of 2009, the markets got off to the strongest start of any postwar cycle. 2009 saw risky assets outperform safer ones. Itʼs all about leverage. As financial and individuals de-leveraged, governments stepped into the abyss with massive government stimulus programs. Fiscal stimulus programs in the U.S. are about $800 billion and an equal amount or greater in the other economic zones. About an eighth to a quarter has filtered into the economy as of yet. Government balance sheets have expanded at an unprecedented rate. Rates have remained low in developed countries, as has inflation. Employment, housing and general economic activity is improving. The consensus view is that the recovery is liable to be slow, particularly in the area of employment growth. This should not be alarming in that employment levels and job growth are generally lagging economic indicators.
Comparisons will always be made with previous cycles, yet what is obvious is that developed nations suffered while the emerging economies, especially BRIC nations, held up very well, thank you very much. Absent China what would Canada, Australia, Brazil and Russia look like today? Leading indicators for these nations are all turning up and hopefully even with a tepid recovery in the U.S., we should see healthy demand for commodities continue. In fact, as we enter the New Year, prices are moving seasonably higher.
Review
Despite a banner 2009, the S&P/TSX is still 22% below its 2008 high. For the year, the S&P/TSX was up 30.79% while your fund was up 49.33%. The notable group performance was Financials, up 38.3%, Energy, up 35%, Materials, 33.4%. The weakest groups were Telecom, 0.7%, Consumer Staples, 6.1%, and Utilities, up 12.77%. The year saw very large individual security gains from extremely depressed levels. Examples were Pacific Rubiales, up 605%, Teck B, 511%, Bank of Montreal, 78.7%, and TD, up 51%. Surprisingly, Barrick Gold, -7.27%, Goldcorp, +7.71%, Imperial Oil, 0.81% were big laggards.
Smaller cap issues over the past 18 months have undergone the most severe collapse, followed by the most robust rebound in the last 40 years. Canadian small caps have outstripped their U.S. counterparts. In fact, U.S. small caps
have tracked the broader market advance this year. Looking ahead for Canadian small caps we have seen only a modest deterioration in the valuation appeal.
Outlook
In all of my years as a market participant, I find for 2010 an unusually wide variance between possible outcomes, with many respected observers being polarized. While consensus is calling for a tepid recovery, there is the potential for a more rapid recovery fueled by easy credit.
While not the consensus, this latter event would fit with a ʻVʼ shaped rebound. Other fears revolve around rising inflation and economic overheating due to leaving stimulus in place too long. Some believe in the ʻ70ʼs scenario of stagflation.
Whatever the future holds, the present is that interest rates are abnormally low and investors run the risk of becoming complacent about their efforts. Today, any return starts to look attractive relative to 0% short-term securities or deposits.
Eventually, real or perceived increases in rates will create volatility in capital markets. The crowded trades all reside in the realm of low rates (i.e. short the U.S. dollar/long commodities and short mid to long bonds) and the U.S. dollar.
Both these are now highly correlated. To avert a post 1990 Japanese scenario of weak economic growth and consumer price and asset deflation, stimulus will have to remain in place longer than anticipated. The economy must grow to avert this scenario.
The old saying, “Be careful what you wish for”, may be the mantra for 2010.
In conclusion, keep your finger on the trigger.
Frank Mersch
Frank Mersch - Q4 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
After a scary 2008 and early part of 2009, the markets got off to the strongest start of any postwar cycle. 2009 saw risky assets outperform safer ones. Itʼs all about leverage. As financial and individuals de-leveraged, governments stepped into the abyss with massive government stimulus programs. Fiscal stimulus programs in the U.S. are about $800 billion and an equal amount or greater in the other economic zones. About an eighth to a quarter has filtered into the economy as of yet. Government balance sheets have expanded at an unprecedented rate. Rates have remained low in developed countries, as has inflation. Employment, housing and general economic activity is improving. The consensus view is that the recovery is liable to be slow, particularly in the area of employment growth. This should not be alarming in that employment levels and job growth are generally lagging economic indicators.
Comparisons will always be made with previous cycles, yet what is obvious is that developed nations suffered while the emerging economies, especially BRIC nations, held up very well, thank you very much. Absent China what would Canada, Australia, Brazil and Russia look like today? Leading indicators for these nations are all turning up and hopefully even with a tepid recovery in the U.S., we should see healthy demand for commodities continue. In fact, as we enter the New Year, prices are moving seasonably higher.
Review
Despite a banner 2009, the S&P/TSX is still 22% below its 2008 high. For the year, the S&P/TSX was up 30.79% while your fund was up 49.33%. The notable group performance was Financials, up 38.3%, Energy, up 35%, Materials, 33.4%. The weakest groups were Telecom, 0.7%, Consumer Staples, 6.1%, and Utilities, up 12.77%. The year saw very large individual security gains from extremely depressed levels. Examples were Pacific Rubiales, up 605%, Teck B, 511%, Bank of Montreal, 78.7%, and TD, up 51%. Surprisingly, Barrick Gold, -7.27%, Goldcorp, +7.71%, Imperial Oil, 0.81% were big laggards.
Smaller cap issues over the past 18 months have undergone the most severe collapse, followed by the most robust rebound in the last 40 years. Canadian small caps have outstripped their U.S. counterparts. In fact, U.S. small caps
have tracked the broader market advance this year. Looking ahead for Canadian small caps we have seen only a modest deterioration in the valuation appeal.
Outlook
In all of my years as a market participant, I find for 2010 an unusually wide variance between possible outcomes, with many respected observers being polarized. While consensus is calling for a tepid recovery, there is the potential for a more rapid recovery fueled by easy credit.
While not the consensus, this latter event would fit with a ʻVʼ shaped rebound. Other fears revolve around rising inflation and economic overheating due to leaving stimulus in place too long. Some believe in the ʻ70ʼs scenario of stagflation.
Whatever the future holds, the present is that interest rates are abnormally low and investors run the risk of becoming complacent about their efforts. Today, any return starts to look attractive relative to 0% short-term securities or deposits.
Eventually, real or perceived increases in rates will create volatility in capital markets. The crowded trades all reside in the realm of low rates (i.e. short the U.S. dollar/long commodities and short mid to long bonds) and the U.S. dollar.
Both these are now highly correlated. To avert a post 1990 Japanese scenario of weak economic growth and consumer price and asset deflation, stimulus will have to remain in place longer than anticipated. The economy must grow to avert this scenario.
The old saying, “Be careful what you wish for”, may be the mantra for 2010.
In conclusion, keep your finger on the trigger.
Frank Mersch