After worrying for months that confidence would never return, we now are concerned that we are dealing with an overabundance. For the last few weeks, experts and authorities have been doing their best to dampen optimism, and step on a few of the celebrated “green shoots” that have dominated the discussion on Wall Street since March.  There was Mark Carney, governor of the Bank of Canada, last week warning that this recovery is still weak and fragile and the World Bank announced yesterday a weaker economic forecast predicting the economy will shrink by 2.9% this year, compared to its original 1.7%.  This news sent the TSX 453 points lower into the biggest day drop since December 2008.

Before last week, for us in the investment community, none of the scepticism mattered much as long as momentum remained in our favour. Consumer confidence is up.  Stocks have rallied for four months. Long-term bond prices have begun to fall. Commodity prices have substantially recovered . And all of this happened despite the fact that economic activity is still weak.

Rising confidence is essential for the economy to recover, however, too much optimism too soon may be the biggest threat to a sustainable rebound. That is largely what worries the authorities.  The higher the market climbs, the more extended stock valuations become and the more difficult it gets for central banks to hold down interest rates.  A few days of drops like we have seen in the past few days and there goes the investor confidence again.  Stepping too hard on the green shoots however, can also backfire and kill what was coming to life.  That is what infuriates me the most because not all news is bad.  Quite the contrary.

The story is different here in Canada.  The Wall Street Journal suggested last week that Americans should think about investing in Canadian assets to take advantage of the recent interim weakness in the Loonie, as Canada’s economic outlook hinges on China and emerging markets’ demand for oil and commodities. The WSJ reported last week that while the loonie might bounce around in the next few weeks, the expected long-term trend is for Canadian vigour.

Benjamin Tal, economist at CIBC World Markets, likens Canada’s exposure to the U.S.’s woes as like a second-hand smoker. Bad but not a direct hit.  China is scooping up oil and metals that Canada produces, China is taking a bigger role in Canada’s fortunes.

Though emerging markets remain far below the lofty highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe.  As a result, India, China, Brazil and other emerging markets’ rally have been much stronger than the US and Europe.

“There was a stampede for the exits in the fourth quarter,” said Gonzalo S. Pangaro, portfolio manager of the T.Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.”

It is not just China that is generating optimism. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil.

The fact of the matter we are no longer totally dependent on the US for growth.  In fact, Emerging Markets will play a big part in this recovery and future growth.

For the time being, by no means, is this recession over but please, let the green shoots live.

Yes.  You read me well.  Recovery...I am almost afraid to say the word. 

If you have been following markets movements these past few days, you are likely pleased but also surprised to see that markets around the globe are sharply up from their lowest lows.  In fact, today March 31 ended the best month for the Dow i n years.  Up 8% this month.  Here is a snap shot of the recent equity markets movements:

From March 9 lowest point to today March 31

TSX (Canada) +15.3%
Dow (USA) +16.2%
S+P 500 (USA) +18.1%
Hang Seng (China) +23.3%
FTSE (London) +11.2%
DAX (Germany) +11.4%

These are pretty big numbers in 3 weeks.  Why is this happening and will it last?  Well, these are big questions but I think it is fair to say that the new data we are getting daily is a lot more positive than it was a few weeks ago.  Banks are showing profits, yes profits, can you believe that? The Real estate market in the US is picking up, consumer confidence is slightly up and companies are starting to invest in a big way making large acquisitions.  These are leading indicators which show that the economy is gaining progress.  We are far from out of the woods but there are clear signs that it is the early beginning of a recovery.

In the past month, the biggest movers were:

Financial services: with dividend yields of 6% to 7% and drops of 30% to 50% last year, it is no surprise this sector is one of the biggest mover these days.  This is an excellent sector to buy right now.  Every portfolio should hold 20% or more in this sector for regular income and participation in the sector recovery.  Canadian banks present the “safer” bet.

Energy sectors: the price of a barrel of oil went from $150 to less than $50.  Analysts forecast the price of oil to go to over $200 a barrel within 3 years.  It is a pure case of supply and demand.  Natural gas too is well positioned.  This one is a no brainer.  Add exposure up to 15%.

Emerging markets & Asia in general: Emerging markets, Asia and especially BRIC countries (Brazil, Russia, India, and China) are up sharply up to 10% in one month.  These are areas of the world where consumerism on the rise.  They will likely ignite the recovery and carry us to the next level of global growth.  Everyone should have some exposure, more if you are younger and less if you are in the later part of your life or very risk adverse.

We have been repositioning client portfolios to take advantage of these new developments.  Please make sure to come in for your annual review and get your portfolio adjusted to participate in the recovery.