TSX outpaces New York markets

Big Picture

Little progress in cliff talks, more positive news out of China, Canada draws a line in the sand

After stringing together a number of winning sessions, North American markets stumbled Thursday on fiscal cliff negotiations.

Differences continue to exist between President Obama and House Speaker John Boehner over cuts to entitlement programs versus tax increases on the wealthiest Americans. The two met face-to-face for the third time Thursday with Boehner criticizing the White House for its inflexibility on the expenditures side of the ledger. If no agreement is reached, automatic spending cuts and US$600 billion of tax increases for every American will kick in January 1.

In Europe, news of a deal to create a single supervisor to oversee the region’s 200 or so banks was viewed as a major step toward a full-fledged banking union. Starting in March, the ECB will police the banks and have the power to force them to recapitalize or shut them if required. At the same meeting, finance officials also gave the go ahead to release US$64 billion to keep Greece afloat. Meantime in China, stronger-than-expected growth in both industrial output and electricity production got the week off to a good start. Both measures are proxies for growth and both provide further evidence the country is recovering from its mid-year slump. The Fed was also making headlines, as it announced it would leave interest rates near zero as long as unemployment remains above 6.5% (the current rate is 7.7%). Finally, Canada’s unveiling of new investment rules that raise new hurdles for foreign, government-controlled energy companies generated both praise and condemnation in global markets. The clarification comes on the heels of $20 billion worth of deals recently green-lighted by Ottawa.

Markets

TSX outpaces New York markets

The TSX outdid its New York-based rivals over the four-day period but it was a positive week nonetheless for all major North American stock markets. In Canada, the TSX closed up 130 pts. over the period to end at 12,289, the Dow rose 15 pts. to finish at 13,170 and the S&P 500 moved higher by a point to end at 1,419.

Our Recommendation

Look through the fiscal cliff debate and buy equity market weakness

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group wrote: “our preference is for equities over bonds, and cyclicals over defensive stocks.  Given our constructive view toward the U.S. economy, we recommend increased exposure to U.S. equities.  Investors should be deploying excess cash balances, particularly during instances of weakness caused by fiscal cliff uncertainties.”
• Fixed income. Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – 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 – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
• Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “The global economy is heading into 2013 with positive momentum, mainly in the United States and China, but Europe continues to weigh on global activity.”

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