Commentary

Markets began the year where they left off at the end of 2011, performing well. Euphoria over continued improvement of the world's largest economy, as well as stability with the European debt markets, led investors to rotate more capital into stocks around the world. Stocks in the U.S. rallied nicely, led by the banking and technology sectors. In Europe, stocks bounced sharply from their woes of previous years.

Our markets participated nicely in the first two months of the quarter, only to give it away, and then some, in March.


Followers of our previous quarterly commentaries may have pegged us as big fans of America. Underpinned by the massive energy shale plays in North America, energy markets and prices would be turned on their heads.  The massive capital spending cycle required to develop this cheap energy, and to consume it, would lead to a renaissance in U.S. manufacturing, while the country expands its way towards energy self sufficiency. By all measures, last quarter we continued to see not only further evidence of, but more importantly, greater acceptance of this macro theme.


Stories abound, such as General Electric relocating appliance manufacturing plants from China, to places like Ohio, because of the changing economic realities. The wage advantage emerging economies once had is narrowing, and America, which continues to be the world's largest consumer of goods, now has the cheapest source of energy for manufacturing. For example, companies like Methanex shutting down a methanol manufacturing plant in Chile, then relocating to Louisiana because of cheap and plentiful natural gas. A textile manufacturer, after analyzing lower labour-cost countries like Mexico, decided to locate a new plant in Texas, because of energy costs and proximity to consumers. When manufactures decide where to locate plants, worldwide, they evaluate many factors, primarily: labour and energy costs, productivity, proximity to markets, geopolitical and security risks. North America ranks highly among these factors, which explains why manufacturing's share of GDP in the U.S. has turned around, and will likely continue. 



So, why are we down on the year?  A very good question. It is frustrating indeed. With a U.S.  banking sector licking its wounds since the 2007-2008 debt crisis, and with a resurgent economy, America's capital markets are attracting capital away from places like Canada and Australia.  Viewed as a resource market by global investors, Canada is suffering as a result of a slowing Chinese economy.


Followers of our commentaries may also appreciate that we never mentioned China. We always maintained that this emerging energy and resource theme was different.  The traditional energy theme of the past  was always one of China and the rapidly emerging economies driving demand for commodities, while driving prices higher, also taking equity share prices higher with them.


This one is different. This energy theme is driven by very cheap, abundant energy prices. This is a made in North America theme. One that is taking shape whether China grows rapidly or not, or whether Europe coninues to hinder world growth because of its sovereign debt issues.

However, Canada continues to be linked to the China growth story for now. China has been successful at slowing their economy from the inflationary tendencies of a few years ago. The government has already begun to relax the bank- lending initiatives, in order revive its growth rate, and we expect more measures to take place as the year progresses. China is an evolving economy, we should expect that. It is gradually evolving away from a cheap-labour-for-exports economy, to a more consumer-driven economy. Their needs will continue change over time.

We continue to like this new energy theme in North America. The masses appear to be buying into this American energy theme. However, in order to get to energy self sufficiency, a tremendous amount of capital spending needs to take place. That is where we continue to stay focused.

Norm Lamarche