Recovery: Past, Present, Future
What a difference a year makes. Last year, we collectively stared into the Abyss, watching our economy grind to a halt. Yet, as history has shown us over and over again, we picked ourselves up, dusted ourselves off, and business activity has resumed. Spending that was canceled, was really just postponed. Investment that was hesitant came back to life (at much cheaper prices). The financial system has been stabilized, people are beginning to catch up on postponed purchases, and businesses have begun to restock their inventories. Cyclical forces were held down too long, which is like pulling on a spring, eventually it needs to bounce back.
The last time Canada experienced such a severe drop off in the economy, was in the 1981-82 recession. The TSX index, over 12 months, fell 43%. Not unlike last year’s 50% decline that brought prices down to a six year low. What is often forgotten about the ’81-82 decline, was that the market went on to produce a stunning full recovery in only one year (see chart on page 3). While the circumstances are different between today and in ’81-82, the point is that recoveries happen much faster than people expect. Buying when the headlines are the bleakest historically is exactly when one should be buying. To borrow a quote from Warren Buffett: “be greedy when everyone is fearful and fearful when everyone is greedy”.
So, what will our recovery look like? Initially, postponed spending, production, and investment, will resume their natural paths. At the same time, as confidence builds, government spending and low interest rates will provide the initial building blocks for a private sector recovery. Canada, fortunately, is in an enviable position of coming out of last year’s financial crisis with one of the safest and sound financial systems in the world. This, along with our natural resource base, has attracted the positive attention of foreign investors, helping increase capital to our economy.
While we appear to be on the road to recovery, it will not be a straight line. Consumers, especially in the US, are fixing their balance sheets by increasing their savings. This will likely constrain consumer spending. On the other hand emerging economies like China are moving away from a reliance on exports and are now trying to stimulate domestic spending. Globally, it appears that the new powerhouse consumers will come from countries like China, India, and Brazil, which are all growing at 6 to 8%. Thus, some nations will see V-shaped recoveries, while others will be initially slow to recover to normal growth.
The implications for the investment landscape are ones to take notice of. Since we are seeing different growth rates emerge in different economies and certain sectors, opportunities will be more selective than in a normal economic recovery. Companies focused more on growth in Asia, like material producers, or government spending on infrastructure, are likely to have the best prospects going forward. It is also likely that certain areas will likely be a drag on growth with the end result being an initial lumpy recovery, followed by a more broad based normal recovery.
The road to recovery is not a straight line, so having funds that can successfully adapt to the ever changing market place will be a very valuable part of our personal portfolios.
ZLC Private Investment Management Inc, the Asset Management division of ZLC Financial Group, acquired a majority interest in Van Arbor Asset Management Ltd, a Vancouver based Fund Manager.
Van Arbor’s core philosophy is to hold a focused portfolio of the best value based opportunities in the market, versus mirroring the respective indices.
This includes staying away from weaker sectors, while focusing on the few selective opportunities that have excellent growth potential and are trading at bargain prices. During periods of volatility, Van Arbor has successfully become more defensive than the general market, thus focusing on capital preservation.
Van Arbor Asset Management Ltd. offers investors two unique non-passive equity Funds. The Van Arbor Canadian Advantage Fund, the number one Canadian equity fund in Canada over the last 5 year period; and the Van Arbor World Advantage Fund, one of the top five ranked Mutual Funds in Canada over the last 1 year period. (Source: GlobeFund as at July 31s, 2009)
