Monthly Commentaries

Macroeconomic Optimism – January, 2007

The January performance of the Canadian market ranked 24 out of the top 25 markets worldwide continuing the weak relative performance of 2006. The declining Canadian dollar relative to all currencies increased this return differential. Without a soaring commodity market Canadian equities should continue to lag all major indexes. At Toron we continue to be optimistic about equity markets particularly during the next 18 months. The confluence of the American presidential election and the Chinese Olympics should keep political turmoil to a minimum and allow cash rich corporations to shine. The low point of American sentiment was likely marked by both the Bush speeches on Iraq and the State of the Union. Neither speech offered any ideas or hope and only served to increase American angst. Against this backdrop and virtually on cue, the 2008 presidential campaign began as both Barrack Obama and Hillary Clinton joined the race. Regardless of one’s views on either candidate the fact that the administration will change at the end of 2008 will generate optimism that will permeate through equity markets this year and next. On the other side of the globe the Chinese government, ahead of the Olympics, will take all necessary steps to ensure that relations with the world will continue on a positive note and any structural problems will be hidden as well as possible. The result is a China that will be supportive for global economic activity and constructive for all world markets.

If problems do emerge they will be more likely to do so in 2009 as the hopes of a new U.S. administration are replaced with the hard reality of implementing effective policy change in an (inevitably) highly partisan environment. In China the strains in the banking system, the mass migration of population to cities, the wage disparities between rural and city workers, and the large growth in productive capacity without regard for return on capital will all weigh heavily on China. For the time being we can enjoy growing markets across the world with muted political pressure. The absence of external pressures results in an environment where business fundamentals can shine. Arthur Heinmaa, CFA Managing Partner