Mid-year market review
Message from Scott Penman, Executive Vice-President and Chief Investment Officer Investors Group Inc.
Following four consecutive quarters of positive returns we are reminded, after experiencing a negative quarter, markets don't always grow in a straight line. Results like this can test investor resolve and may lead to questions like "is the recovery over?"
The short answer:
Not likely.
Reasons for recent challenged market activity
Early in 2010, following a swift market advance from March 2009 lows, focus shifted from hints of a recovery to hard evidence of economic growth. History has shown that an economic recovery is not an express route. In keeping with historical patterns during this stage of an economic cycle, data have not been consistently positive. In fact, it is quite typical that economic activity takes steps forward, pauses, or even takes minor steps back. Recently, global markets have been assessing economic activity and in so doing have been pricing in a slower growth environment going forward.
Despite turbulence, the global economy is growing
Despite a worry list that changes from day-to-day, and includes employment, rising interest rates, stimulus withdrawal, de-leveraging, sovereign debt, oil spills, and ash clouds, among others -- the fact remains the global economy is growing. Supporting evidence includes:
· Rising economic growth forecasts. The International Monetary Fund raised its global economic growth forecast to 4.5% and 4.25% for 2010 and 2011. Growth forecasts for emerging markets in 2010 were also raised to 6.8%.
· Continued business expansion. The most recent Institute for Supply Management (ISM) index report confirms growth in the non-manufacturing sector for the sixth consecutive month. Importantly, additional ISM reports for the Eurozone, China, and Japan also all confirm positive growth.
· Improving employment. In Canada, the unemployment rate fell sharply in June to 7.9%, effectively restoring the jobs lost during the recession. The data is less compelling to date for the U.S., but reported jobless claims saw a better-than-expected drop in the most recent reporting period. We are mindful that, as in every economic recovery, unemployment is one of the last indicators to turn up.
· Low mortgage and lending rates. U.S. mortgage rates are at among their lowest in over five decades, which is showing signs of putting a floor under the beleaguered U.S. housing market. Rates are expected to remain low for the foreseeable future. Improving trends in consumer savings and debt levels. Providing evidence of improving consumer credit conditions including lower credit card delinquencies
Volatility may continue in the near-term
Our analysis shows the current volatile market experience is not uncommon at this stage of the market cycle. As trying as it is, market periods such as this are constructive in terms of digesting the rapid price advances we've seen and laying a foundation for future growth. Our investment professionals are sticking to their investment processes and continue to seek out attractive investment opportunities. As fundamentals reinforce the strength and sustainability of the underlying economy, we have confidence in the improving corporate profit outlook and that investor sentiment will follow suit.
With the end of the second quarter now behind us, for the next several weeks, market focus will shift to corporate profits with the release of corporate earnings reports. Some of the strong operating fundamentals currently in place include:
· Healthy profit margins. A key metric of profitability, for U.S. companies hit an all-time high of 36.4%. By that measure, corporations are currently more profitable than ever before.
· Strong balance sheets. A key indicator of corporate financial health, balance sheets are showing historically high levels of strength. Total cash and short-term investments increased over the past two years by 42.6% on the S&P 500 for non-financial companies, while total debt increased by only 5.6%. Cash balances for non-financials are at $1.84 trillion U.S. Interestingly, the total cash held by Apple, Microsoft, Cisco, and Google was $147 billion-enough to bail Greece out all by themselves.
· Positive expectations. Underlying economic activity is leading to improving earnings results and continued prospects for growth which is vital for ongoing economic strength. This year's forecasted consensus earnings for S&P 500-listed companies are on par with the earnings highs achieved in 2007.
· Attractive long term valuations. By many measures, stock markets around the world are currently valued at levels below historical norms. Price to earnings multiples together with dividend yields, price to book value and returns on equity are all at absolute levels representing attractive value and on a relative basis represent excellent value.
Volatility is an inherent part of the markets and a regular part of any cycle. Throughout history, markets have provided valuable lessons about perseverance. One of the key lessons is that periods of volatility have often represented some of the greatest investing opportunities. Though it may be hard to see it now, investors will likely look back on these times as having been amongst the best for building wealth.
Staying on course
A financial plan is so important because it gives important context and a framework for decision making. Patience and planning remain the keys to long-term financial success and on looking back, now will likely have proven to be a pivotal time to stay the course.
This Commentary is published by Investors Group. It represents the views of our Portfolio Managers, and is provided as a general source of information. It is not intended to provide investment advice or as an endorsement of any investment. Some of the securities mentioned may be owned by Investors Group or its mutual funds, or by portfolios managed by our external advisors. Every effort has been made to ensure that the material contained in the commentary is accurate at the time of publication, however, Investors Group, cannot guarantee the accuracy or the completeness of such material and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. Investment products and services are offered through Investors Group Financial Services Inc. (in Quebec, a Financial Services firm) and Investors Group Securities Inc. (in Quebec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.
© Copyright 2010 Investors Group Inc. Reproduction or distribution of this commentary in any manner without the express written consent of Investors Group is strictly prohibited.
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