Value Library
The following is an excerpt from the ABC Perspective -
October 2011 - Pg. 16
The 2011 Market Correction: Scraping Bottom
Over the past six months, the S&P/TSX Composite Total Return Index has declined 16.6%, while the S&P/TSX Small Cap Total Return Index has fallen 24.3%. During the month of September alone, these indices fell 8.7% and 14.9%, respectively. With growing investor pessimism, concerns over Greece/European sovereign debt issues, and fears of a global double dip recession, many investors are comparing the present market turmoil to the 2008 financial crisis. However, it is our view that the 2011 stock market correction has been caused by significantly different forces than 2008. In particular, we strongly believe that the recent pullback represents a disconnect to the exceptionally strong fundamentals of many North American corporations and offers superior return for patient, long-term investors.
| Differentiation |
2008 |
2011 |
| Liquidity |
US financial institutions face a major liquidity crisis as a result of over-exposure to subprime mortgages and other high risk, complex securities. |
With trillions of dollars injected into the global economy following the 2008 crisis, liquidity is readily available. The US Federal Reserve indicates that interest rates will remain at historical lows through at least mid 2013. |
| Corporate fundamentals |
With little or no access to capital, North American corporations froze capital expenditures, adjusted their cost structures, and reduced headcount. |
North American corporations are in their best financial condition in decades. US companies alone are presently sitting on over $2 trillion of cash. Many corporations have dramatically increased their 2011/2012 capital budgets. Some have turned away new business, while others have completed acquisitions to add capacity and for increased access to labour. |
| Commodity prices |
As fears of a global economic recession mounted, crude oil declined from $90/barrel to ~$40/barrel. Oil & gas equities faltered, with many trading at all-time historical lows in late 2008. |
Crude oil continues to trade above $80/barrel - twice the levels seen at the lows in 2008. Although oil and gas producers are expected to generate significantly higher levels of cash flow, their shares are presently trading at or below late 2008 levels. The October 11, 2011 take-over of Daylight Energy by China Petrochemical Corporation at more than twice the previous day's closing price emphasizes the deep discount valuation of the oil & gas sector. |
 |
In summation, despite the overwhelming panic in equity markets in late 2008, the fact is that within only two years, common stock prices recovered to pre-crisis levels. Indeed, patience and a long-term investment horizon were critical through the overwhelming market volatility. Given our view that the 2011 market correction today lacks the palpable structural impediments seen in 2008, and with select corporations trading at extraordinary discounts to their net asset value, it only builds our optimism for share prices once the formidable negative investor psychology subsides. |
|
