North America stocks to shine in 2011

Having climbed the wall of worry in 2010, the North America equity market is looking at a promising year ahead where new opportunities abound.

Several specific factors are expected to produce positive returns for equities, so stay the course, said Jeffery Tory, chairman GBC Asset Management and portfolio manager at Pembroke Management Limited.

“It was an exceptional year for North American growth stocks last year; it was a year that unfolded in several parts,” said Tory at a lunchtime presentation organized by GBC Asset Management at the National Club in Toronto.

The year that was“The beginning of the year was good, the middle of the year saw a return to all of the same fear factors,” he said. Results were driven by very strong fundamentals in 2010 after an emotional recovery from the downward spiral of stocks in 2009.

“What’s interesting is there’s still quite a bit of scepticism, fear, questions and a lot of uncertainty among the client base,” he said. It’s been amply reflected in the fund industry into which a steady flow of capital continued until very late in 2010. “Looking at the mutual fund statistics, certainly in Canada, money was flowing out of equities and into fixed income.”

But in late 2010 investor started to crawl back toward risk and the mindset is now slightly more bullish.

Sources of performance“The world that we’re operating in, there is a lot of interesting growth, and that growth was evident last year, whether it was in technology, social media, outsourcing or cost containment,” said Tory.

An interesting by-product was acceleration in merger and acquisition activities, he said. The general trend was among small- to medium-sized companies, with a resurgence of the technology sector.

“If you go back and understand the various cycles of growth stocks, the technology stocks, [though] not a bellwether, were a big part of the growth sector, and last year that was a fundamental part of the revival of growth stocks.”

It is in the later part of 2010 where investors started to shrug off some of their caution, and thus paved the way for a gradual return of risk appetite.

The Canadian market also enjoyed strong contributions from the materials, energy, financials and technology stocks, “all reflecting the multi-industry structure of the portfolio.”

The shape of things to comeSo why is he excited about Canada? “Looking at 2011, and good earnings forecasts, Canada is in a unique position in terms of its relative strength in commodities, which the rest of the world wants and needs,” said Tory.

Beyond the mining sector, he pointed at some other Canadian industries where interesting wealth creation opportunities exist. “The Canadian oil sector is super vibrant, a bunch of really very owner-oriented entrepreneurs, very focused on return on capital, and Canada is in a very good position on a long-term basis.”

Additionally, there are some long-term opportunities in some emerging markets although “they too will be cyclical, as the Canadian markets.”

Two great years also mean stocks aren’t really cheap now. Investors, however, can take comfort in the fact that “despite the increase, the Canadian price/earning multiples are below the 2007 peaks, and the U.S. valuations [of larger cap stocks], are still significantly below.

“What’s happened is that out of the trough of the great recession there’s been a very strong comeback in earnings, and then the growth trajectory is actually even steeper than had been expected,” he said attributing this recovery to the flexibility of North American businesses and the way they adapted to the rapid changes in business conditions.

U.S. opportunitiesThe loonie-eagle tango notwithstanding, Tory is still excited about the U.S. market. “Certainly currency is an issue for people investing in the U.S.; but then again, I put my investment hat on and I think of buying U.S. companies [when] the Canadian dollar was 60 cents, now going down there with our very strong dollar to buy the same businesses, some of the companies are on sale.”

In the U.S., he said, there are many opportunities in public companies participating in very interesting trends including mobile communications, which are now becoming ubiquitous. Then there are trends there that are not as evident in Canada, such as the U.S. energy sector which is benefiting from the application of new technologies.

“The state of government finance is troubling, and, of course, it makes people worry about currency values and inflation,” said Tory, but he insisted that stocks are not a bad place to be relative to other investments, particularly if inflation does rear its head.

“One of the issues right now is that while the reported inflation is low, there is stealthy inflation coming along in the system.”

Stay the courseThere are things to worry about, but Tory thinks investors should stay the course. He wants them to see the light at the end of the tunnel. “We’ve got earnings growth working for us; the valuations are still reasonable – of course they’ve come up, but they’re fair in light of growth opportunity.

“If you look around, business activity is picking up; lending is starting to pick up in the U.S. in different pockets and that’s creating opportunities.”

Tory puts a lot of stock in the scope and speed of innovation, too. “The things that we take for granted today were marvels ten years ago.”