As a portfolio manager with First Asset Investment Management, John Stephenson had a front-row seat during the financial crisis. In his new book, Shell Shocked: How Canadians Can Invest After the Collapse, he explores the roots of last year's meltdown and offers some advice on how to prosper now that the global economy is (hopefully) emerging from the Great Recession.
We sat down with Mr. Stephenson to talk about his book and where Canadians should be putting their money.
Stock markets have soared more than 50 per cent from their March lows. Doesn't that make you nervous?
It does make me somewhat nervous. Any prudent investor should expect a pullback. But is a pullback going to be significant? No, and I'll tell you why. Because the amount of capital that governments around the world have been pumping into the economy, through monetary policy and lower interest rates as well as fiscal stimulus, is unprecedented.
With all this stimulus and ballooning government deficits fanning inflation fears, gold has been surging. Can that continue?
I think it's a likely scenario that [governments]will continue to print money and debase the [U.S. dollar] and if that happens that's extremely positive for gold. I think you could easily see gold six months out at $1,200 (U.S.) an ounce and it's conceivable that it could be worth far more.
What about oil prices?
I think a sustainable price long term is around $100 a barrel, because if you look at the projects that need to be developed and where the growth is, it's Canada's oil sands ... offshore Brazil, maybe Russia. The rest of the traditional [basins]are in decline. So to bring on these other projects that are more capital-intensive you need that kind of price to get a reasonable return.
Investors are always told to diversify by putting a chunk of their money in international markets. But in your book, you make the case that investors can get all the global exposure they need by investing in Canada, with its energy, base metals and other resources needed by the developing world. Explain.
The Toronto Stock Exchange, bar none, is the stock exchange that's levered more to global growth than any single exchange in the world. I think if you want to be simple, the simplest way with the least risk is to buy Canada. Underlying the overall premise of the book is that the world is changing. Five billion people in the developing world are going to enter the mainstream and be part of the world community and that will be good for investors.
What's in your personal portfolio?
I bought everything I've recommended. I have Bombardier because I believe it will do well with infrastructure. SNC-Lavalin, I own. It's a world leader in power systems and water systems, and that's a global business. There are huge water shortages not only in Asia but also in North America, places like the southwestern U.S., for example. We have problems in California in terms of irrigating fields. Huge issues there.
Then I own most of the base metals companies as well. Teck, which should do well as metallurgical coal and copper prices go higher. First Quantum Minerals is another name. Quadra Mining, which I own as well. HudBay Minerals, which is a somewhat more defensive name, it's got a large cash position. And then, of course, I own companies that are linked to the oil sands ... Canadian Oil Sands Trust, Suncor Energy, Canadian Natural Resources. And I own a smattering of the banks and all the life insurance companies.
You're bearish on the U.S. Why?
One of the reasons I believe the U.S. will suffer for so long is so much of their economy was geared to the financial services industry. By the end of 2007, 40 per cent of their GDP was linked to the financial service industry directly and indirectly, and by indirectly I mean hedge funds, insurance companies, sort of the shadow banking system.
What the financial crisis did was it drew back the curtain on America. And the reality is that the vast majority of Americans made no wage gains over the last 10 to 15 years. In fact, they lost money. Not only did they lose money in terms of wage gains, they lost money on S&P 500 stocks, they lost money in the tech wreck and they lost 30-plus per cent from peak to trough in their house values. So if you're the average American, you're in trouble. You don't see a future.
Is this a real recovery or a head fake?
We are having a recovery, but I think it will be in fits and starts and therefore you need some defensive names in your portfolio such as the Canadian utilities. ... Utilities are regulated and because they're regulated the return is stable and the cash flows are stable. Now there isn't much growth or upside so you're not going to see the thing double but you get a dividend and you get paid to wait.
John Heinzl