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Manager Report Summer 2009 PDF Print E-mail

Summer 2009

PH&N Second Quarter Economic Outlook

June 30, 2009

With the help of several trillion dollars, the world's central banks have patched up the global  financial system and staved off a deep collapse of the global economy. The move back from the brink by the U.S. economy in recent weeks has initiated talk of moving into the second phase of the recovery, in which U.S. demand steadily improves and the world economy gradually follows suit.

Although the speed of the recovery to date has been a bit surprising, significant progress has in fact been made in addressing some causes of the downturn. Sanity is returning to U.S. housing markets, with average house prices once again in line with median incomes and unsold housing inventories no longer rising. A more stable U.S. housing sector is the first step towards recovery for the broader economy and has also sent a key signal to Canada's housing market that the worst is probably over. In the financial sector, leverage has been cut and transparency somewhat restored, the "shadow banking system" has evaporated and mortgages are no longer being handed out willy-nilly. More broadly, tighter access to credit is forcing the global economy to rapidly adjust to a new, lower level of consumption

...A large stock market gain in such a short time is entirely appropriate when you consider the improvement in the global financial system since March. However, we would remain cautious so long as stock and bond markets continue to price in a relatively smooth recovery and the imminent return of inflationary pressures. Indeed, since mid-June, market optimism has moderated on similar concerns. In past recessions, this was the time when the "green shoots" of recovery blossomed into something more durable; but as we're well aware, this is no ordinary recession. Most major global economies are still shrinking. A new U.S. regulatory regime is being imposed that is causing uncertainty. The emergence of protectionism remains a severe threat to global growth. Finally, there is very little pent-up consumer demand to be unleashed by low interest rates - quite the opposite is true as excess consumer spending was at the root of the problem for the U.S. economy.


Standard Life Q3 2009 Outlook

July 2009

Markets appear to have priced in the end to the global recession in 2009. However, the recovery in economic activity looks to be slower than normal, amid continued volatility in financial markets, pressure on corporate earnings and an uncertain path for inflation...

Many investors are asking whether the recovery in asset prices can be sustained, and what the outlook for financial markets looks like in 2010-11. The headwinds to growth (discussed in previous editions of Global Outlook) plus a changed risk appetite and regulatory environment, suggest markets are likely to remain volatile for some time and not return quickly to the norms seen early in previous cycles

...The first half of this year saw a number of companies report profits ahead of expectations. This surprised some commentators, bearing in mind the context of the deepest recession in 50 years. The reason was that many firms responded extremely quickly to the financial crisis, cutting costs and capacity even more than the eventual decline in final demand. In many industries, inventory levels are too low and re-stocking is required. In addition there was a helpful impact on business confidence from the considerable fiscal and monetary stimulus.

...The House View

There have been no major changes to the House View asset allocation since the previous Global Outlook. We remain Light in Cash, as central banks are expected to keep rates on hold until at least the middle of 2010. They will be wary of tightening policy too quickly, repeating the mistakes made in Japan in the 1990s. The House View favours sustainable yields in its portfolios; hence it is Very Heavy in UK corporate bonds

and Heavy in several government bond markets. Although credit spreads have narrowed in recent months, the sell-off in government bonds has limited the performance from credit overall. Our analysis suggests that this is less related to concerns about potential sovereign debt downgrades or an upturn in economic growth than the dramatic surge in bond issuance anticipated from rising public sector deficits plus changes in consumer and market inflation expectations after QE was introduced.

QV Investors

Joe Jugovic, CFA (July 17, 2009)

...The biggest gains for investors from the March lows has been to buy businesses with both financial and business leverage, we view this as only a trade. This strategy depends on a return to reasonable if not strong global economic growth to support current valuations. One of our strategies has been to focus on industry leaders which have businesses which can not only survive but grow market share as their competitors suffer. The majority of these businesses can still operate very profitably in this environment and are not dependant on a return to the good old days. The phrase we have heard in the past "it's not enough to succeed, your friends must fail" may be exactly what the management teams of financially sturdy companies are thinking right now.

... The one common trait we saw amongst the management teams was their awareness of the current difficulties combined with a focus on improving their business franchise. They are not frozen in the uncertainty of tomorrow. Maintaining financial strength, freezing salaries rather than mass employee cuts, and gaining operational strength we consider positive long term impacts for a business. In contrast, many large companies around the globe are slashing workforces, selling divisions at fire sale prices, and needing to reinvent themselves. The "risky" small caps we are invested in are doing no such thing."

Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with

mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are

not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other

government deposit insurer. There can be no assurances that the fund will be able to maintain its net

asset value per security at a constant amount or that the full amount of your investment in the fund

will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writers. This

information is not intended to provide specific personalized advice including, without limitation,

investment, financial, legal, accounting or tax advice. However, please call Kevin Cork to discuss your

particular circumstances