Monthly Commentaries

The Game Changers – April, 2013

Stocks pushed even higher in April, bringing the year-to-date performance for both the MSCI Global Index and the S&P 500 above 13%. Due to its concentrations in resources, materials and financials, the TSX barely managed to break even over the same period. In the face of this strong global showing, investors may be tempted to capitalize on their gains in anticipation of a future sell-off. However, aside from not believing that market-timing strategies can be successful over a prolonged period, there are two significant influences technology and global central bank easing - suggesting that the share prices of quality companies can improve even further. The advent of the computer and consequent explosion in information technology can be equated to other historical transformational changes such as the Industrial Revolution, the introduction of electricity, railroads and motor vehicles. In all these instances, it took at least a generation to understand how to harness the radical new developments and then adapt to the societal disruptions they caused.

Since the late 1990s, information technology has facilitated the globalization of business, enabling it to operate 24/7 in the most efficient locations; to robotically design, engineer, manufacture and assemble almost everything from aircraft to earphones; and to extract and process resources in previously inaccessible regions. Coincidentally, this fast pace of progress and a continuing quest for efficiency has caused immense dislocations in employment as many jobs become obsolete and our education systems play catch-up and struggle to equip future generations with ever-changing skillsets. These technologies have also reshaped our investment climate at a time when central bank easing policies and investor uncertainty keep the world awash in liquidity. Global competition, combined with on-going technological advances, should keep inflation at bay, even if interest rates edged higher.

Meanwhile, the policies of low interest rates and synchronized global devaluation designed to foster enterprise, employment and economic growth should be reflected in a decline in the value of money even though exchange rates remain fairly stable. In these circumstances, the real return on fixed income will at best be negligible and mostly negative, while amid increasing sources of supply, the commodity cycle has probably run its course. With regard to equities, persistently low interest rates should allow the price/earnings ratio on shares of productive enterprises to move higher and still offer a competitive return. As always, an emphasis on cash flow from operations, quality of earnings and the ability to increase dividends are crucial to successful security selection. So rather than Sell in May and go away, I prefer the axiom Dont fight the Fed especially when the easing policies of central banks around the world are in full flight. Alternatively, in the lexicon of my Kentucky Derby pals, Theres legs in the old nag yet! Peter Sacks Founding Partner