January 25, 2012

It’s not easy to be an optimist after a year like 2011. Canadian stocks sank more than 8%, led by a 52% drop in information technology. Even Canadian bank stocks offered less of a safe haven than in years past. Around the world, 2011 was a year marked by natural disasters, European and US debt and deficit problems, uprisings and protests. Time magazine asked in its December issue: “Is there a global tipping point for frustration?”

I believe there is – things that break often beg to get fixed, and challenges of any kind are often accompanied by opportunities. Here are my observations and comments for the year ahead:

Europe, US and China will continue to be the focus of 2012. Europe has made some progress but many suggest a recession there is likely, if not in place already.  It will take many years to solve their debt problems but we are beginning to see some leadership.  The US is in an election year with possible changes to its political landscape and real solutions not likely until after the election.  Fortunately we are seeing the beginning of sustainable but slow growth in the US economy. China is expected to have a lower, but still strong GDP growth of greater than 8%.

Bleak points in history are not necessarily bad times to invest.  Investors can either have good news or good prices.  The worst time to invest is often when investors are overly optimistic and asset prices are unjustifiably high. When there’s worry and negativity, stock prices generally reflect that sentiment. Today, your fund managers are finding stocks of many high-quality companies selling at very attractive prices. The way I see it, global markets are offering investors an opportunity to upgrade the quality of their portfolios right now and this is what fund managers are doing.

U.S. companies have been remarkably resilient. Despite a less-than-robust economy, and a host of other problems, U.S. companies continue to rebound. The S&P 500 was up 4.6% in 2011, and U.S. corporate profits are at record highs by some measures. When you compare corporate earnings to what government bonds are yielding, it’s hard not to be optimistic about stocks.

Emerging markets are alive and well. Emerging markets have relatively little debt, access to capital like they’ve never had before, powerful technology and a rapidly growing middle class. That’s real growth potential. Many Canadian, U.S. and European companies that do business in emerging markets may also be well positioned, even if their local economies aren’t strong. It’s where a company does business, not where it’s based, that matters most.  Fund managers are seeking out and purchasing the stocks of these companies.

Innovative companies around the world are creating new products and solving the world’s problems. I think that’s what makes markets go up over time — it’s the effort of the individual companies solving problems. That’s a reason for optimism, as long as you’re patient.

The biggest risk right now could be over concentrating your portfolio. When we don’t know what’s going to happen, it’s often wise to invest in different types of securities. Many people end up owning too much of a “good” thing, whether bonds, cash or high dividend-paying stocks. My job is to make sure you stay properly diversified, even when the markets make you nervous.  Note that the 20 year return of a balanced portfolio of 60% equities and 40% bonds to the end of June 2011 (after 10 years of near flat returns) was 8.4%

The recovery is inevitable. This past decade has been difficult for investors but history suggests times like these do end and growth resumes.  We need faith in human desire and ingenuity and that the market does go through a cycle and it will once again recover.

If you feel you’re at your tipping point for frustration, let’s talk. And even if you’re not, it’s a good idea to check on your financial situation and any changes that may have occurred.  As always, I’m available to talk or meet and review your situation.

There is plenty of room for us all – we are getting better at everything.

Matt Ridley is a professor at Oxford who wrote a book called the Radical Optimist – How Prosperity Evolves.  He refutes the media view expressed so often to us that the world is spiralling downward.  This is one of his presentations and he makes a strong case for optimism.