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MEMBER:
Investment Industry Regulatory Organization of Canada
Canadian Investor Protection Fund
Participating Organization: TSX
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James Di Cenzo’s MARKET UPDATE
Taking a ‘Macro’ Perspective
With investors contending with a potential EU Banking Crisis, political combat in Washington, and numerous uprisings
across the Middle East, we can quickly see that this is not the typical investment environment commonplace only a
decade ago.
Unlike the 1980s or 90s, given the predominant increase in global dramas, it has becoming increasingly apparent that
investors should start considering ‘macro’ events as a highly important variable when measuring market risk. Given our
experience with the US financial crisis, global markets can quickly be captured and exposed to the mercy of ‘macro’
developments faster than a poor earnings report or dividend cut. Macro events, depending on their severity, can cloud
economic outlook and drive fear into stock exchanges. As noted earlier this year, natural disasters, geopolitical shocks,
civil insurrection or the occasional systemic economic failure are fairly recent and real examples of macro events.1
Taking a more comparative approach, during the 2001 tech sector collapse, investors were mostly insulated from the
collapse of companies such as Nortel if they held a basket of stable Canadian dividend paying industrial, energy and
financial stocks. In contrast, during the 2008 crisis in the US, the ensuing panic and liquidity problems had an impact on
every sector, including normally safer asset classes such corporate bonds and preferred shares. According to Jason
Zweig, analysts view macro developments as uncertainties rather than possibilities, largely because they are so difficult
to predict.
How can we prepare ourselves if we have entered a new ‘macro’ age? Simply stated; we can start managing our cash
reserves more wisely. If events such as these are mostly driven by fear and panic, then cash can be a very powerful
offset, not just to reduce the impact on the portfolio, but also to allow investors to ‘shop’ for undervalued stocks,
particularly during periods of panic. Secondly, it also underscores the vital importance of portfolio dividends and cashflow in the portfolio. By having a steady stream of income inside your portfolio, even during the most volatile bouts,
dividend paying securities normally withstand market pressures better than non-dividend paying securities.
Furthermore, by having a stream of cash paid into the account on a regular basis, investors can quickly use cash reserves
to take advantage of periods of historically poor sentiment.
1 http://online.wsj.com/article/SB10001424053111904103404576556633057148922.html
MEMBER OF THE CANADIAN INVESTORS PROTECTION FUND (CIPF)
MEMBER OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA (IIROC)
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