BC Finance Minster Colin Hansen presented BC’s 2010 budget this week.  He projects that BC will return to balanced budgets within three years by clamping down on virtually all spending except that on healthcare and education.  The budget forecasts a deficit of $1.7 billion, an improvement from the $2.8-billion deficit from an updated forecast last September. The provincial debt is forecast to rise to $47.7 billion, from $41.3 billion this year and the debt will top $55.8 billion by the 2012/2013 budget year.  Hansen said British Columbia did not escape the world economic meltdown as provincial revenues—especially in natural resources and taxes—plummeted by almost $3 billion.  But those revenues are expected to recover over the next three years, with British Columbia forecasting economic growth of 2.2% this year, rising to 2.7% in 2012.

Here are some of the budget highlights.

-Budget 2010 includes a new property tax deferral program for families with children under 18 for the 2010 tax year. Beginning July 1, 2010, homeowners who are financially responsible for a child under the age of 18 and have at least 15 per cent equity in their homes will be able to defer property taxes on their principal residence. Deferred taxes must be paid if the home is sold, ownership is transferred or it becomes part of an estate.  Interest on deferred taxes will be charged at the prime lending rate of interest. The rate will be set twice annually. To be eligible for the program, homeowners with financial responsibility for a child under 18 must also meet the basic eligibility requirements of the current property tax deferral programs. They must be the registered owner of the home; be a Canadian citizen or permanent resident; have lived in B.C. for at least one year prior to applying and have a currrent fire insurance policy on their home.

-Increase in homeowner grant for northern and rural home owners up to $200, bringing to $770 the amount some people will be able to receive towards their property taxes. Seniors in those areas will be able to receive up to $1,045.

- Medical Service Premiums, increased last year, are going up again for individuals and families. Individuals will pay $3.50 more per month while the premiums rise $7 per family.

-$26 million more for child-care subsidies over the next three years.

-Increased funding for full-day kindergarten to $129 million in 2012-2013, up from $44 million in 2010-2011, the first year for the program.

-An additional $150 million over three years to fully fund teachers’ wages and benefits and offset cost pressures.

- $320 million in reduced ministry spending over the next three years.

- A reduction in the number of full-time equivalents working for the government, not including service delivery agencies, from 31,284 in 2009-2010 to 27,732 by 2012-2013

As the new year begins, we wish everyone a Happy New Year and provide some GDP growth forecasts for 2010.

From a Globe Advisor article titled “Commodities Rally to Drive Provincial Rally”

Summary:
-Scotia Economist Alex Coustas makes positive growth predictions for all Canadian provinces:

-British Columbia will see GDP growth of 3.0%, driven by Asian commodity demand and port activity as well. The province should also see some benefit from the Winter Olympics.

-Alberta and Saskatchewan will see GDP growth of 2.9% and 2.8% due to strong demand for oil and potash extraction.

-Ontario and its auto sector was one of the hardest hit provinces during the recession.  However, the governement stepped in and kept automakers afloat.  Ontario will see GDP growth of 2.7%.

-Manitoba and Quebec both held up well during the recession and should see GDP growth of 2.6% and 2.2%.

-The Maritime Provinces also weathered the recession fairly well and will therefore have a less pronounced bounce back.  They will see GDP growth of around 2%.  At 2.9%, Newfoundland will have the strongest GDP growth thanks to its strong exposure to energy and mining industries.

Notes:

-Another optimistic article for Canadian markets.  As long as there is strong demand for commodities in emerging markets, Canada will continue to benefit.

-Rohit Sehgal, fund manager for Dynamic Power Canadian Growth, one of the best performing Canadian Equity funds of the past 10 years, predicts that the rebound in energy demand in developing nations could push the TSX composite index to 13,000 next year (The index is at 11,700 as of Dec 31st, 2009)

From a December Fortune Magazine article titled “Redefining Emerging Markets”:

Summary:
-Countries such as Brazil, India, and Korea are being labeled “advanced emerging markets” because of high national income levels or developed market infrastructures.
-These advanced emerging markets are unlikely to experience the downfall of the Dubai World debt situation. 
-There are still some skeptics of emerging markets who point to catastrophic episodes from the 80s and 90s, such as Brazil’s inflation crisis.  However these countries have learned from these episodes, and implemented structural changes to reduce risk and maintain growth. 
-Around 15% of the MSCI All Countries World Index comes from emerging markets
-Brazil and India stock market fell harder than the US markets in 2008, but rebounded higher.  Their GDP is expected to grow 3% compared to 1.5% for the US
-Economic indicators still show a strong correlation between emerging and developed markets, especially China, the main trading partner of Latin American and East Asian countries.

Comments:
-The last 5 years have been very strong for emerging markets.  According to the MSCI emerging markets index, as of November 30th the 5yr return has been 13.3%.
-Long-Term (10 years) forecasts predict that they will continue to outperform against developed economies like the US and Europe.
-All well-diversified equity portfolios should have some emerging market content.  A typical You First long-term growth portfolio will have around a 10% weighting in emerging markets. 

I’ve added a video link below to an October 18th, 2009 interview with Patricia Perez-Couttes, who discusses the opportunities in emerging markets.  She manages AGF Emerging Markets, one of the top-performing emerging markets funds and one that’s been voted top emerging market fund in Canada for three consecutive years at the Canadian Investment Awards.

Click here to view the video. 

