Q UEENSBURY G ROUP February 2011
Political events in the Middle East may lead to a rise in oil prices, which if they get to more than $150 /bbl, could curtail growth of the global economy. Focus on this situation has taken attention away from the S&P downgrade of Japan whose government debt/GDP now exceeds 200%, the highest in the world. It is unlikely that S&P will stop at Japan, as the US and some European countries could well be subject to a debt downgrade as well. A more aggressive policy by the debt rating agencies is likely to cool the demand for credit. The US appears to be embarked on fiscal and monetary policies of weakening their currency in an effort to make their exports more competitive and in the process provide a stimulus to their domestic economy. We maintain our view that the US dollar will depreciate in value against the Canadian dollar and the currencies of select emerging nations. In spite of signs of improving US corporate earnings we feel that there will be a headwind against improving share prices from a depreciating currency. One of our major banks suggests the following optimistic forecast for the Loonie: “A series of rate hikes starting in May could lift the Loonie, with the currency topping out around US $1.03″.
Another consideration for Canadian investors looking to invest in US investments, or a vacation property, is the tax consequences. Even if one does not live in the United States estate tax applies to anyone who owns “US situs property” made up of shares and debt of US companies including what is held in a deferred plan such as a RRSP, or a RRIF. If at the time of death your worldwide estate assets are valued at less than US $1.2 million there should not be any US estate tax owing. However, you may still face estate tax on US real estate. This is a complicated assessment for which you would be well advised to seek guidance from a tax advisor who is familiar with cross border investment.
In past Market Outlooks we have suggested the merits of investing in emerging market equities. To date, this strategy has proven successful. Although investments in this sector may experience a higher element of volatility, we firmly believe that the current fundamentals strongly support some commitment to this sector. Some statistics to support this position are:
Emerging Markets represent:
70% of the World’s Foreign Exchange Reserves; 75% of the World’s land Mass
Over 80% of the World’s population; 34% of the World’s GDP.
And yet they represent only 13% of the World’s Market Capital.
We believe that the key drivers for growth in the Emerging Markets will be:
Increasing growth in demand from the middle class; Urbanization of population;
Appreciating currency values; Young demographics; Economic reform & change;
Better credit quality; Large amounts of undeveloped natural resources;
Commitments to increased infrastructure spending.
The Globe & Mail ROB recently had an article dealing with questions put to some of Canada’s top money managers. Their surprisingly diverse answers to “Advice for Investors” are:
“It’s tough to think of a developed country that’s better than Canada, so I’d keep 75% of it (investment) here. I think interest rates are going to trend up, so I don’t want to own any plain-vanilla bonds. I’m going to own mainly Canadian equities and I’m a one trick pony. For 25 years I’ve said small cap, small cap”.
- Co-founder of the Saxon family of mutual funds Eric Bushell
“Own cash and equities. The very credit-worthiness of countries is fully in question and that is the backdrop that modern market investors have never had to consider… That means safe havens pose a risk as well. What do you do? It may be that the safe havens are in the places where you don’t expect them to be — stocks as opposed to government bonds”.
- CIO – Signature Global Advisors Eric Sprott
“They should be in fear of the whole financial system collapsing and figure how they are going to survive in a worst case scenario. Invest accordingly. That is why we have always thought that gold and silver were the pre-eminent places to be”.
- CIO – Sprott Asset Management Kim Shannon
“If you’ve bought cheaply and you’re patient, you will create wealth in the long run, especially if the stock has an income component”.
- President & CIO – Sionna Investment Managers Normand Lamarche
“Expect more volatility over the next ten years. Stick to your game plan driven by your age, needs or wealth. In bullish times, you have to tone down your euphoria. In times like today, you have to tone down the fear. You need to be patient and to have a long-term horizon to be a successful investor”.
The foregoing is indicative of just how difficult it is to attain a consensus among some of Canada’s leading investment advisors. We still favour equity investments to generate superior after-tax returns for the long run. Periods of market weakness should be treated as a buying opportunity. Specific recommendations in keeping with individual investment objectives and level of risk tolerance are available from your Queensbury advisor.
- Co-Chief Investment Officer – Front Street Capital Char
S&P S&P Bank 10 yr Cdn
Levels DJIA 500 TSX Prime Bonds $
Jan 2011 11,823 1,276 13,437 3.00% 3.3% 99.89
Jan 2010 10,067 1,073 11,094 2.25% 2.8% 93.52
Jan 2009 8,009 825 8,694 3.00% 2.7% 81.53
Jan 2007 12,621 1,438 13,034 6.00% 4.1% 98.74
Jan 2006 10,864 1,280 11,945 5.25% 4.1% 87.22
Hugh F. McLelland
Chairman & CEO
Queensbury Securities Inc
February 1, 2011