Bumpy Markets

Given recent market volatility, it is worth my comments to our clients to outline what is going on and why.

As usual when uncertainty rears its head in the stock & some bond markets, investors hit the exits. The question is why now and when will things calm down so that markets can go back up.

Canadian market uncertainty, of course, revolves around the price of oil and other commodities. We have a glut of oil reserves. The Saudi’s continue to pump out at high rates, technology is allowing better access to North American oil, and lower consumption due to technological advances have all impacted oil prices. It is a supply and demand story. High reserves, combined with a slowing in China has led to a precipitous fall in oil prices, which in turn hits all the jobs in that and related industries – and the money flowing from those jobs to the greater economy.

The other side of the oil story is that lower oil prices is good for consumers (we all have more money in our pockets to spend elsewhere). It is also good for a lot of other industries such as transportation and manufacturing. But the price went down very quickly, so investors panicked. Oil and commodities have always gone through boom and bust periods. We are going through a retrenchment in the industry which will likely result in fewer players in the industry in Canada, but those survivors will be much stronger. It is the job of your portfolio managers to buy the likely winners when the time is right.

The U.S., our biggest trading partner, is chugging along quite nicely. Jobs growth and the same impact of low oil prices provide the huge consumer population there with a lot more money to spend. Add to that our low Canadian dollar and you can imagine what a positive lift this will give to many of our manufacturing, tourism and other industries here in Canada. Ontario and B.C. are expected to see the biggest lift from our low loonie.

The other two worries that have made investors jittery are what will happen in China and Europe. China is slowing, there is a remote possibility they may further devalue their currency, and some countries in the Eurozone still have financial issues.

The feeling right now is that this volatility may continue for a while. My decades of experience have taught me that all this downturn does is create opportunities for your money managers. They are really earning their fees right now, doing deep research to choose the industries, and the individual companies in those industries, that will come out the strongest when the market turns. It is NOT about the market, it is about the profitability and growth of the companies you own in your portfolios.

Your individual portfolios are built for you, with a mixture of stocks, bonds and cash. We all have to remember that the upturns are always longer than the downturns, and that your managers are actively limiting the downside whilst preparing for the next upside. If you are a retiree or near retirement we structure your portfolio to ensure you don’t have to sell while the markets are down (cash wedge).

To finish here is a quote from Brandon Snow of the CI Cambridge Funds. It concisely reflects the consensus I have collected from the portfolio managers we favour – true value investors who look deeply at the companies they want to buy and stick to a discipline of buying when stocks are on sale.

“While I don’t know what will happen over the next six months, and our concerns about China and high yield bonds remain, I am more excited about the opportunities I am seeing today than I have been in almost five years.”