FRED:  Welcome to the Scotiabank Podcast. I’m Fred Ketchen, Director of Stock Trading for Scotia McLeod. These regular podcasts call on some of Scotiabank’s most knowledgeable thought leaders to help you make sense of it all. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In this podcast we’ll talk about the upheavals in the economy and the markets in the last year and the possible opportunities these present to investors.

FRED:  Joining me today is Gareth Watson, Senior Equity Advisor with Scotia McLeod. Gareth, investing common wisdom suggests we reallocate components in our portfolios after a big correction or bear market. How hard is it for investors to steer more money into equities after seeing that asset class suffer the biggest of losses?

GARETH:  Well obviously, Fred, it’s quite difficult for investors to do that. We didn’t just see it here in Canada. We saw it globally in terms of equity performance over the past year. But, you know, it’s not as bad, of course, when you see the markets start to show signs of stability for a longer time; and that’s basically what we’ve been seeing since March when the TSX hit its lows. Investors are aware that over time, we do tend to buy the stock market or at least overbuy it on the way up; and certainly on the way down as we saw back in February and March, we do tend to oversell it as well.

FRED:  Address investors psychology a bit, Gareth, it must feel like throwing good money after bad, explain how good diversification works?

GARETH:  Of course, there is a lot of talk about diversification because of what happened over the past year, but it’s always worthwhile reminding investors that investing is a process and sticking to a long term investment plan is the main driver of that focus in order to accomplish what your long term investments goals are. So in most cases, a diversified portfolio is actually required to mitigate risk and sticking to diversification parameters is important. However, also re-balancing a portfolio is just as important as a diversification process itself.

FRED:   We’ve seen a big surge in stocks since the March lows of the major indexes, what have been the hottest sectors and which are the sectors most likely to lead next?

GARETH:  Well in Canada, because we have about 75% of our TSX index weighted towards financials and resources, they have been the ones that have taken the index higher from the March lows. As the global economy improves, these sectors are also going to continue to benefit but the rate of recovery will dictate the magnitude of future gains in these sectors.

FRED:  Is this shaping up to be a normal recovery in terms of market leadership and does that give you comfort in predicting how it will play out in the next stage?

GARETH:  I wouldn’t say this is a normal recovery, in that this time round what we’ve seen in the United States, is a housing market collapse which has destroyed consumer equity. We’ve had previous recessions where housing prices have not been hit as much and equity amongst consumers has not been hit as much but it’s completely different this time. We can’t expect a sustainable recovery until the U.S. consumer increases his or her rate of spending and the environment for that right now is just not really helpful. Home prices are still low, you’re seeing retail sales sluggish and unemployment is rising. Overall what we have to understand, of course, is that the world’s economy is still on life support so we’re not out of the woods yet.

FRED:  What has the market’s big surge told us about where we are in this economic cycle, Gareth?

GARETH:  Well, it is difficult to tell where we are in the cycle in that markets are always tended to be forward looking; so, they’re more of a gage of where we might be actually going rather than where we are exactly right now.

FRED:  Can we be confident that the worst is over?

GARETH:  Well, it really depends on what we are talking about. We’ve likely seen the worst when it comes to stock market performance here in Canada and the corporate credit crisis is likely seen the worst; even though it may take a few years to properly recover. However, we may not have actually seen the worst yet when it comes to the consumer credit crisis south of the border. Savings rates are now high, consumption is down, unemployment is still an issue, and home prices are still struggling and may continue to do so in the near future.

FRED:  Is it telling us that we’re facing a robust or a tepid recovery next year? 

GARETH:  The market is likely pricing in a robust recovery at these levels. But that’s not to say it’s necessarily going to materialize in that way. We still have a lot of structural issues we need to figure out.

FRED:  While we’re figuring that out, Gareth, how likely is it that we’ll see a significant pullback or correction in stocks and what’s most likely to trigger it?

GARETH:   In terms of the trigger, it’s likely going to be further signs of economic weakness. In terms of a pullback or correction, obviously, that’s a difficult question to answer and even more difficult to time. The trend of investors over the past eight months is being to buy on dips and put access cash to work. If this trend continues, then a correction may be unlikely, although it can never be ruled out. A pullback could be in order but eventually the economy will recover sustainably and markets will move higher. The issue is not if but when.

FRED:  Is there any way to time it and should investors even try?

GARETH:   Well, it definitely is going to be difficult to time so long term investors should simply position themselves accordingly today but be prepared for some volatility.

FRED:  Gareth, commodities are benefiting from nascent recovery and a global economy, is it broad-based or likely to favor some segments such as oil over natural gas, or nickel over copper?

GARETH:  Well, oil and base metals and other commodities have been the biggest beneficiaries of any economic upswing, as they’re involved as input cost for production and manufacturing. Because all resources were hit hard during the downturn last fall, they’ve all participated in the upturn to varying degrees.

FRED:  Can we suggest a good diversified play on commodities or should we suggest going to a general resource fund?

GARETH:  This really does depend on the individual investor in terms of how you play resources; it depends on who you are and what your investment criteria are. You can play various exchange traded funds, mutual funds or buy individual securities as well.

FRED:  Loonie drivers. What’s the biggest factor driving the “loonie” strength?

GARETH:  Well, commodities have had a positive influence on the loonie but that simply because we’ve seen so much weakness in the U.S. dollar which has pushed U.S. denominated commodity prices higher. The outlook for the U.S. had deteriorated since their budget deficits continue to climb. They had to rescue their financial system and they may be printing out money which is inflationary in nature.

FRED:   Well, then how long before the U.S. could possibly get trade and budget picture back in shape?

GARETH:  Well, the U.S. deficit picture is unlikely to change for years. It is going to take a lot of time to reduce the deficit which is currently being estimated to be between 1.5 and 2 trillion dollars even before they could start worrying about reducing the debt. They’re either going to have to make significant cuts or possibly even raise taxes.

FRED:   Well, thanks Gareth, for sharing your insights with us today. We hope that the information in this episode has shed some light on the challenges facing investors during these ever changing times in the economy and in the market.

Thank you for joining us, I’m Fred Ketchen. For more information, please come in and talk to a Scotia advisor today.