“Quarterly Portfolio Review: January 1st, 2011 – March 31st, 2011” by Ken Wilk, TD Waterhouse Private Investment

May 12, 2011 | Corporate Member News

Ken Wilk

As the U.S. economy improves on broad based strength it will improve business opportunities for Canadian exporters.  70% of our exports go to the U.S.  The U.S. economy is expected to grow by 3 to 3.5%, however given how severe the recession was this represents a moderate forecasted recovery. 

Rate of Return 1 Month 6 Month 1 Year
S&P/TSX Composite Index -0.14% 14.13% 17.27%
S&P 500  Index -0.11% 16.18% 13.37%
5 year Canada bonds – benchmark yield as of March 31, 2011 is 2.77%

Interest Rates – Slowly Edging Higher

We expect the Bank of Canada to raise interest rates gradually by one percentage point in the second half of 2011 and another percentage point in 2012!  Canadian inflation should remain in check because there is still slack in our economy.  That slack will be fully absorbed only by the end of 2012.  The Bank of Canada (BOC) is anticipating this, knowing that changes in interest rates take 12 to 18 months to affect the economy.  

That suggests rates need to be getting up to more normal levels well before the slack is eliminated, to ensure that inflation does not move materially above the BOC’s 2% target. 

The Global Economy 

While there are reasons to be cautious, there are also many reasons to be optimistic.  Manufacturing is strengthening in the U.S., Germany and China; U.S. employment is improving; U.S. housing is stabilizing and the European debt crisis looks to be under control, at least for the near term.  Moreover, stock market valuations are not expensive. 

The outlook for global economic growth remains constructive. TD Economics expects 3.9% growth in global GDP in 2011 led by China, Brazil and India.  Growth is forecast to moderate slightly in 2012 to 3.8% as most countries implement together monetary and fiscal policies.  Inflation pressures have been building in many countries, in particular those in the developing world, and policymakers continue to struggle to prevent economies for overheating without triggering an abrupt slowdown in growth.  

Corporate balance sheets are strong allowing management to consider dividend increases, share buybacks and merger and acquisitions, all of which are supportive of stocks.  In addition, earnings remain healthy.  Q4/10 earnings were strong on both sides of the border with S&P 500 Index (S&P 500) and S&P/TSX Composite Index (S&P/TSX) earnings up 37% and 28% year over year respectively.  For 2010 overall, earnings grew by 33% for the S&P 500 and 11% for the S&P/TSX.  Boosted by strong commodity prices, S&P/TSX earnings growth is expected to be robust in 2011, however the pace should slow to 17% in 2012.  Expectations are for positive, albeit more moderate earnings growth of 13% and 14% for the S&P 500 this year and next. 

Summary 

While we see the potential for continued volatility over the near term, we remain of the view that stocks can post moderate gains and outperform bonds in 2011.  We continue to advocate building well-diversified portfolios with an emphasis on high quality, large-cap, dividend-paying stocks. 

Should you have any questions, please do not hesitate to call. 

Ken W. Wilk
Portfolio Manager and Investment Advisor
T (204) 988-5221 F (204) 988-5236 Toll free 1-866-988-5221
[email protected] 

* Comments summarized from 1) TD Waterhouse Monthly Perspectives April 2011 and 2) Private Investment Advice Wealth & Wisdom Spring 2011 

TD Waterhouse Private Investment Advice is a division of TD Waterhouse Canada Inc, a subsidiary of the The Toronto-Dominion Bank and a licensed user of The Toronto-Dominion Bank trade-marks.  TD Waterhouse Canada Inc – Member CIPF.

Trade-mark of The Toronto-Dominion Bank.  TD Waterhouse Canada Inc. is a licensed user. 

The information contained in this report was obtained from sources which we believe to be reliable.  However, this information is not guaranteed by TD Waterhouse, and may be incomplete.  This report was prepared to make it easier to manage your portfolio.  We must underline the fact that TD Waterhouse’s liability shall only be attached to the accuracy of the information contained in your statement of account.  Therefore, information in your statement of account will always take precedence over the information contained in the above-mentioned report.

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