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Confidence about global economy improving, but doubt remains

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NOW that the "fiscal cliff" has been averted, most investors can go back to vacillating between dread and muted optimism— the custom for the so-called "new normal."

But according to many members of the investment community, things are looking up for 2013.

In fact, an annual poll of investment analysts conducted by the Chartered Financial Analysts (CFA) Institute in New York reveals newfound buoyancy about the New Year—at least compared to last year.

"You can call it creeping optimism," says Matt Orsagh, director of capital markets policy for the CFA Institute.

The Global Market Sentiment Survey found 41 per cent of analysts — CFA charter holders — believe the global economy will expand in 2013, compared to about 21 per cent who believe it will contract.

The remainder believe growth will be flat.

"That’s pretty surprising when you look at last year and it was 29 per cent who were optimistic," Orsagh says. "Even in Europe where (people) are the most pessimistic, members are more upbeat than they were last year."

Canadian analysts are a little more bullish about our economy with 45 per cent expecting expansion versus 13 per cent who predict the economy will shrink. The remaining 42 per cent believe it will remain flat.

"No one is under the illusion that things are fantastic, but things are generally seen as going in the right direction," Orsagh says.

Major concerns remain much the same as recent years. Europe’s economy continues to be sickly and analysts still see the break up of the eurozone as a distinct possibility.

The U.S. economy is another worry. The last-minute bill to avert the fiscal cliff did little to solve the nation’s debt and spending problems.

The U.S. still faces stubbornly high unemployment, low consumer confidence and continued political intransigence over resolving its budget difficulties.

But another concern for many analysts is the public’s growing mistrust of investment experts.

Marg Franklin, CEO and president of Kinsale Private Wealth in Toronto, says one reason investors are apprehensive about the investment advice industry is they’re now much more reliant on it to save for retirement than in the past. Gone are the days when most people could rely on good work pensions and high-yield GICs to get them through their golden years.

"The investment world is becoming more complex so people are appropriately focused on their financial portfolios because the responsibility for financial security really rests with them," says Franklin, a former chair of the CFA Institute.

"I think that only truly sinks in for people after a major crisis like we’ve seen in the past few years."

More than 50 per cent of analysts surveyed, however, consider the lack of ethical behaviour at investment firms as the No. 1 contributor to the lack of trust in the industry.

More than a decade of ill-doings by investment banks, advisers, brokers and others involved in the industry eroded investor confidence. Much of the problem boils down to mis-selling of products, Franklin says.

"For the last three-to-four years we’ve talked about restoring trust because the financial business has not delivered against the broad expectations of society," she says. "Then you begin to peel back the layers and, of course, you find people are quite concerned about the difference between what they thought they were getting and what they actually got." Five or six years ago, for instance, advisers told clients they could expect eight or nine per cent average annual returns on their portfolios. After a decade that produced essentially a flat return in the stock market, advisers have revised their pitch, instead talking about expectations of three-to-five per cent returns.

Still, investors who can get over their mistrust of the industry should find fertile ground in markets in 2013. Many equity markets can be purchased relatively cheap compared to past years and many blue chip firms are in top financial shape despite peaked economic conditions, says Peter Frost, a fund manager with AGF.

"Companies are the best financed that I’ve ever seen in my career," he says.

"Their balance sheets are very strong. They’re generating a good cash flow, so even if there’s any kind of downturn, they’re prepared."

Still, Frost says the stock market will not rise as uniformly and rapidly as it has done in recent years. The positive effects of central bank monetary policy on the stock market have become increasing muted. In the U.S., the stock market rallies are getting shorter and shorter with each round of quantitative easing by the Federal Reserve, he says.

"We think that security selection will be much more important this year. Fundamental, active managers will be able to find a lot of value," Frost says.

Yet overall, the stock market is generally trading at a lower valuation than normal, says Tony Demarin, president of Winnipeg-based BCV Financial.

"Valuations on corporations are still a couple of multiple points below the long-term average," he says about the S&P 500 in the U.S. "If stocks generally trade around 15 to 16 times earnings, today they’re trading around 14 times earnings."

What this means is investors are willing to pay $14 for every $1 of earnings by the market. When the market, or a stock, trades below its normal valuation, it means investors are leery of buying it. Counter-intuitively, this is generally a good time to buy because it’s a buy low circumstance with a greater chance of selling high.

Prices still can go lower, but the current market valuation is a good indicator that investors can buy a quality company at a reasonable price that will, at some point, be worth more money. By comparison, when times are really good — generally before a big fall — markets trade at equity multiples of 20 times earnings or more, Demarin says.

Still, the U.S. has more upside in his view than the rest of the world, including Canada where the TSX is trading at about 15 times earnings but more volatile than the U.S market..

"Canada is still very much a resource and commodity economy that’s tied to world growth," he says.

And the global economy is expected to be sluggish because of worries about Europe, a potential debt crisis in Japan and a slowing Chinese economy.

Of course, as the U.S. economy and markets go, so too does Canada, often enough.

"You can’t see the U.S. market meaningfully advancing without dragging the Canadian market up by its collar," he says.

"But you can see more tailwinds in the U.S. supporting growth as opposed to the headwinds to growth in Canada."

 

Correction to last week’s column on wireless providers: In the fact box in the Dec. 29 Money Matters column, it erroneously stated Rogers offers the latest and fastest wireless network 4G LTE in Manitoba. Its roll-out for the new technology is expected later this year.

 

giganticsmile@gmail.com

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