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 | Strategy, selectivity key to playing market rebound
by Carolyn Leitch
The Globe and Mail
January 21, 2004
First, you have to open your statement.
That may sound simple enough but many investors became too disheartened to even look at their registered retirement savings plans when stocks slid into a long bear market in 2000.
Those who took that head-in-the-sand approach, however, may be surprised to find that markets in Canada, the United States and much of the rest of the world rebounded smartly in 2003.
Those who do take the brave step of tearing open missives from their banks and brokerages now will likely find that their fortunes have improved -- and may be ready to plow some money back into markets and mutual funds this RRSP season.
But where to put the cash in 2004?
Strategy will be key, says Raynor Burke, a mutual fund analyst at National Bank Financial.
He believes investors can still see good returns after last year's amazing run. But, he says, they will have to be more selective in the stocks and sectors they pick.
Mr. Burke believes China's sizzling economic growth, the recovering global economy, the presidential election in the United States and the strengthening Canadian dollar will all drive investment returns this year.
But before investors decide where to invest, he recommends they take stock of their holdings. "Job No. 1 is to take a look at what you have," he says.
Mr. Burke points out that the Dow Jones industrial average rose a blistering 25 per cent last year. The S&P/TSX composite index advanced 24 per cent, and Canadian bonds jumped 33 per cent. "As long as you were invested, you probably had a pretty good year."
Unfortunately, some people did not follow the experts' advice to keep investing through the bad times. The mutual fund industry watched people take more cash out of their funds than they put in for nearly every month from March, 2002, to October, 2003.
"A lot of people left the markets when returns just looked so bad," he says.
But fund flows turned in October, and in December net sales excluding reinvested dividends surged to a healthy $1.1-billion, according to the Investment Funds Institute of Canada.
Now the mutual fund industry is gearing up for what many expect to be a healthy RRSP sales season.
A recent survey sponsored by Royal Bank of Canada showed that Canadians are becoming more upbeat about financial markets: The Ipsos-Reid poll found that 54 per cent of those surveyed anticipate positive rates of return for their RRSPs in 2004 -- a hefty 38-per-cent increase from the 39 per cent with that view in last year's survey.
The same survey found that 35 per cent of respondents are more willing to take some risk for higher returns, as compared to 25 per cent last year.
Mr. Burke believes stock market returns may be lower this year than last, but he still sees potential for solid, double-digit returns.
The analyst points to three factors: It's a presidential election year in the United States, and no government wants to see its economy sputter in an election year; corporate profits are improving with the strengthening global economy; and interest rates in Canada and the United States remain low.
The analyst recommends investors look at Canadian stocks and mutual funds in sectors that benefit from economic recovery and that import their technology. For example, broadcasters, cable companies and telecommunications firms all make most of their profits in Canadian dollars but import equipment priced in U.S. dollars, so they benefit from the strength of the Canadian dollar against the greenback.
Mr. Burke also likes the financial services sector.
Those institutions benefit from interest rates that are low for short-term securities and high for those with a long date to maturity, resulting in a nice steep yield curve.
The analyst notes that commodity prices have had a good run, but he believes prices can move higher as China's boom continues.
Canadian investors can gain exposure to China by buying stocks and mutual funds in the natural resources area, or by purchasing funds that invest in Asia.
He points to the $25-million Dynamic Greater China Fund, which has a heavy weighting in natural resources in Canada, and stocks in Hong Kong, Taiwan and Singapore.
While conventional wisdom holds that investors should not have more than 10 per cent in aggressive or risky areas such as emerging markets, Mr. Burke says that, with so many economies heating up, 2004 could be the year to meet or slightly exceed that.
In Canada, Mr. Burke expects some big, blue-chip stocks to do well as corporate profits improve. He notes higher-risk names grabbed much of investors' attention last year. As a result, gains for many well-managed, conservative mutual funds lagged overall returns.
He says investors whose portfolios look lacklustre against the overall market could be due to catch up. "It could mean that you have a lot more blue-chip names in your portfolio than you think."
One fund Mr. Burke likes is the Redwood Long/Short Canadian Growth Fund. The "alternative strategies" fund holds both long and short positions in securities in an effort to maximize returns. Mr. Burke says the fund has exposure to many sectors and both large- and small-cap stocks. "It's one of the funds that brings high net worth investing to the retail investor."
Another of his top fund picks is the $1.6-billion CI Signature Select Canadian Fund, which holds a collection of Canadian blue chips and a smattering of foreign securities. He also likes the $753-million AIM Canadian First Class Fund.
Glen Hilton, co-manager of the AIM fund, says he is optimistic about the outlook for 2004. During the bear market, the value-oriented fund was able to purchase beaten-down stocks that have taken off in the past months.
Mr. Hilton says that finding new stocks to buy is getting more difficult. "The volume of opportunities does not match that of 12 months ago. You have to turn over a lot of rocks."
Mr. Hilton believes that stocks will be flat to slightly up in 2004, and he and co-manager Roger Mortimer always aim to protect capital so their portfolio doesn't have far to fall on the downside.
Shauna Sexsmith, senior portfolio manager for Canadian equities at Manulife Financial Corp. in Toronto, believes the rally in stock markets in 2003 was the first leg of a new bull market.
Ms. Sexsmith says economic data show that the turnaround the stock market was betting on has occurred, and she expects more upbeat profit surprises to come.
Ms. Sexsmith says she likes technology stocks such as Nortel Networks Corp., which is enjoying the benefits of its drastic restructuring now that companies are buying equipment again. She also points to Open Text Corp. and Cognos Inc. as stocks that will benefit from economic recovery.
The manager also believes that producers of base metals and gold have tremendous potential for profit growth.
"It's a funny bull market in that both techs and base metals are showing the best characteristics of growth and earnings momentum. In Canada, we have both working for us," she says.
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