Investment Forecast & Themes for 2011


Investment Forecast & Themes for 2011

Higher Interest Rates

The first investment theme that will dominate 2011 is higher interest rates on a global basis.  Interest rates are destined to move higher in 2011 as we continue to see an economic recovery in most regions of the world take hold.  Countries from the Pacific Rim have already raised rates a number of times in 2010 and are continuing to do so in 2011.  China continues to raise interest rates to cool their over-heated economy.  The Euro-Zone is now looking at beginning to raise rates too.  The United States will be the laggard in this regard.

Strong Canadian Dollar

The Canadian Dollar will continue to stay strong against the U.S. Dollar as long as the United States maintains a loose monetary policy.

Higher Commodity Prices

Higher Oil Price

The most immediate impact of the violence in Libya has been sharply higher oil prices.  Libya was producing approximately 1.6 million barrels of oil per day with approximately 1.3 Million barrels per day of production destined for export.  Europe looks somewhat vulnerable to a curtailment in oil exports as Libya is one of the major exporters for this region.  Oil prices will maintain at these lofty levels as long as the fear of supply disruptions in the Middle East persist.  Oil prices should remain strong for 2011.

High Copper Prices

Copper prices have continued to move higher in 2011 on the back of stronger demand for the commodity from the Pacific Rim and other strengthening economies.  Slow permitting and weather related disruptions have pushed the price of the commodity into the $4.00 territory making it extremely profitable for copper producers.  Rebuilding efforts in Japan will continue to support strong prices of this commodity later this year and into 2012.

High Uranium Prices

From a recent low of $40.00 per pound, uranium prices (U3O8) have surged back to a recent high in the low $70.00 level as inventories have been built up and plans for new nuclear reactors are being announced.  Recent events in Japan have cast a shadow over this commodity as the long standing debate over safety comes back to the fore.  Uranium stocks responded quickly to the downside over the nuclear reactor containment issues.  The sector looks over done on the downside.

High Gold and Silver Prices

Investors have continued to flock to the safe haven of gold bullion as violence in the Middle East has kept a constant upward pressure on the commodity price.  More recently silver has overtaken the glitter of the golden commodity and silver prices are reaching highs not seen in decades.  Gold will fall back on any peaceful resolution in the Middle East, but will resurge as inflationary concerns resurface later in the year and into 2012.

Increased Global Tensions

The year 2011 has begun with dramatic uprisings continuing in the Middle East.  After many years of suppression, citizens have taken to the streets and have been fighting for a greater stake in the way they want their country managed.  The uprisings will continue to roll across the Middle East as victories are met by further uprisings.  Many of these countries will face tremendous upheaval as ruling powers are well entrenched and a sudden change in power is not likely.  Oil production disruptions are a reality and present a major stumbling block to the investment thesis for 2011.

Continued M&A Activity

Corporations have been in retrenchment mode for a number of years and balance sheets have grown much stronger.  Job cuts have been taken and profit margins are staying strong.  As demand starts to pick up for many corporations, the decision to build or buy will be a major consideration.  Many companies will choose to buy as there is no waiting period for green field operations to be built.  Corporate activity has already begun to pick up as many companies are choosing to buy existing assets.

Asset mix from Bonds to Stocks will continue

With the recent deterioration in bond performance over the last six months, investors have been making the shift in asset mix from bonds to stocks as they have seen the improvement in performance from stocks.  Some investors have been afraid to venture into stocks after the tumultuous decline in 2008, but this decline set up a decisive move to the upside as the economy came back to life.  Any bond rally related to the trauma in Japan should be used as an opportunity to lighten bond exposure.

Slow recovery of employment in the United States

Employment in the United States has been slow to recover. Non-farm payroll numbers are starting to improve and are now edging close to 200,000 on a monthly basis. This recovery has been slow in terms of showing any material improvement in the employment rate.  The housing market has also remained slow to recover, which is directly related to the slow recovery in employment.

Continued improvement in Industrial Production

With the continued application of loose monetary policy, companies have been coming back to life after a severe contraction.  Growth in the U.S economy is now at a point that it can support further improvement in the employment numbers.  Overall U.S growth will be targeted in the high 3% range for 2011.

Inflation will continue to heat up

While inflation has been ignored for many years, the fact is that inflation will soon be upon us and is showing up quite dramatically in fuel prices, commodity prices and ultimately food prices.  Inflation has not gone away.  Be aware of the refinancing costs in the United States and the potential for crowding out as the appetite for U.S treasuries is now somewhat diminished.

Some thoughts to consider for 2011…………

Robert Floyd, CFA, is Lead Manager for BirchLeaf Investments (