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Market Watch Weekly - January 10, 2013

Erik Dekker - Jan 10, 2014
Happy New Year! We hope that everyone had an enjoyable time with friends and family over the holiday season.

Happy New Year!

We hope that everyone had an enjoyable time with friends and family over the holiday season.

We have written many times that the simple change of one calendar day to the next should not drive one’s investment decisions. However, last Thursday we began a new trading year where we seemingly reset the clock and ask ourselves what is the upcoming year going to most likely bring? The difficulty in predicting the future is the fact that one’s point of reference is greatly influenced by the immediate past.

The year 2014 will mark the 16th anniversary of being in the investment business by the partners of the Dekker Hewett Group. Looking back, we can say we have been through a lot – the Russian debt default and subsequent Long-Term Capital Management crisis in 1998; the Y2K scare that everything computerized would all of a sudden stop working in 1999; The 2000 Tech market bubble burst; the recession and bear market of 2001 and 2002; the 2008 credit market collapse; the 2009 and 2010 recession; the European PIIGS Sovereign debt crisis of 2010 and 2011. And last but not least the Canucks losing the Cup in 2011, (OK maybe this one isn’t a financial crisis).

Managing through two of the worst three bear markets in history within a 7 year window was not enjoyable by any of us. Yet despite all of these negative events over the past 16 years we look at our client portfolios and march higher. This is the time of year to give thanks, and to those of you who have been with us from the start, or those who have joined us along the way, we extend our sincerest gratitude. We thank each and every one of you for entrusting us as the steward of your wealth through some very tumultous periods in time.

The strong market return that was seen outside of Canada last year is not a frequent occurrence, the last time the market did so was 1999. We all remember 2000. Not suggesting a repeat of that, but what we are saying is that we are looking forward within a changed macro-economic environment and not expecting a mere repeat of last year. Let’s not forget how 2012 ended and 2013 began with capital markets fearing gridlock from the threat of US Government shutdown and sequestration causing fear to ripple through.

2013 was a challenging year for us at the Dekker Hewett Group in that we expected to see greater inflationary pressures work themselves into the economy and a slower recovery that would take time to manifest and grow within the United States. While that forecast provided us with very good investment returns over the previous 4 years, that same forecast put us behind for the first half of the year. Inflation pressures did not materialize as we had expected and the US economic environment improved at a faster pace. The result was that we were behind the general capital markets through the first six months of the year. Mid-year changes incorporated the shifting macroeconomic environment resulting in much stronger performance returns for you, our clients, in the last quarter of the year.

For 2014 our outlook remains optimistic. Here are some thoughts on where we see areas of strong returns along with areas that we would be less enthusiastic.

The removal of Quantitative Easing in relatively equal increments over the course of the year should result in higher long term interest rates. Thus if you are renewing a mortgage over the next few months you could expect to see increasing mortgage rates and should think about locking in lower current rates if possible. For those who require income from their portfolio, fixed income investing should be kept short term and be able to take advanatge of rising or floating rates.

The growing energy independence of North America should be expected to keep the Canadian energy sector companies very busy. We expect to see Oil and Natural Gas prices remain strong benefiting Canadian producer, transport and distribution companies. We see especially strong demand for energy infrastructure

The materials sector, which is where we were behind last year, does look to be slightly better in 2014. We continue to see decent demand for base metals over the year, however continued low inflation should keep precious metals prices more muted. Thus we would continue to own base metals producers with strong balance sheets and only very selective precious metals companies, with speculative venture related mining remaining very weak.

On the international front, we expect that the North American economy will continue to expand, however, the S&P 500 should be expected to provide a more normalized average level for investors. We do not expect a repeat of mid 20 percent levels, but rather a return to more normalized returns of high single digits. In conversations with our strategist, we expect to see the greatest growth be driven by the financial services, technology and consumer discretionary sector of the United States.

In a nutshell for 2014, we are remaining moderately underweighted towards fixed income, while keeping those investments short in nature and positoned to take advantage of rising longer term interest rates. Our largest investment allocations should be expected to remain positioned within Canada, especially the energy, infrastructure and financial services sectors as we continue to see tremendous value here.

Internationally, we are increasingly looking outside of North America, but would remain modestly invested within the United States, again focused towards financial services, technology and consumer discretionary companies.

Thank you for your trust.

As always, we welcome any feedback.

The Dekker Hewett Group