Every October for the past six years we have presented our financial outlook for the coming year to our clients. This year we held our event on October 25th, and for the first time, we had a professional video made. We will soon have a link to the video on our website, so that those who missed it can see the presentation.
It is certainly fair to ask if we are at all accurate in our forecasting. In order to answer this question, we have looked at the printed material we circulated last year. What we predicted is in bold type. What happened in the next twelve months is in regular type. Here is our scorecard.
1. There will not be a “double dip” recession in the U.S. This was correct. Growth has been slow, but steady.
2. There will not be a major default in Europe. Correct. Measures by the European Central Bank have stabilized the situation, although Greece remains a real trouble spot.
3. Political gridlock in the U.S. will continue to pose problems. Correct, and the U.S. now faces the “fiscal cliff” of mandated spending cuts and tax increases if Congress cannot reach a deal.
4. Canada will continue to perform well. Mostly correct. GDP growth is anemic, but employment growth has been steady.
5. In spite of problems, Asian economies will continue their rapid growth. Mostly correct. Growth in China has moderated, and growth in India is at risk of stalling.
Capital Markets Predictions:
1. Short term rates will remain very low in both Canada and the U.S. Correct. Current yields on cash in both countries are under 1% per year.
2. Longer rates will rise gradually, particularly in Canada. Incorrect. In fact, long rates fell slightly in the twelve month period to new record lows.
3. Corporate bonds will offer better returns than Government bonds. Correct, although spreads have narrowed somewhat over the year.
4. Preferred shares will continue to be a viable alternative for taxable accounts. Correct. Preferred shares have returned between 4% and 6% over the past year.
5. The Canadian dollar will rise above par with an average value of $1.03 U.S. during 2012. Partly correct. The dollar did rise to as high as $1.04, but the average has been closer to $1.01.
6. The Euro will fall from $1.39 US to $1.25 US. Correct. The Euro fell to a low of $1.23 and is currently trading around $1.29.
7. We see good opportunities in Canadian banks. Correct. Our three core Canadian bank holdings produced an average return, including dividends, of 12%.
8. Utilities, pipelines and real estate will provide stable income but not much growth. Partly correct. The persistence of low rates caused investors to drive up the price of real estate in particular.
9. We will see major rebounds in energy and materials stocks. Incorrect. In fact Canadian commodity stocks continued to underperform the market in spite of higher commodity prices.
10. Major Canadian retailers offer a reasonable combination of growth and yield. Partly correct. This group offered increased dividends but not much capital gain.
11. Infrastructure companies are undervalued. Partly correct. We saw good increases from the Brookfield Group, but SNC Lavalin suffered from foreign scandals.
12. Major U.S. technology firms increasing yield and growth. Partly correct. Microsoft and Google are each up about 10% while CISCO is little changed. Apple was up 50% for the year.
13. A stronger dollar could depress the earnings of American multinationals. Correct. This has affected companies such as McDonalds, Pepsico, and General Motors.
14. Health care companies will benefit from growing health care spending. Correct. Abbott Labs is up 30% in one year.
Economic forecasting (indeed forecasting of any kind) is difficult, and no one ever gets it completely right. On the whole our predictions for 2012 have worked out quite well. Our portfolio management style is a mix of “top down” strategy and “bottom up” stock picking. Our top down understanding of the macro-economic trends guides our asset allocation and sector choices. Our bottom up analysis of companies leads to our individual stock picks in the sectors in which we choose to invest.
Every year has its challenges. In 2013 the U.S. will have to come to terms with its structural budget deficit, regardless of who is the President. Europe will have to find a way to grow without austerity choking the economies of the south to death. Asia will have to find the middle path between high growth and over-heating economies. By and large, we expect the world to muddle through, and accordingly, expect reasonable returns for prudent and patient investors.
Clients of Baskin Financial own shares in Apple, Brookfield, Abbott Labs, SNC Lavalin, Cisco and Microsoft.
The author owns shares in Apple, Brookfield, SNC Lavalin, Cisco and Microsoft