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Anthony Layton MBA, CIM

Chairman & CEO, Portfolio Manager

Peter Guay MBA, CFA

Portfolio Manager
Contact
  • T514.875.7566 x 224
  • 1.800.875.7566
  • F514.875.9611
  • Place Alexis Nihon
  • 3400 de Maisonneuve Ouest,
    Suite 1501
  • Montreal, Quebec H3Z 3B8
September-22-11

Key Points About the Current Volatile Markets

Will Greece default on its debt?
This morning, the CFA Institute released a survey of more than 2,000 financial analysts: 86% of respondents believe that Greece will default on its debt. So the answer is: possibly yes.

What would be the consequences of such a default?
The consequences are already felt: the interest rate on the borrowings, not only of Greece, but also of many financially-challenged European countries has shot up. The market has also become very reluctant to buy new bonds from these countries. Since they rely on new bond issues to finance their deficit, they might have to eliminate it with deep cuts in government expenses. This refinancing problem will only become more acute in the event of a default, making sharp expense cuts even more likely.

Why is that a problem?
Markets are worried that deep government spending cuts will drag the whole European economy into a deep recession. Not only the governments of Greece and other weaker countries will have to cut spending, but the credit losses incurred by French and German banks on Greek government bonds could affect the general access to credit in stronger countries, leading to a recession.

Is it the end of the world?
No. The worst-case scenario we can envision is a “credit crunch” where the European Mega-banks stop lending money. As we’ve experienced in the 2008 financial crisis, Central Banks don’t let that happen. If the European credit market freezes up, it will take a heartbeat before the European Central Bank floods the system with liquidity and restart the credit engine. Markets also fear that the recession spreads to the rest of the world, creating a global recession. While it could happen, this is a long shot scenario, as Europe is not the only engine of the Global economy: North America and most notably Emerging Markets are also heavyweights that could follow a more positive trajectory. 

How does that situation affect my PWL portfolio?
PWL portfolios are made of several broad components. Let’s review them:

  1. Cash and equivalent: This asset class is invested with strong credit, the main ones being TD Waterhouse and deposits insured by the Canadian federal government. This asset class is insulated from the effects of the European crisis.
  2. Fixed-Income Securities: PWL typically invests a large portion of client portfolios in high-quality short-term bonds. This asset class is insulated from the effects of the European crisis.
  3. Other Income Securities: PWL typically invests a smaller tranche of client portfolios into higher-income securities with an equity-like risk profile. This asset class includes, among others, Real Estate Investment Trusts (“REITs”) and high-yield bonds. Although these investments are affected by the volatility of global markets, they are mostly affected by the North American rather than the European economy.
  4. Canadian Equity: Although many Canadian companies are global businesses, their specific exposure to the European economy is limited.
  5. U.S. Equity: Although many U.S. multinationals are global businesses, their specific exposure to the European economy is a limited proportion of their revenue.
  6. International Equity: This asset class, in which PWL typically invests typically less than 20% of clients’ portfolios, is the most directly exposed to the effects European crisis. But even then, just about a half of PWL’s allocation to International Equity is allocated to European markets. This asset class is invested through a diversified fund consisting of thousands of securities.

As we mentioned in previous communications, markets crises are part of an investors’ life. They are unfortunately the dear cost investors pay to capture the equity risk premium (the long-term return difference between stocks and bonds). Our human nature can lead us to believe that every new crisis is unique and that our investment portfolio is endangered. Nothing is farther from the truth: robust portfolios such as those built by PWL have weathered other severe crises in the past and recovered when markets have settled down. This time is no different.

Best regards,
Tony & Peter
 

By: Anthony Layton & Peter Guay | 0 comments
September-09-11

Lessons from the Recent Equity-Market Drop

In this month's Economic Pulse issue, Raymond explains why “we don’t believe there is any miraculous recipe for capturing equity-market returns other than living with its ups and downs.”  Diversification helps but is not an answer.

Having enough ‘safe’ assets to weather the storm is the best approach which is why PWL customizes each portfolio for each client.

Bon weekend!
Tony & Peter

By: Anthony Layton & Peter Guay | 0 comments