Investing 101

2012 – Year in review

Canadian markets finished up, with pockets of strength worldwide

Canadian investors looking back at 2012 could be forgiven if they thought it was 2011 all over again. . The S&P/TSX Composite finished the year up 7.2%. And the newspapers were filled with headlines that seemed as if they had been recycled from the previous year: the European sovereign debt crisis continued, the US economy struggled and individual indebtedness in Canada increased. But behind those seemingly intractable issues some markets had exceptional rallies with the Eurostoxx Index up18.5% on December 31, and the S&P 500, a major barometer of industrial strength, up 13.4%. For Canadian investors who had diversified to capture some of that growth, 2012 was really a tale of two markets: moderate growth at home and surprising strength in the US and European markets.

The resource-heavy TSX struggled as sluggish global economic growth reduced demand for commodities of all types, from copper to iron ore. The resource component of the TSX will likely continue to underperform until economic prospects improve. But there are reasons to be optimistic on that front. Mackenzie Investments’ Chief North American Investment Strategist, Norman Raschkowan, believes a new $570-billion infrastructure-spending program that the Chinese government launched in September may stabilize industrial commodity prices with the country’s economy picking up steam in the spring. If that happens, demand for resources may accelerate again and potentially carry the S&P/TSX higher in 2013.

While the resources component of the TSX disappointed investors in 2012, the financial sector did not. In fact, Raschkowan notes that Canada’s major banks posted solid earnings gains and began to reward investors earlier this year when they started to increase their dividend payouts. “As a group they had returns that are similar to how the US market did in 2012,” notes Raschkowan. “Now we’re seeing the first increases in what may be a multi-year trend of regular bank dividend increases.”

And as the year drew to a close, two positive trends started to emerge that could benefit long-term investors. The first saw the US unemployment rate fall below 8% for the first time since 2009 in October, even though American economic growth is not strong. In November the Canadian economy posted what economists called “blockbuster” job growth, with the Paris-based Organization for Economic Co-operation and Development predicting that Canada will lead the G7 for the next half century with real gross domestic product growing by 2.2% on average annually.

Of course, despite that bullish outlook the direction of the Canadian economy is heavily influenced by how our largest trading partner’s economy performs. But Raschkowan believes US growth will continue to grow in 2013, in part thanks to low interest rates, an expanding housing sector and growing low-cost energy reserves.

Even if predictions of slow-and-steady growth do materialize, it is impossible to predict how the S&P/TSX Composite will perform in any given year. That’s why it’s important for investors to take a hard look at the market rallies that took place outside of Canada in 2012, and ensure that their portfolios are diversified to take advantage of that growth. There are many quality investing products that can help you do that. And it’s a topic you may want to talk to your advisor about as 2013 begins.