Where can a stock investor look for relief?

Well, here we are, a little more than halfway through 2013 – and many Canadian retail and institutional stock market investors are licking their wounds. The TSX 300 index is down by something in the order of two per cent so far this year, largely due to significant weakness in the commodities/resources sector (the oils, the precious and industrial metals etc.).

And lately, faced with the prospect of the U.S. Fed considering an end to its quantitative-easing, bond-buying, stock-friendly punch bowl, equities investors the world over are grappling with their own personal uncertainty over where markets might be headed over the short and medium term.

What to do? What to do? Well, consider this, for a start: Inasmuch as the U.S. Federal Reserve under chairman Ben Bernanke may well have good reason to take stimulus out of the equities markets (i.e. the U.S. economy has rebounded broadly and is performing quite well), that is absolutely not the case across the pond in Great Britain and Europe. 

Mark Carney, the recently departed Bank of Canada governor and the newly installed head of the Bank of England, suggested just last week that the BOE would absolutely not be contemplating an interest-rate rise in the near future. He held the BOE rate at 0.5% and hinted broadly that the only possible short-term direction for rates is down. That says all you need to know about the economic fragility of Great Britain.

On the continent – and on the very same day – European Central Bank chief Mario Draghi said precisely the same thing. No rate hike on the horizon. No quick withdrawal of stimulus. No sign at all – none – that Europe is healing. Record-high unemployment rates have their own way of forcing a central bank’s hand.

As for Canada, there is no rate rise on the horizon either. That leaves the U.S., the globe’s single biggest economy, the only major force on the planet contemplating an end to economic stimulus. And that end, if it comes at all within the foreseeable future, isn’t likely to come until sometime in 2014. Meanwhile, the U.S. dollar has been appreciating significantly and the Canadian dollar now finds itself somewhere in the mid-90-cent range.

And so, half-way through 2013, let’s give a few moments’ thought to your Canada-heavy stock porfolio. Resource stocks, as noted earlier, have  taken a beating. Canadian banks have generally been flat to mildly down. Another heavyweight sector, the telecom group, was taken to the  woodshed recently when word emerged that U.S. giant Verizon might have an  interest in taking a stake in Canada. All in all, it’s been a tough six  months, which gives Canadian investors good reason to get down on their  knees nightly to say a quiet prayer to the gods of dividend investing.

And so, what now? What should we make of the final six months of  2013? Well, we’ve noted before the wisdom of spreading around your eggs  and your baskets which, in this case, has meant that moving some  holdings into the U.S. equities markets has been a clear winner so far  in 2013, even more so now that the U.S. greenback has appreciated in  value this year against its Canadian counterpart. And yes, there is  likely more room to run for U.S. financial stocks, and housing stocks,  and U.S. consumer domestics.

As for your Canadian holdings, can you really make a case for the golds and the metals in this kind of global economic environment? Can you make a case for a substantial rebound in your resource stocks? Forest products, maybe, but that’s purely a reflection of the strength in the U.S. housing sector.

In the tech sector, BlackBerry’s future continues to look shaky. The valuations on the Canadian banks look stretched, although the insurers are showing some strength in anticipation of the potential for higher interest rates. (Just a reminder here: That day won’t be coming soon!) And, yes, Ottawa appears determined to find some way to bring new, cheaper competition to the Big 3 telcos (Bell, Telus, Rogers).

In short, in a tiny, thin market such as Canada, where can a stock investor look for relief? We see only this for the short term: A continuing need to look toward the big cap, established players with a strong, long-term record of higher profits, stronger cash flow, and steadily increasing dividends. We see very little on the horizon to suggest broadly and sharply higher stock prices.

Yes, the day will once again come for Canada and its equities markets to get back on a roll, but that day is not now and it is not just around the corner. Only a full-scale global recovery, with Canadian resources and exports in hot demand, can make that happen. In the meantime, sit tight, hold onto your wallet, and invest wisely, safely and defensively.

Alan Coates,

Financial Columnist