Storm clouds over Canada

There is little optimism about Canada’s markets, according to a new survey of Canada’s Chartered Financial Analysts conducted on behalf of BNN. Only 17% of Canada’s CFAs think markets have hit their bottom.

When asked if the North American markets have hit bottom, nearly two-thirds (61%) of the 845 CFAs polled said “no” while only 17% thought the worst has already passed.

CFA-holder Ian Robertson, a director and portfolio manager with Odlum Brown, says the poll reflects a general uncertainty about the level of damage to U.S. financial markets.

“I have a sense just like the respondents that there is a lot of uncertainty out there. We can see this is going to take a lot of time to unfold. With that unfolding in the U.S. housing market and the U.S. economy comes a lot of uncertainty. With that uncertainty comes volatility in the market,” he says.

Robertson says that he, like the majority of respondents to the poll, has adjusted his client’s portfolio asset-mix to take the sting out of the volatility. Nearly 60% of the respondents said they are employing asset allocation to structure volatility-resistant portfolios; an additional 20% are basing their portfolios upon security selection.

It should also be noted that 63.8% of the CFAs said they did this proactively in anticipation of volatility.

“For my own clients, I’ve taken similar steps to those of the respondents,” Robertson says. “We have positioned accounts in anticipation of market volatility. We’ve done that in two ways: through [changing] asset mix of stocks, bonds and cash; and secondly, within the equity and fixed income portion we have ensured the appropriate mix of securities.”

When CFAs have chosen to react to market conditions in the last four months, the poll finds there is no single popular tactic. The largest proportion of respondents (36.2%) have increased their defensive positions in portfolios, while 14.7% have taken cash off the table and 16.1% have seen volatility as a buying opportunity.

“It is one thing to intellectualize the risk and say this is the appropriate mix and work with clients to implement that. When volatility hits, individual investors’ reactions can be different and sometimes there are some necessary readjustments. You predict the best you can,” Robertson says. “Some investment professionals have needed to adjust their investment portfolios further. Some have seen it as a buying opportunity and some have seen it as a wake-up call and have taken money off of the table.”

Canadians were also hit with some pretty poor economic data on Wednesday. Canadian monthly real GDP decreased 0.2% in February, according to Statistics Canada, continuing at a much lower pace than in the first half of 2007. StatsCan reports wholesale trade and manufacturing accounted for most of the decrease.

Michael Gregory, senior economist with BMO Economics, says while the data does not point towards a recession looming in Canada, it does point towards a potential downturn related to what is likely a recession in the U.S.

The contraction in Canadian growth over the last three months of GDP data is the deepest it has been since 2001, the last time the U.S. was in a recession, Gregory says.

“It’s the first time over a three-month period [GDP] has actually shrunk since 2001, which of course was the last time the U.S. was in a recession,” Gregory says. “If the U.S. is in a recession or very weak growth it’s very hard for Canada to deal with that and not be pulled down by that,” he says.

But for now, Gregory says strength in areas such as Canada’s commodity sector should keep Canada treading water while the U.S. submerges.

“Clearly the weak link in this economic climate of ours is the manufacturing sector — it’s in really rough shape. But, the retailers are doing okay, the construction companies are just going like gangbusters still. Of course, anybody touching natural resources — whether it’s oil and gas, mining or agriculture — are doing very well,” he says. “It does suggest we should be able to skirt recession. The same can’t be said for the U.S. but definitively I think the strength of Canada’s underlying fundamentals should allow the economy to manage to hold onto positive territory.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(04/30/08)

Mark Noble