PART 1: For Canadian investors, the underlying importance of a globally diversified portfolio is clear. While the opinions of economic forecasters may vary widely, the question is what are the risks and the new opportunities?
For Canadian investors - with a market that comprises only three to four per cent of global market capitalization and is focused heavily in the financial, resource and energy sectors - there is really no option but to invest globally. And while the opinions of forecasters vary from extreme bearishness to healthy optimism, there is no question that new opportunities and risks abound.
Bill Cheney, chief economist at MFC Global Investment Management, says, "While the risks are serious and the outcome far from easy to predict, we are in the more optimistic camp. After a weak start, we expect U.S. growth to recover over the course of 2008. Our optimism is based on some signs of resilience in the labour market, decent retail sales, and strong exports driven by the weakening U.S. dollar. In a year with both a war and a presidential election, government spending should also provide support."
One of the most prevalent global fears concerns the American consumer, who has been propping up the U.S. economy and driving global growth with borrowed money "unlocked from their home equity," but Mr. Cheney says that his group expects the housing sector to be a lesser drag on growth than in the past year.
Steve Tyson, chief executive officer and chief investment officer at MFC Global Investment Management (Europe) Limited in London, England, says, "After two decades of benign conditions and several years of positive returns from equity markets, the second half of 2007 came as a shock for many investors.
While the S&P 500 booked a total annual return of 5.5 per cent, the MSCI World Index underperformed the Citigroup World Government Bond Index."
Commodities continue to yield strong gains, he says, with a very positive year for agricultural commodities, while the worst performing asset classes have been in the mortgage derivatives area.
In his view, says Mr. Tyson, the question of a U.S. recession is much less important than how much growth slows and for how long. "The big question mark is the consumer. As rising fuel and food prices - and falling home prices - erode confidence, will he or she continue spending?"
Of greatest concern, says Mr. Tyson, is the potential impact on the rest of the world. "Weaker exports to the U.S., coupled with price declines in several individual European residential property markets, could result in a slowdown in European growth."
That impact will reach Asia, says Mr. Tyson, but may be muted by the fact that several dollar-linked currencies could experience a significant asset bubble as a result of lower interest rates in the United States. "Emerging markets significantly outperformed developed markets last year, and this could continue, particularly in Pacific-Asia."
Whatever the economic and market outlook, however, it's important to remember that volatile times represent real opportunity for institutional investment managers. David Ragan, director and portfolio manager at Mawer Investment Management Ltd. in Calgary, says, "We're a bottom-up investor: we build a portfolio by choosing solid companies. It's difficult at the best of times to predict where the mentality of the market will go."
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