Resource World Magazine

INSIGHTS & INVESTMENTS E r ic H oe sg e n & D e n n i s Ho e s g e n Outlook 2014 – resource cyclicals, overweight energy and energy services T his issue is dedicated to our 2014 outlook and we will begin with an analogy. Imagine getting off the ski lift at the top of the hill. You feel like you are on top of the world. The next thing you know you find yourself at the bottom, eager to head back up again. Investing in cyclical companies is much the same, except for the time it takes to go up and down. This is commonly known as a business cycle, which can last several years. For insight into the global economy and how it correlates to the business cycle, we turn to Portfolio Strategist and quantitative analyst, Martin Roberge, of Canaccord Genuity. He is arguably one of the top strategists in the country and has been consistently accurate in his analysis. He believes the economy is transitioning into Phase II of the business cycle with global GDP growth to reaccelerate in 2014. His view is that rising bond yields are now confirming rising Leading Economic Indicators (LEIs), hence a phase of global growth reacceleration. The Fed keeping its foot on the gas pedal, low bond yields and a weak US dollar represent a boot of reflation that should provide downside risk protection to the economic outlook. Also, strong global PMIs (Purchasers Manager's Index) seem unlikely to trigger tighter monetary policies due to below-target inflation and subdued employment growth. As such, abundant liquidity conditions should encourage further risk taking even though the global equity rally has become more risky. The recent US Federal Reserve decision not to moderate its QE strategy has knocked down the US dollar and forced other central banks to accelerate the pace of monetary easing. For example, the central banks in Mexico and Hungary cut their policy rate to counter a rapidly slowing economy. In Canada, the BoC dropped its long-held tightening bias. A lower Canadian dollar seems required to improve productivity. Ever since the C$ moved above 90 cents in 2009, Canada has run chronic traded deficits. By dropping its tightening bias, the BoC is neutralizing the Fed's QE. It is also opening the door to further C$ depreciation which could be needed for Canadian exporters who have to compete with weak EM (Emerging Markets) currencies/economies and global min26 www.resourceworld.com RW December 2013.indd 26 ing austerity. Now that energy prices have come down, investors should expect more EM central banks to halt their tightening cycle and/or cutting interest rates. Competitive devaluation could be a key theme next year. Central banks are creating explosive monetary conditions which are translating into sharply rising leading LEIs. Case in point, the accompanying chart shows that the OECD LEI diffusion index has reached a four-year high (69%), underscoring that growth resynchronization is operating. When we break down our diffusion index between DM (Developed Markets) and EM economies, the chart shows that synchronization among G7 economies has been achieved while it is improving in EMs. Should this recoupling persist, the diffusion index could reach the 80%+ level last seen during the 2009-10 recovery, hence our recommendation to have exposure in resource cyclicals. Roberge's portfolio strategy includes a mix of early, mid and late cyclicals over defensives. He believes matching resources against defensive non-cyclical stocks is the next source of "sectoral alpha" or investment strategy offering the best returns for large-cap money managers. Martin's specific sector views are to be overweight in energy, industrials, financials, US technology and DECEMBER/JANUARY 2014 12/11/2013 6:12 PM

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