Big Picture

German economy stalls; Italy, Spain raise debt

Germany’s economic growth averaged a robust 3% in 2011 – twice that of the U.S. and the rest of the eurozone – but a foreboding 0.25% contraction in the final quarter has prompted fears of a recession this year. Solid bond auctions in Italy and Spain saw borrowing costs fall, easing concerns the countries would struggle to finance their debts. The European Central Bank decided to leave its key interest rate at a record low of 1% after two straight cuts. The U.S. saw a burst of growth at the end of 2011, according to a Federal Reserve survey that said the final weeks of 2011 were the U.S. economy’s strongest since last spring. Economists predict the U.S. economy grew at a 3% pace in the last quarter, versus 1.8% in the summer.

U.S. retail sales rose less than projected in December, up a mere 0.1% following a 0.4% rise in November, suggesting that consumers did their holiday shopping early. New jobless claims climbed to a six-week high in the first week of January, believed to be the result of layoffs after temporary hiring for the holiday season. A backlash against the growing wealth gap, as seen in the Occupy movement and Middle East uprisings, threatens the advance of globalization, according to a report by the World Economic Forum. 

Markets

Stocks rally at start of new year

Strong U.S. economic data from late December lifted markets in the first week of the year. But Thursday, a higher-than-forecast increase in jobless claims put a damper on sentiment. A boom in traffic at CNR and CP, Canada’s two largest rail companies, may mean the country will outperform the growth outlook recently trimmed by economists and the Bank of Canada. A dramatic drop in U.S. foreclosure activity in 2011 was the result of delays in dealing with delinquent mortgages, according to a report by RealtyTrac in California, which expects foreclosures to rise again in 2012.

Global manufacturers are worried about a scarcity of minerals and metals they need to build everything from cellphones and jet planes to cars and trucks, according to a poll by PricewaterhouseCoopers. IBM set a new record in 2011, earning 6,180 U.S. patents, and was the company to receive the most U.S. patents for the 19th consecutive year. The price of orange juice futures surged 26% in six days amid worries that a recent cold snap in Florida had damaged crops and that the FDA will recall juice imported from Brazil, leading to a shortage.

Our Recommendation

Outlook remains cautiously optimistic

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “although weaker global economic growth has negative implications for commodity demand, if economic data continues to improve our conservative outlook may prove to be too cautious and there is likely greater upside potential in 2012 than downside risk.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “Our 2012 objective will be to raise cyclical exposure when easing monetary policy is extended, China’s PMI index bottoms, and the S&P 500 settles above its 200-day average.”

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