You may have noticed that your account value may have suffered some losses in the past few weeks and wonder why, especially since we appear to be in a recovery. Here is why and what to do about it.

Markets around the world have dropped a few percentage points in most countries in the past few weeks caused by several world events starting with geopolitical turmoil spreading from Egypt to Libya to the Middle East followed by the devastating Earthquake & Tsunami in Japan.  Oil prices soared and that ugly word “Inflation” is on everyones minds.  The Asian / Europe monetary policy tightening, and the uncertain debt environment ( the end of  the controversial monetary policy, quantitative easing in June) are also amongst the negative market factors . 

When such events happen, inevitably, volatility returns.  Markets always react to uncertainties. The set back we are experiencing now follows a very surprisingly quick and strong recovery after the “Great Recession” triggered by the financial crisis.  It is normal and healthy to have a bit of a cool off after this amazing run up.   In fact,  several markets (DOW, TSX) have reached post-recession highs in the past few weeks and the year over year figures are still very good (17% for TSX, 13% for S&P as of March 31).   It is always upsetting to see our portfolio go down in value and even if you own very good, solid and poised for growth companies, fluctuations are inevitable.

The message we keep hearing from analysts is clear and consistent.  The Canadian and U.S. economies continue to improve and many indicators point to further expansion. Strong balance sheets and cash flows have corporations increasing dividends and indicating that higher payouts are highly probable. “The market is currently trading at a price-earnings multiple of just under 20 times based on trailing earnings and 16 times based on consensus 2011 estimates. We expect the multiple to shrink by year end as the Bank of Canada increases rates. However, even if the multiple shrinks, investors could still expect returns from Canadian equities for the remainder of the year. ” – Manulife Q1 Market Commentary

Going forward though, we feel that the cycle is maturing and only four of ten Canadian equity market sectors can be described as being attractively valued, with valuations at a discount to the historic median and profitability higher than historic norms. Five sectors – comprising 82% of the index – fall within the reasonably valued category. 

The biggest threat is indeed inflation.  What can the investor do?  Different inflation projections lead to different strategies. The strategy here is to buy the asset class likely to rise:
• Commodities and commodity equities
• Gold and gold equities
• Residential real estate
• Selected equities

But a strategy to buy  “protection” against CPI rises includes categories such as:
• Real Return Bonds
• Energy and energy equities
• Food and agricultural equities (Food and energy are often the driving force in headline CPI)
• Residential real estate (it often matches CPI cycles)

To summarize, the news is not all bad.  The fundamentals improve and yes we can protect ourselves from inflation and even profit from it. Management skills are of utmost importance in these types of markets. Picking the most skilled managers in these changing markets is essential.  We are confident in the  fund managers we select for our model portfolios and remain positive in the mid to long term outlook as we expect the recovery to continue, although at a slower pace than what we experienced in the past 2 years.

 In any event, stay tuned and visit our blog often.  Never hesitate to contact us for a review should you have any questions or concerns.