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(© Brendan McDermid / Reuters)
(© Brendan McDermid / Reuters)

Earlier Discussion

What Jim O'Shaughnessy expects in 2012 Add to ...

Where should investors look for opportunities in 2012? What investments and regions right now are signalling buys? Jim O'Shaughnessy, chairman and CEO of O'Shaughnessy Asset Management, shared his insight and answered your questions in a live discussion Thursday.

As a quantitative money manager, Mr. O’Shaughnessy often delves into historical patterns to find today’s opportunities. He wrote the bestselling book What Works On Wall Street. Two of his mutual funds – the RBC O'Shaughnessy U.S. Growth Fund II and the RBC O'Shaughnessy All-Canadian Equity Fund – received Lipper awards earlier this year for their performance in 2010.

A full transcript of the discussion follows:

Darcy Keith - Good morning everyone, and welcome. I'm Darcy Keith, an editor with Globe Investor. Jim O'Shaughnessy is here with us and ready to go Thanks for joining us today Jim

[Comment From Jim O'Shaughnessy]

Good Morning everyone.

Darcy Keith - Just to start things of Jim, I'm hoping you could give us your general outlook for 2012? Are stocks looking undervalued heading into the New Year?

[Comment From Jim O'Shaughnessy]

We tend to try to take a longer look to create our expectations for the equity markets. We did a study of the 50 worst 10 year periods since 1876 and found that the 3 5 7 & 10 years following them all equity returns were positive. Since February 2009 was the second worst of the 50 periods we are expecting equity returns to be strong in the long term.

[Comment From Steve in Upper Thornhill ]

What's your take on our Canadian Banks as far as valuation and 2012 growth amidst what is happening in Europe and their valuations relative to the rest of the global banking sector?

[Comment From Jim O'Shaughnessy]

Currently we are seeing strong dividend yields within the Canadian banks.... For example Royal Bank of Canada currently has a yield of 4.38%....

[Comment From Jim O'Shaughnessy]

Where as the US Treasuries are providing significantly lower yields

[Comment From Jerome ]

What is your outlook for the US market vs. Can. market looking out 5 years

[Comment From Jim O'Shaughnessy]

In the US we see the next five years as being strong for US equities, particularly market leading companies with high dividend yields and strong buybacks of the stock. We also think that growth stocks will have been hit hard over the last several years will see a revival.....

[Comment From Jim O'Shaughnessy]

As for the Canadian market, continued strong demand for resources should be good for the Canadian stock market.

[Comment From Fernando ]

With a five year horizon, what sector/s would you recommend for an individual investor?

[Comment From Jim O'Shaughnessy]

Telecommunications are currently offering very strong dividend yields globally and consumer discretionary stocks, particularly those that serve the lower end of the market.

[Comment From anne ]

jim, by looking at the long term patterns of the stock market since 1876 you are looking at a period when the west, north america and the us in particular dominated the world economy, even allowing for the fact that that may remain the case in the next few years and even allowing for your rejection of the view that "this time is different" wouldn't the decline of the west and north america's influence in the world make this time different?

[Comment From Jim O'Shaughnessy]

We think that the study still makes a lot of sense given that stock market cycles are driven by human behaviour. When we get wildly optimistic, we tend to drive valuations up and yields down...

[Comment From Jim O'Shaughnessy]

And when we get very negative, we see valuations driven down and yields up, which is generally good for stock investors...

[Comment From Jim O'Shaughnessy]

We also think that the overall negative assessment about the West is over done. Remember in the 1980s when everyone said that Japan was going to take over the world? It didn't happen and I think that within the U.S., we can again revive the economy so that it again is very productive.

[Comment From Omid ]

The developed nations of the world have a lot of develeraging to do, what do you think the implications are on economic growth? Do you see strong fundamentals in the North America overriding this develaraging effect in terms of growth?

[Comment From Jim O'Shaughnessy]

Well, I think you need to split the question into two parts--Government and corporations. Right now, Governments are in need of cost-cutting and rationalization of taxes...

[Comment From Jim O'Shaughnessy]

Whereas in many instances, corporate balance sheets have never been stronger. So I think that companies are actually in a much better place going forward than Governments.

[Comment From Ryan Anderson in Winnipeg ]

Over the next 3 or 4 years do you expect the high level of volatility we have seen in the markets to continue?

[Comment From Jim O'Shaughnessy]

We think that while markets will remain volatile over the shorter term, things will calm down over the next 3 to 5 years and we will see a return to more normal conditions.

[Comment From Dennis ]

I am currently still sitting in a lot of cash and fixed income holdings. Is right now a good period to start going back into equities even with problems in the EU and employment and debt problems in the US. Or should I hold off until either region stabilizes a little more?

[Comment From Jim O'Shaughnessy]

It very much depends upon your personal circumstances. If you are young, I would recommend that you move a significant portion of your assets to stocks but if you are older, I would suggest investing the cash in stocks with high dividend yields. I would also seriously consider...

