July - Summer Edition - CI Investments

Tetrem Capital Management Ltd.
Commentary
Daniel Bubis
President and Chief Investment Officer
Since last quarter, financial markets have taken a decidedly
“risk off” perspective as the S&P/TSX Composite Index and
the S&P 500 Index both witnessed corrections in the second
quarter. At the end of the first quarter, our view was and
remains that we are in a bull market. Trying to predict nearterm
fluctuations in share prices is a reactive fool’s game,
which only serves to whipsaw investors. We saw this in the
days leading up to, and coming out of, the July long weekend.
Portfolio managers who extended their long weekend by
heading out early missed a market surge, with the S&P/TSX
climbing 5.0% from recent lows and the S&P 500 coming
to within 0.8% of its post-financial crisis highs. Given the
experience over the past few years, the resolve to remain
invested is continually tested.
Investors were psychologically wounded by the 2008 financial
crisis and its aftermath, and the healing process will take
some time. Excessive use of debt in earlier decades has left us
with a legacy of ongoing deleveraging. If the 2008 financial
crisis was the earthquake, debt crises since then have been
its aftershocks. Thus far we have avoided another “big one”
– even though each new aftershock makes investors run for
cover, as they have been conditioned to do so.
Late in 2009, the first aftershock came from Dubai. Dubai
presaged the European sovereign debt crisis, whose tremors
were initially felt in the first half of 2010 when “PIIGS”
(Portugal, Ireland, Italy, Greece and Spain) entered the
investment vernacular. European sovereign woes represent
the most serious aftershocks since the traumatic failure of
Lehman Brothers in 2008. Their epicentre has been Greece
– somewhat ironically the cradle of Western civilization. The
first shock occurred in the first half of 2010 and triggered
corrections in the S&P/TSX and the S&P 500 into July 2010.
What was particularly frightening was the risk of financial
contagion spreading to the rest of Europe and the threat to
the global economy of a double-dip recession. Last year’s
Greek crisis eventually stabilized as the economically
stronger northern parts of Europe provided Greece with
stopgap financial backing. Unfortunately, the fault lines run
deep, so here we are one year later with a relapse and a new
round of financial aftershocks.
Euro vs. U.S. dollar
1,7
1,6
1,5
1,4
1,3
1,2
1,1
Dec.
2008
Jun.
2009
Dec.
2009
Source: Bloomberg. As of June 30, 2011.
Crisis I
Jun.
2010
Dec.
2010
Crisis II
Jun.
2011
Chart 1: Despite the current crisis in Greece, this time around the euro has
remained relatively stable against the U.S. dollar. Currently, it is trading around
US$1.40 – a far cry from the US$1.20 it hit during the first Greek crisis.
Interestingly, in this current bout of risk off, the euro has
remained relatively stable, as can be seen in Chart 1. If
the current crisis is so threatening to the European Union,
wouldn’t it be reasonable to expect euro weakness, similar
to last year’s crisis? Exchange rate mechanisms are extremely
complex and are affected by many variables – that is why
predicting a future currency level is nearly impossible. For
instance, the relative stability of the euro now may be more
about investor apathy towards the U.S. dollar than comfort
with the euro. More likely, it has something to do with
the European Central Bank’s hawkish stance on inflation
– a position it may not be able to afford for much longer.
SUMMER 2011 PERSPECTIVE AS AT JUNE 30, 2011 35