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Market Watch Weekly - August 8, 2014

Erik Dekker - Aug 08, 2014
This week British Columbia saw one of its worst accidents within the resource sector, the tailings dam breach of the Mt. Polly Mine near Quesnel BC.

This week British Columbia saw one of its worst accidents within the resource sector, the tailings dam breach of the Mt. Polly Mine near Quesnel BC. Whether you are an opponent or proponent of resource development this was a tragic black swan type of accident that will impact our province in many different ways for years to come.


Aside from the obvious visual, environmental impact that we see on our evening news, how could this impact our province in general and specifically for investors? The answer to the first question will be the subject of debate for many years to come, but suffice to say British Columbians can expect to see heightened environmental regulation and oversight within the resource sector over the longer term. However in the near term, unfortunately, it can be expected that the Cariboo region of BC could experience a decline in resource exploration as well as tourism dollars.


While we expect to recover from the near term affects relatively quickly, i.e. a year or so, it is the longer term uncertainty of just how regulations surrounding our resource sector, be that mining or energy will impacted. At a time when British Columbia has signed memorandums of understanding with China to increase our trade in energy, specifically liquefied natural gas, this accident just adds more fuel to an already fervent debate.


We still expect to see up to three of the proposed LNG storage and export facilities get built over the remainder of this decade as Japan, South Korea and China increasingly move towards the cleaner burning fuel to provide electricity to their nations. However, these facilities may face an increase in their environment costs, but still see significant long term economic benefits to the province as a whole.


From an investment perspective we have taken a more cautious tone with respect to owning mining companies with operations within British Columbia for clients, but remain owners of the sector on the whole. We did take a modest loss on our Imperial Metals holding, however this event was very much unforeseen / unexpected event that could not have been planned for and we exited our position quickly as we re-evaluated the companies longer term value, concluding that the new risks were far too great.


Capital markets worldwide have started off the month of August on a distinctly sour note, with many of the world leading capital markets down anywhere between 3% and 5% over the past 6 days. While North America is ending the week on a more positive note, the week has been negative. Much has been made that this is the start of a correction, the looming inevitability of rising interest rates and ongoing geo-political strife does make us agree that a pullback in the North American markets of between 5 and 10% over the next couple of months would not surprise us.


Trying to predict or time a market correction is exceptionally difficult at the best of times, therefore we do not try to do either, but rather manage expectations before, during and after to ensure that we lessen the negative impact and accentuate the positive recovery, because all we really know is that both will happen.


We do not expect to see a protracted market decline, nor a recession, as the underlying longer term economic fundamentals continue to reflect an economy in expansion. Thus our long term thesis remains one of being invested, just with a bit more cash on hand at the present time to take advantage of opportunities as they present themselves.


For the past few months, one suggestion that we have made to investors is reduce their ownership of individual high yield fixed income assets, and diversify towards actively managed investment grade fixed income assets throughout North America. Now, some readers may be thinking to themselves that we haven’t called them regarding this recommendation.  The reason is, that not everyone has owned individual high yield fixed income assets and are already diversified within their fixed income investments. We remain diligent and will look to continue to reduce your risk and portfolio volatility, suggesting adjustments as needed.


Have a great weekend.


Thank you for your trust.

As always, we welcome any feedback.


The Dekker Hewett Group