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This is NOT 2008.


When stock markets roil, Institutional investors receive an abundance of ‘comfort letters’ that offer a healthy perspective. What are Institutional managers saying today?

All Institutional money managers agree that the global economy is slowing and is likely to be slow in the coming years. Especially in the developed economies. Investors, therefore, ought to reduce expectations for growth-related performance. This is not new information. The message of a grim fiscal picture has been repeated for several years now.

Institutional money managers agree that Government spending cuts will be a drag on the economy. (It had to happen). Nearly all also agree however that fiscal austerity in developed countries may well be offset by:

1- Monetary policy which is still incredibly loose (i.e. Interest rates are historically low and can be expected to remain low for some time … and both the U.S. Fed and Bank of Canada say they intend to keep them low for some time. Make no mistake, however, the Bank of Canada has its finger on the trigger. Interest rates ‘will’ eventually rise). (Investors ought to look to dividend yields over bond yields).

2 – Emerging markets have emerged and their growth has momentum. As such, they will remain the primary engine of global economic expansion. (So investments ought to be leveraged to companies that have a significant proportion of their revenues tied to emerging markets. Hahn Investments has written about this for years and has mentioned the Wisdom Tree Large Cap Dividend ETF DLN).

3 – Corporations have been profitable. This is not unexpected as they have slashed costs, sold off inventories, de-hired and hoarded cash for three years. (Cash as a percentage of Corporate assets is now at the highest level since the 1960’s). Now comes the investment in technology and innovation to enhance productivity and competitiveness. (Small comfort for ‘former employees’ … but employment always comes last). Is Corporate profitability sustainable in a slowing economy? How can it be with slowing revenues? Stay tuned. (For investors quality Corporate bonds yield more than Government bonds).

4 – Bank balance sheets are in good shape. Capital ratios are sufficient to cover losses from defaults and with interest rates so low, Banks don’t pay much if anything on deposits. (Not a bad business model – pay depositors zero and charge borrowers 4, 5 or 6% or so. It’s like free money, er,  funding).

5 – Oil prices are lower today than they were in 2008. Anyone who commutes will recall $147 oil. Not fun. Today, oil is $81. This is like a tax refund to many commuters (who may also be investors).

6- Of note is that, while U.S. consumers continue to get their financial houses in order by reducing debt obligations relative to disposable incomes … Canadian consumers show no interest in that regard. Mark Carney, Governor of the Bank of Canada, has raised his ‘interest rates will go up’ red flag many times. It is clear that the runway is getting shorter. (Except, of course, for Vancouver condo buyers. For them, the party will go on … forever. It will, won’t it)?

7- The message from Institutional money managers are consistent in differentiating today’s environment from 2008. No recession. Not yet. Reading between the lines, my best guess is that the recession threat will be real only when interest rates begin to move up and yield curves move from steep to flat to inverted. Stay tuned.

8- All Institutional money managers expect markets to be volatile.

What should Individual investors do? They should rely on their investment policy and maintain their asset allocations by rebalancing and reinvesting income and dividends.

Like always, Investors should decide what to buy and at what price … then wait for the opportunity to do so.

Here are a couple of earlier posts with the slow/no growth, ‘Sideways Drift‘ theme.

Feb 24, 2011   Oct 15, 2009   Aug 15, 2009

Next time?
Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.
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2 Comments Post a comment
  1. very nice post, i certainly love this website, keep on it

    Like

    August 14, 2011
    • Thanks for the very kind words. I appreciate the feedback.

      Like

      August 15, 2011

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