[Comment From Jim O'Shaughnessy]

thinking about moving your fixed income to shorter duration bonds, as inflation is very likely under all of the quantitative easing.

[Comment From Nick, Barrie ON ]

Hey Jim, using quantitative research everyday do you find there is a positive correlation between Inflation and stock returns?

10:41 [Comment From Jim O'Shaughnessy]

We did a study of inflation and found that while it kills bond returns, it is far better with stocks, particularly those with strong price momentum. You can see the whole study at our website at www.osam.com

[Comment From Wilf ]

With the expectation of a positive period for 2012, would you anticipate small caps to lead the charge?

[Comment From Jim O'Shaughnessy]

Small stocks have had a hard time in general gaining traction during the European debt crisis and yet historically they have outperformed large. Generally, buying into weakness of an asset class that has good long term results can provide good returns.

Darcy Keith - Up next, we got two questions, from Fernando and Brian, on the always popular topic of gold

[Comment From Brian ]

Hi Jim, do you see physical gold appreciating further with all this quantitative easing expected?

[Comment From Fernando ]

At current prices is gold still a good investment? If affirmative, would you invest in ETFs, producers shares or physical gold?

[Comment From Jim O'Shaughnessy]

Gold has been acting strange recently. There was a pretty big sell off in September and it has been inching back up recently, but I wonder if a lot of the buying in gold has already been done. In general, with QE, gold and other hard assets should do well.

[Comment From Jim O'Shaughnessy]

We own gold in a Tactical Asset Allocation portfolio we are developing and we use the GLD ETF.

Darcy Keith - Next up is Craig, with a question about your outlook for the loonie.

[Comment From Craig ]

Will the us dollar be stronger than the Canadian dollar

[Comment From Jim O'Shaughnessy]

The U.S. dollar may become popular if the Euro deals fall apart. That would see a lot of money flow into US T-bills and bonds, which could firm up the US dollar.

Darcy Keith - Speaking of the euro....

[Comment From Jerry ]

Can the Euro be saved ? , if not what is in store for Canada?

[Comment From Jim O'Shaughnessy]

If the Euro is to be saved, the ECB must be the lender of last resort, the way the Fed is in the U.S., currently, Germany is not backing that option. Until the Germans agree to a far more active ECB, things will remain uncertain for the Euro.

[Comment From ]

Some of the pipeline stocks like PPL and IPL.un have been on a tear. Do you think it is just funds looking for high-dividend yields, or are the valuations justified?

[Comment From Jim O'Shaughnessy]

We own those stocks in our RBC O'Shaughnessy All Canadian fund. Since we insist on reasonable valuations, they are currently still meeting our rules for holding the names.

[Comment From Mo from Montreal ]

What do we expect from emerging market such as China and India for the next year. Is the growth sustainable and what are the impact on the North American equity market and commodities price?

[Comment From Jim O'Shaughnessy]

I think China is heading for a rather dramatic slow down. They have built many "ghost cities" where the buildings are not occupied just for the sake of building them. I also think their over heated real estate market is due for a slow down.

[Comment From Fernando ]

During 2012, do you see any special effect on US stock prices because of the presidential elections? I have heard people saying they will buy now and sell a couple of weeks before the election.

[Comment From Jim O'Shaughnessy]

If the US election results in clarity around regulations and taxes I think that would be a very good result for the stock market.

[Comment From Ixion ]

Do you foresee developing nations with arguably undervalued currencies (e.g. China) allowing those currencies to float more freely? How much of a boost will this give to the manufacturers in the west and what industries / firms would benefit the most from such a move?

[Comment From Jim O'Shaughnessy]

China would like its currency to remain low versus the dollar in order to allow it to continue with its export boom. At some point, they will be forced to allow it to more freely float and that should see it go up in value...

[Comment From Jim O'Shaughnessy]

If that occurs, it should be good news for western manufacturers.

Darcy Keith - And, we have one final question from Michael:

[Comment From Michael in Vancouver ]

High Yield including corporate bonds and reit's have had a great run over the past few years. Are there any headwinds facing this asset class that causes you concern?

[Comment From Jim O'Shaughnessy]

I like high yield stocks over bonds, and still think REITs are attractive.

Darcy Keith - Thanks Jim. I'm afraid that's all the time we have for Q&As for today. Any final thoughts for our audience today?

[Comment From Jim O'Shaughnessy]

Stocks should be one of the better performing asset classes over the next ten years, just make sure that you don't react emotionally when they get hit in the short term. If you can stay the course, you should be very pleased with your portfolio over the next five to ten years.

[Comment From Jim O'Shaughnessy]

Thank you so much for having me! I really enjoyed it.

Darcy Keith - Great, thanks Jim. This has been a popular discussion, apologies to those who asked questions we didn't have time for. We'll be doing a series of videos with Jim soon as well - look for that in the days ahead.

Darcy Keith - Thanks everybody!

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