The new year will be good for stock pickers, who won’t be distracted by prediction either of imminent economic doom or an outbreak of irrational panic buying.
True, the forecasting sages are not much help. Both the Royal Bank of Canada and IHS Global Insight forecast strong economic growth for Canada — provided, of course, that there is no further trouble on the U.S. economic front, troubled European economies soon recover, and Canadian resource exports to Asia and an only gradually recovering U.S. regain their previous strength.
As for U.S. equities, the range of forecasts is for a 16 per cent plunge in the S&P 500 or a gain of as much as 15 per cent — a spread that suggests your guess is as good as anyone’s about 2013 U.S. stock performance.
The reality check is that all recessions end, as even the Great Depression did. And stocks over the past century boast an average annual return, including dividends, of 7 per cent, making them a superior asset class.
Common sense tells you there is pent-up demand worldwide for cars, houses, appliances, home-renovation materials and other big-ticket items. Consumer electronics (that is, smartphones, tablets and video games) have been the only sector to continue booming in the downturn, as Hollywood almost alone did in the Dirty Thirties.
For the equities investor, the wise bet is on a gradual and then quite spectacular economic recovery over the next few years, no matter the troubling factors of the moment. Caution certainly is appropriate given the abundance of worrisome signs out there. “I’m not predicting Armageddon,” Doug Cote, chief market strategist for ING Investment Management told CNN Money this week. “But I do think it would be prudent to take a more defensive position in the market this year.” Cote’s predicting a modest and but solid 4.5 per cent increase in the S&P 500 for 2013.
By all means brace yourself for more bad news in 2013. Pacific Investment Management Co., or Pimco, the U.S. firm that runs the world’s largest bond fund, thinks it’s a certainty that America’s credit rating will be cut again in 2013, a repeat of the destabilizing event when the U.S. was stripped of its Triple A rating during the debt-ceiling fiasco of 2011.
Protests among laid-off Chinese factory workers are occurring at the rate of one per day. A great many Spaniards, enduring 25 per cent unemployment — three times the jobless rate in Canada and the U.S. — are choosing between paying the rent or putting food on the table. Canadian families are carrying record household debt, on average, and about 400,000 Canadians remain out of work. U.S. debt, at the federal level alone, is a breathtaking $ 16 trillion.
But the global economy is dynamic, as the emergence of China and South Asia as economic superpowers has shown. Key economies like Canada and Germany, averse to public debt, are poised for prosperity. A more sensible tax regime in the U.S., no more “punishing” than the corrective medicine of the Clinton years, will greatly improve America’s books.
One of last year’s edifying events was the investor sell-off of the arrogantly overpriced Facebook Inc. from the day its stock first went on sale. Not necessarily older, but certainly wiser after boom-bust cycles in stocks, real estate, precious metals and oil-price futures, investors today are smarter in sussing out real, sustainable value than perhaps at any time in modern history.
I’m not one for stock tips. (Run, don’t walk, when you hear one). But among the firms I’d be looking at with interest now are some good enterprises that have been beaten down not by weak fundamentals in their operations or industries but a spell of bad luck, bad behaviour, or bad economic conditions certain to improve.
That puts me in mind of Ford Motor Co. (NYSE: F), by some measures the bestselling automaker in the world. Ford’s trading at a discount of almost 60 per cent to its 2001 peak, is affordably priced with a seductive price-earnings multiple of just 2.9, and sports a decent dividend yield. Montreal’s SNC-Lavalin Group Inc. (TSX: SNC), laid low by a year-long bribery scandal, remains one of the few go-to enterprises for the most challenging engineering projects worldwide, with a fattened order book in 2012 to prove it. Bank of Nova Scotia (TSX: BNS) has strong growth potential, an eye-popping dividend yield of 4.0 per cent, and one of the lowest price-earnings multiples of the Big Six banks (11). TransCanada Corp. (TSX: TRP) is likely to see its proposed Keystone XL pipeline megaproject green-lighted by the White House this year. Calgary’s Agrium Inc. (TSX: AGU), the Canadian fertilizer giant that thrives in the shadow of Potash Corp., will continue to experience upward pressure on its stock as a U.S. activist investor tries to force needed changes at the firm. WestJet Airlines Ltd. (TSX: WJA) keeps going from strength to strength. Its planned regional airline, Encore, is a promising revenue builder.
In today’s “defensive” times, as noted above, one is obviously wary of turnaround plays like Research In Motion Ltd. (TSX: RIM), whose future hangs on the BlackBerry 10 to be unveiled at month’s end. I fear a humbling of Hunter Harrison, who will be hard pressed to repeat at Canadian Pacific Railway Ltd. (TSX: CP) his remarkable turnaround success heading Canadian National Railway Co. CN is a very different beast from CPR, which is overly reliant on resource shipments, suffers above-average maintenance costs in its Western Canadian redoubt, and lacks CN’s continental breadth. Air Canada (TSX: AC), with its own plans for a regional airline (Rouge), has not made a great success of previous efforts Tango and Zip, nor has it dislodged upstart Porter Airlines from Toronto’s Billy Bishop inner-city airport, and not for lack of trying.
All that said, forecasts, mine included, are so often wrong that one assumes they derive from a blend of factual analysis and peyote. Forecasts are so conditional these days they defeat the point of prognostication, the most common escape hatches today being that all bets are off if the U.S. fiscal cliff emergency isn’t resolved. (It will be, but possibly not before the return of T-shirt weather.)
So I’ve expanded my rules of investing. Rule 1 is preserve capital. Rule 2 is to remember Rule 1. And Rule 3 is to invest in such a way that you benefit even if the forecasts are wrong by a country kilometre. Because, Rule 4, most of them will be.
Full disclosure: I own shares in two of the firms above, Bank of Nova Scotia and TransCanada Corp.