GONE GLOBAL

 

You may recall that the articles from my Newsletters for the last 6 months have suggested a move towards realizing Canadian investment profits and reinvesting those proceeds abroad. My last arcticle “go Global” encouraged siversification outside of our commodity based market. This article assumes you’ve already “Gone Global”.

When weighing the risk and reward associated with foreign investments,

I believe that for most investors, exposure to foreign markets is an appropriate

strategy to ensure investment portfolios are well diversified. The

suitability of global equities for a portfolio should be viewed within a longterm

strategic framework that considers each individual’s unique set of

investment objectives and risk tolerance.

I encourage investors to include foreign investments in their portfolios

in order to help reduce portfolio risk and enhance longer-term returns. The

purpose of this report is to help identify a suitable level of foreign equity

exposure as well as investments within these markets to provide further

diversification.

Volatility has returned to financial markets with the recent correction in

global equities. The late February sell-off in the Shanghai market triggered

a correction around the world as investors focused on negative

economic data and concerns over the U.S. economy.

The accumulation of softer U.S. economic data has renewed fears surrounding

the potential depth of the U.S. economic slowdown, contributing

in part to the sell-off in global equity markets. I continue to be of the

view that while growth is slowing, the U.S. economy will not tip into a

recession. BMO Capital Markets Economic Research forecasts moderate,

but below average, U.S. GDP growth of 2.6% in 2007. Sub-par U.S. growth

should help to cool core inflation to the U.S. Federal Reserve’s (Fed) pre-ferred level. The combination of receding inflation, slower growth, and

concerns over the mortgage market all point to a 25 basis point rate cut

by the Fed before year end, after which we anticipate they will move to

the sidelines through to the end of 2008.

Notwithstanding the slower pace of U.S. growth, the outlook for the global

economy as a whole remains constructive. BMO Capital Markets

Economic Research estimates 4.8% growth in global GDP in 2007. Emerging

market economies are expected to continue to lead the way with

growth among these nations exceeding 6% this year. The global powerhouse

remains China where GDP is forecast to grow at roughly 10% over

each of the next two years.

European economic data has remained firm and supportive of healthy

growth in 2007. European interest rates are likely to remain under upward

pressure over the near term. Comments from the European Central

Bank (ECB) point to a rate hike later this week. Although inflation in

the region remains on target, the ECB is concerned about potential inflationary

pressures.

In Japan the economic data continues to be mixed, but the economy is

clearly on firmer ground; GDP is estimated to grow by 2.3% in 2007 and

2.2% in 2008. The Bank of Japan raised its policy rate 25 basis points to

0.50% in February, the first increase since July 2006. The volatility in

global equity markets has contributed to the unwinding of the carry trade

and a surge in the yen. The strength of the currency has shaken the outlook

for Japanese exporters. At the same time, news of Japanese inflation

dipping to zero in January has rekindled deflation concerns. On a positive

note, the Japanese consumer is showing signs of strength with

household spending posting its first year-over-year gain in 13 months at

the beginning of 2007.

As each investor’s personalized circumstances differ, my recommendations are adjusted accordingly, that being said , International diversification can help control the effect of being exposed

to weakness in the Canadian market. Furthermore, the opportunities

available in foreign markets are often more diverse than those available

in Canada, providing exposure to companies, industries and markets that

are simply not available here. It is also important to recognize the risks associated with

foreign stocks. In addition to company risk and market risk, which also

exist for domestic equities, there are risks that are unique to international

investing. Currency risk is likely the most dramatic and unpredictable

factor of international investing. Investors must also take into account

the political environment and the outlook for the economies in which they

invest. As well, when investing directly in foreign countries, time, language

and accounting differences, timely trade settlement and custodial

costs must also be considered.