Irwin Michael, portfolio manager of ABC Funds of Toronto, sees a sharp contrast in business and investment sentiment this year from that of 2011, as companies become more optimistic about their economic prospects.J.P. MOCZULSKI
As the fourth-quarter reporting season wraps up, it is clear that the 2012 market has shaken off the doldrums of 2011.
The Greece crisis appears solved, at least for now. In the United States, the majority of companies that have reported earnings are beating expectations, and economic signs continue their slow improvement. Case in point, Thomson Reuters Corp. reported on Feb. 23 that of the 446 companies in the S&P 500 that have reported earnings so far, nearly two-thirds (63 per cent) beat analyst forecasts.
The S&P 500 is flirting with nine-month highs and is up more than 20 per cent from its lows recorded in October. That has investors wondering whether the index has hit a ceiling or is just taking a pause before marching further up and to the right. The S&P/TSX composite index, which has been on an upward march since December, powered in part by gold, is still well off its 2011 highs of last March, a year in which the index fell nearly 12 per cent overall.
So can the strong run continue?
"We like what we see," said Irwin Michael, portfolio manager of ABC Funds of Toronto, which manages about $1-billion of investments.
He sees a sharp contrast in business and investment sentiment this year from that of 2011. Last year, companies were hoarding cash and fearful of a double-dip recession. Stocks were trading well below their book value. "There is no double dip, Greece is not even an issue any more . . ."
ABC's main Fundamental Value fund is up 19 per cent to date, but the event that has renewed Mr. Michael's faith in his firm's stock-picking acumen was the recent takeover of Flint Energy Services Ltd. by U.S.-based URS Corp. for roughly double per share what ABC paid for it. "We have a number of stocks like that," Mr. Michael said.
He expects the pace of mergers and acquisitions to pick up as companies become more optimistic about their economic prospects and see stock market bargains.
"On a macro basis, it is cheaper to buy a company on the stock market than to start one up from scratch," he said. "In a number of cases, stocks are so cheap that to replicate them or replace them, it would cost you more."
Reinforcing that perceived trend, the corporate ranks also remain relatively thin given the slow pace of initial public offerings over the past year. And North American corporations have coffers full of cash – more than $3-trillion worth is sitting on their balance sheets just waiting for deployment.
Expansionary monetary policies in the United States and Europe should also lend support to precious metals, particularly gold, as well as oil prices, two key components of Canadian equity markets.
Levente Mady, managing director of derivatives at Union Securities Ltd. in Vancouver, questions whether North American markets can keep chugging ahead.
"Since the end of November the market has only gone one way. It is a little bit overdone here, so we are due for a pullback," Mr. Mady said. "Certainly the latest numbers continue to indicate that there is improvement on the U.S front. But last year the U.S. economy grew less than 1.5 per cent, so if we grow by 2 per cent this year is that going to be sufficient to continue this market on an upward trend?"
The Vancouver analyst does not spend too much time worrying about the fate of Greece and its bailout from its EU partners. "Have there been any days when you haven't seen a Greece headline? In the past three months the stock market went up 20 per cent" during a daily barrage of often gloomy reports about the troubled EU country.
The bright spots for Mr. Mady include precious metals and energy. "Oil and related products have been doing very well with all the uncertainty in the Middle East," he said.
Though the U.S. economy looks to be on the path to a slow mend, worries about corporate profits, job growth and the housing market are hard to shake, said Adrian Mastracci, a portfolio manager with KCM Wealth Management in Vancouver. "Most of the S&P companies beat the estimates (in the fourth quarter) but by less than prior quarters, so the earnings growth is coming down and we are probably going to see more of that in the next quarter."
Mr. Mastracci "hopes to be wrong" about his pessimistic view of U.S. employment. Rising U.S. payrolls would not only slow the rise in government deficits, they would give a boost to consumer spending that is being crimped by rising gas prices. He also does not expect any quick turnaround for the U.S. housing market despite a national foreclosure settlement. "U.S. real estate is still a big mess, nothing has really changed."
He recently released a list of 10 issues that will make for "stormy sessions" through 2012. Those include euro-zone sovereign debt woes beyond Greece, the implications of $100-a-barrel (U.S.) oil and whether China can maintain its factory output and high single-digit growth rate.
"China is still having a little bit of a problem. They need to keep those factories humming and putting out stuff that people buy," Mr. Mastracci said. "If their growth falls from their nine or 10 per cent [growth rate]to seven or eight, that means millions of people are out there doing nothing and don't have a job."