05.14.2012
By Terry Flanagan

Canadian Markets Poised for Rebound

While Canadian markets continue to splutter amid ongoing European sovereign debt concerns, solid fundamentals are likely to drive any future turnaround.

“Companies right now are just making far too much money, have far too much cash on their balance sheets and are paying dividends far higher than even the highest yielding bonds for this to continue,” said Brendan Caldwell, president, director and chief executive of Toronto-based Caldwell Investment Management. “Stock prices are 100% correlated to earnings over a long enough period of time. Despite the negativity going on in the world now, earnings will eventually drive share prices. You can’t have price to earnings ratios and interest rates both low during periods of tremendous volatility.”

Market participants continue to have real concerns regarding the stability of the European Union, with some fearing that Greece may leave the eurozone, which would then lead to a new and potentially lethal phase. The $2 billion trading loss from JPMorgan Chase also has many Canadian investors on edge, particularly as it pertains to financial stocks.

“This whole thing with JPMorgan and the $2 billion loss has obviously impacted the financial services sector,” said Caldwell. “The biggest sector in Canada is financial services. Even though a TD Bank or RBC have nothing to do with the trading losses, they’re still down a few per cent, which shows how skittish investors are when firms are losing money. But, in the end, $2 billion isn’t that significant—it’s just a rounding error compared to the 2008 financial crisis.”

JPMorgan Chase’s chief investment office unit took risky bets on synthetic credit securities that were more volatile than expected, and as a result may cost the bank an additional $1 billion in the coming months, according to its chief executive Jamie Dimon.

With investors increasingly frustrated by the state of the markets, many are moving to the security offered by fixed income instruments, particularly government-issued bonds.

“Interest rates right now are ridiculously low, clearly because investors keep buying bonds,” said Caldwell. “Our rates are unnaturally low given the strength of the economy.”

The Canadian flight away from equities is evident in the trading volumes. TMX Group saw quarterly profits decline 10% from year ago numbers to $56 million, from $63 million, as equity trading volumes decreased 28% on TMX’s three equities venues, the Toronto Exchange, TSX Venture and TMX Select.

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