Here is a sector by sector review of what we said last year, and what we are anticipating in the year to come.
FINANCIALS
What we said last year:
We think it is unlikely that any of the major financials will need to cut dividends this year, and as a result, these stocks become very attractive yield vehicles. As financial conditions improve, most of the financials will have recovery in their earnings, and will regain the price to earnings multiples they previously enjoyed.
What happened:
The three bank stocks we hold had an average return of 70%. Manulife surprised the investment community by cutting its dividend in half, devastating the stock price.
What we expect:
The Canadian banks will continue to be very profitable, and will probably raise dividends this year. In a world of low interest rates they will continue to be attractive, but bank stock prices have already risen close to all-time highs. We expect all-in returns for the banks to be in the range of 10% to 12%. Insurers may do better.
ENERGY STOCKS
What we said last year:
The worldwide recession has resulted in diminished demand, but at the same time, supply will start to fall as expensive and marginal projects are mothballed. We are modestly bullish on the major Canadian companies with the exception of the pure oil sands plays, which we expect to take longer to recover.
What happened:
Oil prices increased more than we expected and oil stocks rose about 60%; gas producers suffered from excess supply and did much less well.
What we expect:
World energy demand is picking up and a lack of investment in 2008 and 2009 means that new supply will be delayed. Oil could rise to $100 in 2010. Natural gas continues to suffer from over-supply and while gas prices have come up from their lows, we favour the oil-focused producers. If crude prices continue to rise, returns could be above 15%.
PIPELINES AND UTILITIES
What we said last year:
The stability of revenue and earnings in this sector make these stocks core holdings during times of economic uncertainty. The dividends are particularly attractive compared to the very low bond yields which now prevail.
What happened:
Our core holdings held up well even during the early part of the year and had an overall return of about 16%. Investors favoured the more volatile commodity names as the market recovery took hold in the summer and fall months.
What we expect:
This sector remains attractive for its stability and high yield. We expect to see continued interest in these stocks as conservative money comes off the sidelines. We expect returns in the range of 8% to 10% for the year.
TELECOMMUNICATIONS
What we said last year:
There are only a handful of major players in Canadian telecommunications, and all have high and reliable cash flow. As with the utility sector, we expect investors to favour the telecom companies due to their stability and strong dividends.
What happened:
Non-Canadian companies bid billions to buy Canadian wireless rights, spooking the market. Rogers and Telus fell about 10%, but BCE rose 16%. After dividends, the sector was flat for the year, underperforming the market.
What we expect
Investors are taking a fresh look at the major players and we expect to see better values this year. The sector should have an overall return of over 10%.
METALS AND MINERALS
What we said last year:
Recovery in this sector will depend on evidence of renewed demand from Asia, and on a recovery of the US economy. Precious metal prices could do well as worldwide concern rises about the rapid growth in the U.S. money supply, which will ultimately result in inflation.
What happened:
All mining stocks rose in the second half of the year and some had stunning gains of over 500% for the full year as metal prices recovered sharply.
What we expect:
The major gains for metal prices have been made, but continued demand will favour the larger players. Precious metals will likely do less well than base metals as the recovery takes hold. There will be wide variations in results.
FOREIGN STOCKS
What we said last year:
Our belief is that the Canadian dollar has been oversold, and that the Canadian economy is in fact in better shape than that of either the U.S. or the E.U. We therefore expect to see the Canadian dollar strengthen in 2009.
What happened:
The Canadian dollar rose 16.5% against the US dollar during the year.
What we expect:
We think the CDN$ will trade above par in 2010. We therefore continue to favour Canadian and Euro names over US companies.
GOVERNMENT BONDS
What we said last year:
We expect to see inflation increase in the U.S. starting in 2011 and the current rates will likely look ridiculously low at that time. This would result in major price drops, which would increase as the time to maturity increases. We have almost no bonds with maturities beyond 2012, and we will not be buying any bonds with maturities of more than three years while these low yields persist. The one exception to this is Real Return Bonds which have a built-in inflation hedge.
What happened:
Government bonds had a mediocre year with overall returns of 1.6%.
What we expect:
Our view is unchanged. We are keeping maturities short and we continue to build our position in Real Return Bonds.
CORPORATE BONDS
What we said last year:
Unlike Government bonds, corporate issues were hit hard by the fear of credit risk. Many issues with good credit ratings sold off sharply, and as a result, now present a good alternative to the low yield of Government issues
What happened:
Corporate bonds had very strong returns over 15% as credit spreads narrowed.
What we expect:
Corporate bonds now offer only modest premiums over Government issues and are much less attractive. We will not be building our holdings.
IN SUMMARY
As corporate profits improve and interest rates stay low, demand for stocks will increase. We expect to see the TSX rise to the range of 12,500 to 13,000 providing all-in returns of about 10%. Bonds will have a sub-par year and will likely return less than 4% for the year. For most investors, an overall return in the high single digits will be a good result.
