The U.S. economy is gradually improving, meaning there are good opportunities in Canadian and global equity markets, says Leith Wheeler president and CEO Jim Gilliland.
But not everyone believes that. Speaking in Calgary Feb. 20, he outlined four market misconceptions.
Misconception 1: U.S. housing continues to drag the economy.
Reality: According to Gilliland, the U.S. housing market is rebounding. He gives the example of Mountain House, a small town in the San Francisco Bay area. It was one of the country’s worst-hit regions in 2008, but is now a bustling locale where they’re starting to build new houses. “That is a microcosm for what we’re seeing in the overall U.S.”
Misconception 2: Small business, the growth engine of the North American economy, is dead.
Reality: Small business is leading the U.S. recovery, Gilliland says. “They’re more optimistic than they’ve been at any time in the last five years. Bank lending is very healthy, and employment growth for companies with fewer than 50 employees is leading the nation.”
Misconception 3: Government deficits are putting the U.S. on an unsustainable path.
Reality: “The deficit picture in the U.S. has improved dramatically over the last three to four years. The U.S. is now on track for a lower budget deficit than at any time in the last 40 years — lower than the ‘80s, which was the Reagan era.”
Misconception 4: Money printing has led to a stock market bubble.
Reality: “The major underpinning for stock market gains over the last five years has been earnings growth,” says Gilliland, who’s starting to see a slow improvement in the overall economy, led by housing and business spending.
Gilliland says that when interest rates normalize in the next few years, they’ll only rise to 4%, “which is where they were prior to quantitative easing.” In a normalizing interest rate environment, he adds, “you really need to focus much more on securities selection than you have been in the last several years.”
Leith Wheeler Canadian equity analyst Richard Liley also sees opportunities in the equity markets.
Constellation Software has produced a high rate of return on capital since going public in 2006, producing returns on capital of 30% to 35% in the past few years (in comparison, Liley notes, the average business generates a return on capital of 7% to 10%).
Hudson’s Bay Co. is another company Liley favours, because it’s “cheap because it’s under a cloud. We think that cloud is not permanent, and there is some big upside in the stock.”
Other companies his firm has held for years include CN Rail, Toromont, and TD Bank.