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Politics won't dim Canada's fiscal 'halo,' strategists say

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Canada's 'halo' The manager of the world's biggest bond fund is very keen on Canada, and he sees any election "noise" as a possible buying opportunity.

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"In a world that is awash in sovereign debt concerns, the halo around Canada is sustainable for a while," Pacific Investment Management Co.'s Ed Devlin told Bloomberg News in an interview.

"If we do get some kinds of backups because of political noise, it's probably a buying opportunity," he told the news agency.

An election won't dim this view of Canada, he added, because politicians are committed to deficit-reduction.

Financial markets showed little reaction to political developments this week after Finance Minister Jim Flaherty's budget on Tuesday.

"The market reaction has been muted to such developments following the budget, in large part because Canada's fiscal and other fundamentals are supportive, in contrast to political instability in, say, Portugal's case," said Scotia Capital economist Derek Holt.

"That also stands in sharp contrast to the political instability in 1995 when a Quebec Referendum occurred in the context of deeply stressed government finances. I recall sitting in a hotel room watching the results come in on TV before having to make a presentation the next morning, thinking that the solution to our vote-dependent forecast dilemma was to possibly turn some of the slides upside down in the projector carousel. Character building, you might say, but today's backdrop is exceptionally different."

Douglas Porter, the deputy chief economist at BMO Nesbitt Burns, agreed.

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"The Canadian dollar and bond markets finished the week almost precisely in line with pre-budget levels, entirely unfazed by the impending election," Mr. Porter said.

"...The fact is that Canadian markets have been dealing with a minority government since mid-2004, and can absorb almost anything the electorate throws at them. And while the budget won't survive, the generally improving fiscal landscape presented in the document will - a drop in the deficit to below $30-billion in the coming fiscal year. That's 1.7 per cent of GDP, compared with an average deficit of more than 6 per cent in industrialized world economies this year."

For equity investors, election outcome means little For Canadian stocks, at least, it doesn't matter whether the Tories or Liberals win the election.

Brockhouse Cooper has tracked the performance of the S&P/TSX composite during campaigns and after, and found that "there is no clear way to profit from upcoming elections."

Global macro strategist Pierre Lapointe and financial economist Alex Bellefleur looked at the benchmark index in the days leading up to, and following, federal elections over the past three decades. They of course excluded the 2008 election, which was called just a week before the Lehman Bros. collapsed that plunged the world into a financial crisis and recession.

"Political parties would probably like to claim that the stock market does better if they win, but this would essentially be data mining; in the short run, returns are not significantly different based on the colour of the party that wins," they wrote.

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"Based on all Canadian elections since 1950, there is also no evidence that immediate stock market returns are better in the event ... a majority government is voted in."

That's the short term. But even in the medium-term, they found, for stocks it really makes little difference which party is in power.

"To put it in a European way, Canada is not Greece, nor is it Portugal or Ireland or Spain or Italy," they said.

"Canadian politics simply don't matter that much for the country's stocks. We are not worried by the successive minority governments and elections the country has experienced in recent years.

"We continue to like Canadian equities not because of the country's politics or because we are based in Canada, but mostly because of the country's exposures and sector mix.

"We consider Canada's heavy exposure to energy, basic materials (including agricultural-themed resources such as fertilizers) as well as financials to be attractive in the current portion of the global economic cycle."

RIM stock sinks after earnings Shares of Research In Motion Ltd. sank today after the BlackBerry maker disappointed investors with its first-quarter outlook, despite a surge in fourth-quarter profit. Shares of Apple Inc. , on the other hand, climbed as the iPad 2 went global.

As Globe and Mail technology writer Omar El Akkad reports today, RIM is embarking on a new chapter with the April 19 launch of its own tablet, the PlayBook. It also said yesterday the tablet will run Android applications, giving users access to 200,000 more apps.

But its forecasts for the first quarter suffered, RIM said, on higher marketing and R&D related to the PlayBook, and a general shift in the market toward lower-margin phones.

RIM earned $934-million (U.S.) or $1.78 a share in the fourth quarter, beating analysts' estimates, but its outlook for the current quarter fell shy at earnings per share of $1.47 and $1.55. For its 2012 fiscal year, though, RIM projected earnings per share will top $7.50.

For now, UBS analysts Phillip Huang, Amitabh Passi and Maynard Um said today, RIM is a "show-me story" in the run-up to the sale of the PlayBook and launch of other products.

