Every October for the past seven years we have presented our financial outlook for the coming year to our clients. This year we will hold our event on October 17th, and for the second time, we will have a professional video made. This will be posted on our website at baskinfinancial.com sometime in November. If you are unable to attend the event, please take a look.
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, and here is the answer.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. Correct. Growth has been slow but steady, so much so that “double dip” has passed out of the every-day vocabulary.
2. The Euro Zone will muddle through. Correct. Measures by the European Central Bank have stabilized the monetary situation, and bond yields for troubled countries like Italy, Greece and Spain have come down to reasonable and affordable levels. Budget deficits are better controlled.
3. Political gridlock in the U.S. will continue to pose problems. Correct. As I write, the U.S. government is shut down and a further crisis looms in the form of the debt ceiling. The dysfunctional U.S. Congress poses a continued threat to economic progress.
4. Canada will survive a commodity slowdown. Correct. Metals, particularly precious metals have been weak, as has natural gas. But Canada’s GDP continues to grow albeit at a slow rate.
5. Asian economies will be the world’s growth engine. Mostly correct. Growth in China has moderated, but growth in India has stalled. Overall, Asia has not been as strong as predicted.
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. Correct. 10 year bond yields are up by about 1.25% year over year in both countries but remain very low by historic measures.
3. Corporate bonds will offer better returns than Government bonds. Correct. Credit spreads remained reasonable giving investors good supplemental returns on bonds as low as BBB rated.
4. Preferred shares will continue to be a viable alternative for taxable accounts. Mostly correct. The sharp rise in interest rates over the summer cut the prices on some preferred shares but overall they produced reasonable returns in the period.
5. The Canadian dollar will rise above par with an average value of $1.04 U.S. during 2013. Incorrect. The Canadian dollar rose to as high as $1.02 over the past year, but averaged only $0.985.
6. The Euro may fall to a low of $1.20 US. Incorrect. The Euro fell to a low of $1.27 and averaged $1.31 for the year, almost 10% stronger than expected.
7. We see increased profits and dividends for Canadian banks. Correct. Our three core Canadian bank holdings produced an average return, including dividends, of 16% in the past 12 months.
8. Telecommunications, utilities and pipelines offer good dividends but not much growth. Mostly correct. These stocks were generally little changed in price but yielded over 4% on average.
9. Metal and mineral stocks are unattractive. Correct. Materials was by far the worst performing sector of the TSX over the past 12 months. Our only significant holding, Inmet, was taken over.
10. Energy stocks may remain under pressure. Correct. Energy was the second worst performing sector of the TSX over the past 12 months. We continue to have minimal exposure to this sector.
11 Major Canadian retailers offer a reasonable combination of growth and yield. Correct. Our retail holdings had a very good year with Shoppers Drugs being taken over, Empire (Sobeys) rising to a record high and Tim Hortons returning 18% over the period.
12. Infrastructure companies are undervalued. Correct. Both of our major holdings, Brookfield and SNC, returned over 10% in the period.
13. Major U.S. technology firms will prove increasing yield and growth. Partly correct. Microsoft and Cisco had good returns for the year but we took a major hit on Apple which was down 29% in the period.
Economic forecasting (indeed forecasting of any kind) is difficult, and no one ever gets it completely right. On the whole our predictions for the past year 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.