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Quarterly Investment Review Letter 2013 Q2

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In the last quarter, a run up in markets was being touted broadly by market pundits and Government spin as evidence that the 'recovery' was underway and that increasing interest rates would surely soon follow. The deeper you dig around each of these sources the more apparent vested interests and conflicts of interest becomes. For the market pundits, a rising market means rising prices and speculation which fuels emotional buying. The vested interest of the market pundits is thus served. Governments - municipal, provincial, federal and international too - would all benefit if their liabilities and pension obligations could be reduced by significant higher returns being earned by pension assets. These two sources, while not exhaustive, do exemplify the self-serving story that was gaining traction. We at RMFP do not buy the story.

 

Jobs are and continue to be elusive throughout the Euro Zone, the United States, India and Communist Asia (China). Jobs that pay well are sustainable and create consumer confidence. These are not in evidence, even in the most recent job numbers north, south, east or west. Yes, of course, there are reported microscopic/fractional shifts but not close to recovery levels. In the USA, the jobless rate is still north of 7.6% compared to the 4.4% level in June 2007. Under age 25, unemployment rates in Spain, as an example, are raging around 24% as quoted to me by neighbourhood store owners in Barcelona. The growth of the middle class in China and in India is on pause as exports to the developed and developing economies ease. Jobs? ... Where?

 

With stubborn and stagnating global employment numbers, there can only be slow coincident growth or consumption. Without demand and consumption, the likelihood of impending rising interest rates is a fundamental optical illusion. The corroborating evidence is given by the World Bank and The Bank of England most recently. Global GDP has been projected to decline from current lows by nearly half of a percent. The British economy is still so slow that in his first pronouncement as Governor of the Bank of England and Chair of the G20 Financial Stability Board, Mark Carney pointed to sustained record low Bank rates that will persist for at least the near term.

 

The relevance is this: in the absence of rising interest rates, bond and fixed income investments are still a steady source of income. That and the value investment style as practiced by the managers of the Manulife Monthly High Income Fund and by Cardinal Capital continue consistently to provide the preservation of capital and the predictability of level income. Value investing stands in stark contrast to other flashier styles. Growth, sector and geographical styles, which are largely dependent upon forecasting and predicting the fastest growth companies, industry, sector and economies all embrace higher levels of volatility. "Rapidly raising" anything has the potential of a rapid descent - and that is the higher risk.

 

Value Style remains the course for our money!