"Much hinges on the success and ramp of new product launches in [the second and third quarters]and the success of the PlayBook," they said in a research note.

"On the latter, management sounds confident though we believe the jury is still out."

Still, amid the bloodying in the market, they kept their 12-month price target on RIM shares at $63.

Raymond James Ltd. analyst Steven Li also held his price target at $77, and his rating at "outperform," but added that he was not impressed with the first-quarter projections and "we are not going to sugar-coat it."

As for the solid full-year forecast, he added, "while this strong guidance reflects management confidence with the engagements it has with multiple carriers, it does set the bar high."

Deutsche Bank analyst Brian Modoff cut his 12-month target to $50 from $60, and his recommendation to "sell" from "hold."

As investors sour on RIM today, Apple is in the limelight, with lineups greeting the international sale of the second version of its iPad 2. That includes Canada.

U.S. GDP revised up The U.S. economy is on slightly firmer ground than initially believed.

The U.S. Commerce Department today revised its reading of economic growth to an annualized pace of 3.1 per cent in the fourth quarter. That's up from an earlier estimate of 2.8 per cent.

"But the source of the revision was not that encouraging," said CIBC World Markets chief economist Avery Shenfeld.

"Real final sales, GDP excluding inventories, was left unchnaged, albeit at a very strong 6.7 per cent," he said in a research note.

"The upward revision came from a smaller drag from inventories. Still, inventory accumulation was extremely light in [the fourth quarter]even in the revised figures, which leaves room for restocking to contribute to [first-quarter]growth. Within the components of demand, the revisions pointed to a stronger gain in residential and non-residential buiness investment, offset by slightly weaker readings for consumption, government and net trade ... All told, there was not much for markets to chew on in these figures, with the focus more on [the first quarter]at this point."

EU approves package EU leaders today put the final touches on a crisis package - a bailout fund that would be in place in 2013 - as Portugal's borrowing costs reached new heights and the country continued to plunge toward seeking a bailout.

"Momentum was lost in the 9th inning when German Chancellor Angela Merkel appeared to succeed in limiting the capital injections for the post-2013 stabilization apparatus to €16-billion, down from the €40-billion discussed earlier in the week," Scotia Capital economists Derek Holt and Gorica Djeric said before the approval was announced.

"Yields on Portuguese 10s climbed further to the 7.79-per-cent mark overnight, well above what the government says is the unsustainable threshold of 7 per cent."

Added economist Benjamin Reitzes of BMO Nesbitt Burns: "German Chancellor Merkel seems intent on having the [European Stability Mechanism]run her way, as her party fights in state elections over the next two weeks.

OMG joins the dictionary The venerable Oxford English Dictionary - for the purposes of this entry let's call it the OED - is taking a cue from the texters and tweeters and adding OMG, LOL and FYI to its new online edition.

"For the March 2011 release of OED Online, we have selected for publication a number of noteworthy initialisms - abbreviations consisting of the initial letters of a name or expression," the group said on its website.

"Some of these - such as OMG [OMG int. (and n.) and adj.] 'Oh my God' (or sometimes 'gosh', 'goodness', etc.) and LOL [LOL int. and n./2] 'laughing out loud' - are strongly associated with the language of electronic communications (e-mail, texting, social networks, blogs, and so on)."

The OED had some interesting things to say about what has become quite common as texting, tweeting and all such things work their way into our lives.

"Of course in such a context initialisms are quicker to type than the full forms, and (in the case of text messages, or Twitter, for example) they help to say more in media where there is a limit to a number of characters one may use in a single message," it said.

"OMG and LOL are found outside of electronic contexts, however; in print, and even in spoken use ... where there often seems to be a bit more than simple abbreviation going on.

"The intention is usually to signal an informal, gossipy mode of expression, and perhaps parody the level of unreflective enthusiasm or overstatement that can sometimes appear in online discourse, while at the same time marking oneself as an 'insider' au fait with the forms of expression associated with the latest technology."

Its research, too, is fascinating. Not just adding the initialisms, it tracked them back as well, finding that the first use of OMG was actually in a personal letter in 1917, while in 1960 LOL stood for Little Old Lady.

Boyd Erman's Morning Meeting Ever-optimistic investment bankers expect only a short cooling in the pace of deal making due to the crisis in Japan and the uprisings in the Middle East, Streetwise columnist Boyd Erman writes.

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From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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