I’m agnostic on precious metals. I just have no opinion. Obviously industrial metals, I think they are vulnerable. This is copper, tin, lead, zinc... they are very much driven by industrial production and on top of that, there’s been this extra zeal because people assumed China was going to buy all of them in sight. Indeed, in recent years China has consumed more than 40 per cent of all of this metal. … but I think with the likelihood of slow growth and weakness in exports, and China’s growth being subdued, I don’t think these nonferrous metals are going to be attractive. I think they are going to be really unattractive for a number of years.
Q: I have very high regard for your expertise, rigorous analysis and economic investment views. Here is my question on equities. What if corporations maintain, and even better, grow earnings at about a 5 per cent rate, despite all the headwinds you are worried about? Is it possible that the worry over the peak margins/earnings cliff may be misplaced given the efficiencies the corporate sector has achieved and the stagnant GDP growth. -- Madhu Kodali of New Jersey
A: The trick is to achieve that profit growth. There are three factors that I think are affecting corporate profits now. One is revenue growth, top line growth, with the world moving as slowly and perhaps getting more slow in terms of economic expansion. I think there’s limited potential there. Second factor, and this really applies more to U.S.-based corporations, is the currency. I’m of the opinion that the dollar is going to continue to strengthen against many major currencies. The yen certainly - they want that weaker; the euro, probably. And that means currency translation losses. In other words, foreign earnings by U.S. corporations and export earnings translate into fewer US dollars. So that’s a negative. Third factor is an interesting one: profit margins. And that’s where the efficiencies come in. American business did a very robust job of cutting costs in the early part of this recovery. It was almost impossible to raise prices, so the route to profit increases was to cut costs, and of course that’s reflected in the declining real wages in this economy. … Also, there was productivity-enhancing equipment. The reality is, that worked beautifully in 2009 and 2010, but recently that productivity growth has been much less reliable. What this means is that businesses are simply scraping the bottom of the barrel, there isn’t a lot of these cost-cutting productivity boosting opportunities… I think that which really was primarily the driver of corporate profits is not there. Now somebody says 5 per cent growth rate. But where are you going to get it? Are the economies of the world suddenly going to come to life? Is there further opportunity in terms of margin improvement, productivity improvement? Is the dollar going to weaken? ….i think that’s where you have to look before you conclude that you have a 5 per cent higher profits growth rate in store.
Q: What do you think of high-quality corporate bonds and would you ever recommend getting exposure to it through a bond ETF. --William England of Edmonton
A: I’m favourably disposed to high-quality corporate bonds, and we use corporate bond ETFs in portfolios that we manage. And that is what we are doing now. We talked earlier about this zeal for yield and this grand disconnect, and while it is ongoing, it is a risk for trade. The way we’re handling that in our portfolios is by not going out and buying a bunch of junk bonds and emerging market bonds that are really at the high end of the risk curve. I think they are most vulnerable and most bubbly. Instead, we’re sticking to much more conservative investments such as high-quality corporate bonds. The yield is not spectacular, but I think on a risk-adjusted basis, I think it’s way ahead of the high-risk areas.
Q: At what point should a person reduce their exposure to government bonds? What should they use to replace them? --Dave Founk of Calgary.
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