I thought I would update our Markets rise from the bottom figures.  The numbers are mind boggling.  If you did not sell at the bottom and follow the course like we encouraged you to, you should congratulate yourself.  If you sold, you should cry.  If you made an investment last fall, February or March this year, you are a big winner!

Market data as of Dec 14, 2009

TSX Canada from 7566 to 11545 +52.59%
low point was March 9/09


Dow Jones USA from 6547 to 10501 +60.39%
low point wasMarch 9/09



S&P 500 USA from 676 to 1114 +64.79%
low point was March 9/09



Hang Seng Hong Kong from 11015 to 22085 +100.50%
low point wasOct. 27/08



FTSE from 3512 to 5315 +51.34%
London low point was March 3/09



DAX Germany from 3666 to 5802 +58.27%
low point was March 6/09

data source advisor.ca
e./o.e.

From a November 28th, 2009 Financial Post article titled “Now is No Time to Learn Pitfalls of Bond Market”. 

Article Summary:
-Lisa Myers, lead manager of Templeton’s flagship Templeton Growth Fund warns that now is not the time to increase your bond weighting. 
-Interest rates are at all-time lows and have nowhere to go but up
-There is an inverse relationship between interest rates and bonds
-The past 30 years have been favorable for bonds as interest rates have mostly fallen, therefore bond prices rose.
-Balanced fund managers are reducing their weighting in longer-term bonds to mitigate this interest rate risk.

Comments:
-As explained in the article, bonds have negative relationship with interest rates.  Given where we are with interest rates, it is understandable to have a weary outlook for bonds moving forward. 
-There have been a lot of articles written about inflationary concerns and what will happen once interest rates start rising again.  This is partly why gold has risen to record levels, due to its strong correlation with inflation. 
-Certain fund managers are starting to recommend real-return bonds (where the rate of return is adjusted for inflation) as a good fixed-income solution to a possible rising interest rate / inflationary growth environment.
-Fund managers are still pointing to the favorable yield spread between corporate bonds over government bonds.  Corporate bonds tend to be less sensitive to interest rate changes than government bonds.
-For those looking for higher yielding income solutions, in the past year, CI Investments, Mackenzie, and Dynamic Funds have all introduced some type of “Strategic or Diversified Income Fund”.  The objective of these funds is to seek income from the most attractive opportunities in corporate bonds, income trusts, infrastructure, and high-yield equities.  As market conditions change, managers have the flexibility to move in and out of these assets as they see fit. 

The link below provides 5-minute outlook on bonds given by John Braive, Vice-Chairman CIBC Global Asset Management in November 2009.  He goes over a lot of the issues discussed above.

Bond Outlook

Despite economic recovery seeming bleaker in the United States than many other parts of the world, there is still reason for optimism. 

U.S. federal reserve chairman Ben Bernanke announced today that the recession is very likely to be over.  Last week, U.S. stock prices had a great week as they rallied for 5 straight days.  The rise was fueled by reports of declining jobless claims and upbeat forecasts from large U.S. companies. The S&P index (which tracks the prices of the 500 largest U.S. companies) reached its highest level since October 6th, 2008.  Bernanke added that although the economy will feel weak for some time, most forecasters expect moderate growth for 2010.

The numbers below shows the Year to Date (as of Sept 15th) figures of the major North American indices (The first three are the major U.S. indices; the last is the major Canadian index):

Index YTD
Dow Jones +9.69%
S&P 500 +16.17%
NASDAQ +32.64%
TSX Composite +26.08%

Even though the U.S. still had the “recession” label attached to it, this does not mean that stock prices were still falling.  Remember that stock prices are forward-looking.  That is they are not an indication of a company’s present growth potential; they are an indication of what investors believe to be the company’s future growth potential.  This makes stock prices a “leading economic indicator” because they change before the economy does. 

Although there is not one accepted definition of recession, it is usually linked to GDP (Gross Domestic Product: basic measure of a country’s economic performance).  The GDP is updated every quarter and therefore reflects the past three months of economic data.  This makes the GDP a “lagging economic indicator” because it changes after the economy does. 

Some positive news is coming out of the U.S., just like the rest of the world. 

It’s time to be optimistic.  Here is a collection of articles that describe the current positive signs of much better times to come.  Read on and remember Warren Buffet’s best quote:  “I’m an optimist because I have never met a rich pessimist”.

Barrons.com - For Stocks, the Signs Point Up

the cover story in Barron’s outlines how the highest quality stocks have lagged in the recent run up - but are positioned to outperform going forward.

Barons.com - Quality counts

A story in last Saturday’s Wall Street Journal highlighted the first upturn in manufacturing in nine months - with no signs of accompanying inflation pressures.

Wall Street Jornal - Industrial Output Climbs, While Price Stay Steady

An article in last week’s New York Times reported on a positive outlook from the Federal Reserve Board.

New York Times - Fed views Recession as Near an End
And on last Friday the New York Times also reported on positive indications for global trade.

Globe & Mail - How long can the rally really last?

Wall Street Journal: Stock Dividends make a difference
August 12, 2009 As the stock market continues to recover, more investors are easing back into the market. While stocks have had a good run, they remain well off their record levels reached in 2007.

The International Monetary Fund (IMF) officially announced this morning that the Global recession is over and a recovery has begun.  They quickly added “but leaves in its wake “deep scars” whose impact will last “many years.”

Nonetheless, the mere fact that we can move on from here is good news.

Here is the full story.

MarketWatch article: Recession Over. Recovery begins.