Five Reasons to Be Economically Optimistic in 2009

The financial crisis of 2008 won’t be forgotten anytime soon and investors will likely remain wary of the economy in the coming months since the volatility is expected to continue. But optimism will eventually make a comeback as markets factor in the end of the consumer downturn.

National Bank Financial market strategist Pierre Lapointe expects equities will be higher 12 months from now, with stocks likely to go from a stabilization phase in the first half of 2009 to a period of higher returns in the second part. Reminding clients that equity markets rebound before the economy does – typically two-thirds of the way through a recession – he said this two-stage outlook implies a defensive strategy in the short term and a more aggressive approach later on.

Mr. Lapointe highlighted five themes National Bank considers promising in the months and years ahead. The first is a focus on low-debt companies given the expected change in the way credit is allocated to both businesses and households in the coming years as G-20 governments design a new regulatory framework to reduce the systemic risk of financial markets.
If the G-20 errs of the side of regulation, National Bank thinks credit spreads could narrow again and give low-debt companies an advantage over heavily indebted companies.

Another key area of concentration is sound high dividend companies. Mr. Lapointe highlighted Canadian banks and their historic unwillingness to make cuts, even in recessions.

“Of course we cannot guarantee that all Canadian banks will maintain their current dividends, but we think the market underestimates their chances of doing so,” he said in a research note, adding that the ratio of their dividend yield to the Government of Canada 10-year bond yield is at a record 2.37. And since the U.S. Federal Reserve appears to have committed itself to keeping short-term interest rates very low, the strategist expects investors in search of yield will take another look at the banks.

Next up is the Obama factor, with even his inaugural speech on Jan. 20 expected to have a major impact. “When U.S. presidents launch a strategy, they tend to get behind it and push,” Mr. Lapointe said. Infrastructure, health care and clean energy are considered the three themes of Barack Obama’s presidency that are likely to influence allocation of capital and growth opportunities.