Bedtime stories and market wisdom

Is the sky falling? Or is it just an acorn hitting investors on the head?

I have been revisiting children’s fairy tales in recent months – I am blessed with four grandchildren and they are avid listeners at bedtime. Chicken Little is a favorite.

You may remember the story. A young chick believes that the sky is falling when an acorn falls on its head. The chick decides to tell the King. On its journey, the chick meets other animals, shares the disastrous news and soon many are on the quest to see the King. Unfortunately, it all ends badly for the irrational fowl and his new friends. A fox invites the group to its lair and eats them all.

Chicken Little would be at home on Bay Street in the summer of 2011.

But instead of an acorn, it’s a billion dollar IOU hitting our feathered friend on the noggin.

Debt is the story of the day. It’s dominating the business pages and many investors are convinced that the sky is falling.

First, there is Greece. At the time of this writing, many Athenians are enraged by the government’s austerity plan to tackle the country’s economic woes. The plan is critical if Greece is to receive the next installment of a €110-billion ($155-billion U.S.) bailout loan from the European Union and the International Monetary Fund.

Without it, Greece faces the prospect of becoming the first euro zone country to default on its debts — a potentially disastrous event that could drag down European banks and affect other financially troubled European countries. There’s some speculation Italy, the euro zone’s third largest economy, may soon face its own credit crunch.

Then, there is the United States.

President Barack Obama and his allies are pushing the Republican-dominated Congress to extend the government’s ability to borrow money. The U.S. government is rapidly approaching its current borrowing limit of $14.3-trillion. The Obama administration is warning that if the debt ceiling is not raised by August 2, the country would face its first default, potentially throwing world financial markets into turmoil.

Many Republicans are not convinced disaster would ensue if the debt ceiling isn’t raised, and some administration officials worry that the markets could take a financial plunge before Congress acts.

The U.S. crisis may sound hauntingly familiar. In a case of debt deja vu, it was the Bush administration almost three years ago that struggled to persuade Congress to intervene at the height of the financial crisis. The $700-billion plan to rescue banks was defeated initially in the House, freezing credit markets and sending stock markets into a nose dive. The measure finally passed in September 2008.

Unfortunately, debt worries have fuelled a stomach-churning ride for investors with the Toronto Stock Exchange roiling up and down hundreds of points for much of 2011.

Emotion is the crux of the problem. I believe many investors are reacting to short-term noise – er … news – and letting fear and greed get the better of them. Volatility in the marketplace breeds uncertainty. Investors, large and small, are in a panic and rethinking their investment strategies. Looking back at past markets, some of the best returns have been realized by objective, disciplined investors, buying when most other market participants have been in full retreat.

Canadian investors are uniquely positioned to take advantage of the global equity market. The Toronto Stock Exchange recovered smartly in 2009 and 2010. Today, despite short-term volatility, Canada’s leading exchange is not far from its 2007 record trading high.

Global stocks have recovered too, but nowhere near the trajectory of our resource-rich Canadian market. Many international blue chip equities remain well below previous highs. When our fully-valued Canadian dollar is factored into the mix, it means some of the world’s best global opportunities are for sale at bargain prices.

I urge investors to be wary of the short-term headlines and remain focused on their long-term financial goals and aspirations. It’s tougher than you think – that’s why relying on the experts for fund management is crucial.

First, active fund managers are very nimble and best positioned to take advantage of market opportunities. In many ways, 2011’s choppy markets are exactly the type of environment where tactical asset managers excel and add significant value. Experienced, engaged investment professionals are best positioned to take advantage of market trends and position the portfolio more advantageously. They have the investing acumen to identify undervalued companies with strong long-term prospects. A skilled equity fund manager will remain focused on long-term goals and keep the short term noise at bay.

Don’t get me wrong. The U.S. and Greece, along with its European partners, have some critical days ahead. Governments will be forced to make some tough decisions. Taxpayers will pay the price. We are in for some unsettling times ahead.

I can guarantee the market will react to news with a mix of shock and awe. Volatility will continue with investors spooked one day and then ready to pop champagne corks the next.

But the sky is not falling. Unlike our friend Chicken Little, patient investors will keep their emotions in check and avoid a nasty final encounter with a hungry fox.

Don Reed is President and CEO of Franklin Templeton Investments Corp.