Prognostication on the future can be a mug’s game. You look like a goat if you’re wrong and some kind of wizard if you’re right. But I learned early on in my career at Richardson Greenshields, and then RBC Dominion Securities, working with the influence of some great people like Don Vialoux or Ray Hansen that true investment success comes from understanding probabilities. It’s a stark, uneventful way to assess opportunity, and act, but the most relevant now. With the contemporary twin investor objectives of performance and asset preservation having one’s cake and eating too, or at least a bit of both, is the portfolio manager’s job these days.
From today’s standpoint – that is post-QEternity, post-US presidential election, pre & post the Euro mess, and as we (especially the non- American “we”), march along with the US on their lemming saunter (it is like a slow motion train wreck isn’t it?) towards the fiscal cliff – here’s what changes are occurring in asset classes, sectors, TSX stocks and countries. They lay out an investment map for 2013.
Asset Classes
Our regular weekly work on asset classes is a study in inter-market analysis, something crucial to delivering absolute return. This tells us which broad asset classes are strong and which are weak. Within the large group the biggest movers on an intermediate or investment term basis (vs. short term or trading) since mid-September were US government bonds, the US dollar and silver bullion. Bonds jumped from 11th to 4th; the US dollar moved from 14th to 9th; and silver bullion from 1st to 13th. While we expect markets to favour pro-risk assets through to the New Year big money appears to be placing its markers in more risk adverse classes.
TSX Sectors
Drilling down into TSX sectors the top ranked are the cons. staples, cons. discretionary, telecom and trusts. Industrials and financials moved down out of the upper ranks to mid-tier. Rogers Comm. (shown) as a presentation of the teleco sector (we have preferred to own BCE) continues to show strength against the TSX. The recent up mofavveofuorr pthroe-risk moved down oowners of the trade-hot Blue Jays too shows a longer term commitment to industries with more stable revenue, cost-certainty and a good yield. Consumer discretionary in Canada is not as much about consumer consumption pace as it is in the US. Besides take-out-candidate Astral Media, it also has Shaw and Cogeco. Go figure.
TSE Stocks
On an individual stock basis the strongest stocks within the TSX 60 tables are appropriately Rogers, Shaw, BCE Inc., TransCanada, Enbridge, Weston and Fortis Inc. Collectively all the stocks passed the TSX – we include the TSX itself in the TSX 60 company component table for a total of 61 in the list – over the last month, again reasserting investor compulsion towards securities and sectors showing reliability. We recently purchased George Weston (shown) as it has more upside potential and a good risk-to-reward equation. The company just announced decent earnings and a dividend increase. Success lies at the hands of Loblaws management. The baking is doing well. (Ed Note: I know they bought George Weston before the run-up in December shown below )
Countries
It’s no surprise to see Switzerland make a jump, going from 17th to 6th in the country rankings. When you peer inside the components of the ETF (shown), which presents a cross-section of Swiss industry, you see names like Nestle (cons. staples), Novartis (pharma), and Roche (pharma). For investors, Switzerland and all things Swiss represent performance, reliability and efficiency. They are expecting the same attributes of their capital today. Other stand outs include Turkey, Thailand and Mexico. The common theme amongst the latter group is a young population, smaller government liabilities and pro-commerce policies and reasonable resources.
S&P Sectors
In the US, biotech, healthcare, financials consumer staples and consumer discretionary lead the pack. The biggest losers on the month? The NASDAQ, info tech, and the S&P. Like in our TSX 60 rankings we include broad indices to understand when shifts are occurring. Healthcare and biotech are the long term standouts, and most healthcare companies have significant biotech divisions now. On the shorter term I expect that we will see trading investments made in tech (Apple), materials (Freeport), industrials (Cat) or beaten up financials (Bank of America) into December but on the whole they have displayed material changes since mid-September.
Conclusion
With corporate earnings rolling over from weakening top-line revenue growth and decreasing effectiveness of central bank stimulus programs, investors are preferring to allocate to those securities, sectors or countries displaying predictability in profit and income (dividends) As alluded to above, there will be one more kick at the “risk-on” can at the end of 2012 here and briefly into 2013, a trading timeframe. Granted there will be particular or individual cases of strong growth, but these will be the exception not the rule. When scanning those areas showing good price action there is very favourable return potential.
