Valuation fears grip markets

The Big Picture

Valuation fears grip markets

Growing concerns about the level of stock market valuations sparked a risk-off trade in global markets this week. Investors are worried that many companies’ high share prices aren’t justified in the face of increasingly muted expectations outlooks for earnings. Disappointing economic news out of China Thursday didn’t help as the latest export figures point to further slowing in the world’s number two economy. Exports declined 6.6% last month following a drop in February – the first back-to-back falls since 2009. Chinese trade figures also showed an 11% drop in imports providing another source of concern. News out of the US was, on the other hand, largely positive with jobless claims for last week coming in at the lowest level in seven years and falling more than expected. In Washington, the IMF slightly trimmed its global growth forecast to 3.6% in 2014 and 3.9% in 2015. In the same report, the IMF pegged Canada’s growth to slow to 2.3% this year and 2.4% next; still good enough for third among G7 countries trailing only the UK and US. Finally, after the biggest sovereign debt restructuring in history, Greece returned to the bond markets this week looking to raise three billion euros. That turned out to be an easy task as the five year issue with a yield of just under 5% was oversubscribed.



Stocks turn lower

North American stock markets turned lower late in the week. The NASDAQ and its heavy complement of tech and biotech stocks led the way downward for the four-day period falling 73 pts. to finish at 4,054. The Dow was off 242 pts. to finish at 16,170, the S&P 500 shed 32 pts. to settle at 1,833 and the TSX gave back 85 pts. to end at 14,308.


Our Recommendations

Valuation remains a barrier to significant share price appreciation

Equities - Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Despite declines in both the TSX and S&P500 indices over the past week, we continue to see valuation as a barrier to significant equity gains in the near term. We continue to expect positive returns for North American equity markets in 2014, and maintain our cautious stance on interest rate sensitive sectors. In the news, the railways made headlines this week as CN’s CEO spoke out against the Canadian government’s imposition of minimum grain shipment targets in March while we also saw a pickup in M&A activity in the Canadian energy sector.

Fixed Income - Andy Mystic, Director, Portfolio Advisory Group wrote “Very little has changed, in our overall view, on the back of this morning’s non-farm payrolls data. Although the US economy will likely continue to show momentum as we enter H214, this morning’s employment data did little to support a breach of the US ten year’s key technical resistance level. As a result, we see ten year Treasury yields remaining range bound in the near term. There does remain the risk that steady growth and momentum does lead to an uneven normalization of yields in the back half of the year. We continue to view name selection as a key aspect of outperformance as the economic backdrop improves and issuers are inclined to take on greater risk. We continue to believe that corporate and provincial paper should outperform straight government paper in the near term. The Canadian yield curve is likely to remain well bid as inflation worries remain muted and the BoC continues to retain a dovish bias. As a result, value inside the three year part of the Canadian curve remains centered on GICs. Canadian credit has seen a bit of shift toward exposures in the five to seven year part of the curve. We see the value of some modest term extension but, given the upward bias and influence of the US term structure, we remain cautious.”


All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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