Tis The Season…
With another trading year about to come to a close, it looks like the TSX will post an approximate 12% loss for the year. With commodity prices generally down across the board - our resource driven market has felt the effects of slower growth in China and the emerging markets; a stronger US dollar; and the never-ending European sovereign debt crisis.
Gold, which has helped portfolio returns with a 10 – 20% exposure, has recently come under some selling pressure as investors liquidate positions to take some profits, and as a number of sovereign banks sell gold to raise funds for stimulus. Further, recent strength in the US dollar has corresponded to some negative volatility for the shiny metal.
Our longer term case for gold is still bullish as we likely haven’t seen the end of global debt issues resulting in gold resuming its secular uptrend. It is still perceived as a global save haven currency.
Income investors face record low interest rates as the yield curve has flattened over the year. The difference in short term rates and long term rates is very narrow as long (10 year and up) bonds have increased in value over the past year. Investors with fixed-income portfolios tilted toward the longer term have fared well as a result.
At this stage, new money into the Canadian bond market will earn less than 2% for 10 years, or a meager 2.47% for 30 years. With banks and utilities yielding close to 5%, I’d personally rather seek yield with defensive stocks, REITS (Real Estate Investment Trusts) and convertible bonds. Of course, we will still use government bonds for investors requiring principal guarantees.
The ETF market continues to expand with new products and suppliers arriving on a regular basis. My Balanced Income ETF model has a yield of approximately 4.68% at the market. That 4.68% consists of monthly dividends, interest income, and some return of capital. With the dividend and return of capital portion of the income, the after-tax interest equivalent yield is north of 5%.
The prospect for 2012 is for continued moderate growth in North American economies. The sovereign debt crisis continues to cast doubt on prospects for European economies in the short term. The emerging markets still present longer term upside and our commodity based economy will fuel our stock market in the years to come. At this point, investing in securities providing stable income is the key to success while maintaining commodity exposure and gold exposure to hedge returns. The volatile markets have created some value and we will continue to seek added performance using ETFs in sectors which seem opportunistic.
I look forward to my next blog in early January where I will highlight market and sector performance for 2012, and calendar returns for our ETF model portfolios. I’d like to wish all the best to my clients and readers for the holiday season.
Merry Christmas and Happy New Year to you and your families.
Don Cromar CIM, FCSI