How protected are Canadian stocks from a US or Greek government default and resulting global credit crunch? How far will oil prices fall if China pulls in its horns? How much will that pull down the loonie and Canadian investments in general? Is Canadian real estate a bubble? What happens to our Portfolio Holdings if the global economy slows?
Most Canadian stocks have lost ground since the market’s most recent peak in early May.
Why the pullback? Simply, the memory of 2008 is all too fresh. Since that crash every dip in stocks has many investors asking the questions listed above--and no wonder. The financial media continue to trumpet every pullback as the potential beginning of a greater crash.
Market psychology was much the same in spring and early summer 2010. Then, investors also worried about softer economic growth and global credit concerns as precursors to a steep drop for stocks.
Last year’s downturn eventually reversed by mid-summer, and stocks moved on to new post-crash highs by late April 2011. Rising prices calmed fears of a reprise of 2008, as investors again focused on growth and yield.
That’s pretty much what I expect to see this time around. For one thing, sovereign debt crises--whether in Greece or the US--don’t have the potential to sow panic the way the mass default of mortgage-backed securities did in late 2008.
With government bonds everyone knows where exposure lies. As we discuss in the July 15, 2011, article, The Debt Ceiling: Failure Makes Everything More Expensive, available to all Investing Daily readers, a real US default would no doubt hurt the US economy, not to mention the country’s credibility. But there would be no surprises about where exposure lies.
That’s a very stark contrast with the mortgage-backed security crisis in late 2008, when bombs went off repeatedly in places suspected by few, if anyone at all.
As for economic growth, for all the sturm and drang in the financial media, it’s still running basically the way it has since mid-2009. That is very lumpy and uneven with real pockets of weakness. But it’s growing nonetheless. Meanwhile, 1970s-style inflation remains impossible, due to very slack employment conditions.
In 2010 many investors were convinced Chinese growth was on the verge of slowing rapidly, and prices for commodities, including oil, dropped in anticipation of lower demand. That didn’t last long, as the world’s most populous nation soon drew down inventories of key supplies and ramped up imports once again.
The current selloff may go on for a while longer. But the bottom line is credit, economic and market conditions just aren’t anywhere close to as dire as they were in mid-2008, before the crash unfolded. That means we’re likely to see a third leg of the post-crash bull market begin sometime this summer.
The Canadian economy as a whole is also far less leveraged than the US. The country’s federal budget is on track for balance in the next couple years. Debt has risen at the household level. But 69 percent of Canadian homeowners have at least 20 percent equity in their homes. Those just aren’t the right conditions for a wholesale crash as happened in the US.
Even the Canadian dollar is no longer acting like the commodity-price proxy of yesteryear. Despite a sharp drop in oil prices last month and worries about slowing growth, the loonie held above parity versus the US dollar.
As for the individual companies themselves, many of the companies we track for our Canadian Edge portfolio operate in recession-resistant niches that proved their ability to generate consistent revenues during the 2008 crash and subsequent recession. And, mindful of the potential for a relapse, managers of these companies have used the better economy of the past couple years to further cut risk by adding stable assets.
2008 proved that so long as a company remains solid on the inside, its stock will eventually recover any decline due solely to market factors.
So long as the fundamentals underpinning the Canadian economy remain healthy we are going to want to continue holding on to Canadian stocks offering attractive dividend yields and healthy growth. (To learn more about high-yielding Canadian stocks sign up for a free report) Remember, this is a high-percentage strategy that worked in 2008. It will work again in 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.