Template for a mid-year letter
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December 23rd, 2009 by Dan Richards, ClientInsights.ca
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Below is a template for a mid-year letter to go to clients. Please make sure you read the accompanying post, Guidelines for An Effective Mid-Year Letter.
Please remember that this letter is intended as a template only, be sure to take the time to modify this to reflect your personal views.
June 22, 2009
A mid year note to clients
For many of us, the July 1 Canada Day holiday is the official beginning of summer.
It also marks the half-way point of the year. Looking forward, I am cautiously optimistic - and want to share some thoughts on why that is, where markets stand today and what we can look for in the period ahead.
Where we are today
If you’d asked forecasters in early March about prospects for the economy, you’d have heard some very dire predictions – this was when the conversation about the possibility of a depression or Japan-like lost decade was at its loudest.
While we still face significant challenges and there’s no shortage of negative forecasts, it does appear that the worst is behind us:
- Although we are still seeing some tough news on job losses and corporate earnings, it appears that global economies have generally stabilized and early March was the point of maximum fear and pessimism. Since the market bottom on March 9, we have seen global markets rise by about 40%
- Consumer and business sentiment has shown modest improvement and some important economic indicators have gone from negative to neutral and in some cases positive. Much has been made of the so-called “green shoots” pointing to early signs of recovery.
- While businesses are still cautious, access to lending has improved and we are seeing some positive prospects for a resumption of economic growth. The current forecast is for the U.S. to exit its recession in the second half of this year and for modest growth in 2010, followed by a return to stronger growth in 2011.
Select one of the two articles below to insert here
As an example of the improving outlook, here’s a June 16 article from the Wall Street Journal on an upgraded forecast for the U.S. economy by the international Monetary Fund :
WSJ.com – IMF Upgrades Its View of U.S. Economy*
or
The article below from the June 19 Globe and Mail, titled “IMF sees economic slump moderating”, is an example of the more upbeat thinking on timing of a U.S. recovery.
Reasons for caution in the near term
In my conversations with clients over the past while, the number one question relates to the outlook for the period ahead and what we should be doing in our portfolios as a result.
Having said that the worst appears to be behind us doesn’t mean we won’t see continuing challenges in the economy and stock markets in the period ahead.
As I said at the outset, I am in the category of “cautiously optimistic.” Here are some of the things that make me cautious – note that some of these will be positive in the mid and long-term, but are problematic in the short-term.
- Americans have responded to declines in stock markets and house prices by reducing spending and increasing saving. Lower consumer debt is positive long term but given that the consumer accounts for 70% of the U.S. economy this limits growth prospects in the near term.
- The U.S. housing market is still a mess, with 20% of American mortgages “upside-down” category, where the mortgage exceeds the value of the house. House prices do show signs of bottoming but it will take some time for the housing market and U.S. government policies to work through this.
- Many of you have read about “deleveraging” by businesses and financial institutions. This is a fancy word for reducing debt – and while decreasing debt levels will increase stability and reduce pain in a downturn (a good thing), it will also lead to lower earnings than we saw in the past few years.
- Reduced debt will particularly hit the profits of many U.S. and European banks, which are also eliminating high risk operations. While this will result in fewer accidents and lower volatility in earnings, it also means that some of the sources of windfall profits from trading and capital market activities over the past decade will disappear going forward.
- With the global economy still operating well below capacity, in the near term many companies will struggle for revenue growth and will also be facing pressure on margins; this will inevitably hurt profitability.
- Governments are funding their stimulus spending with record issuance of new debt and budget deficits. At some point, this will have to be repaid – and also runs the risks of fuelling inflation down the road.
Why I’m optimistic in the mid-term
While these challenges are real, I believe they are fundamentally manageable and that they are outweighed by the mid and long-term positives. I don’t believe anyone can predict market movements in the short term and so avoid doing so myself – instead I try to focus on prospects for the economy and markets looking out eighteen months to three years.
When I do that, there are numerous reasons for optimism:
- The coordinated action by central banks and governments around the world appears to have stabilized the economy and prevented the precipitous decline that many had feared. We’ve never seen the level of international cooperation on the economic front that exists today.
- Some of the most extreme fears about the global banking system now appear exaggerated. The stress tests of bank balance sheets in the U.S. gave most banks a clean bill of health and some have started repaying the funds they received earlier this year (although these stress tests also highlighted continued problems with a few large financial institutions.)
- We’re going to come out of this with a more solid, better regulated global financial system.
- The focus on energy self-sufficiency and clean fuels has unleashed a frenzy of entrepreneurial activity around the world, with break-through technology being developed by many small and mid-size companies. In the past year, Fortune Magazine has devoted considerable space to profiling some of these companies, here’s a link to an article on green firms of the future.
6 green tech firms of the future – Green Wombat*
- Many of the building blocks that led to optimistic forecasts a year ago are still in place – the impact of technology on productivity and profits, record levels of research and development around the world, the emerging middle class in China, India and other developing countries, continued growth of trade and the global move to open markets.
- Canada’s economy is well positioned for the future, despite the current issues with the manufacturing sector and commodity prices. Our banks and real estate market never participated in the excesses seen elsewhere, our manufacturing system is going through the necessary adjustments to compete going forward (albeit some of these are very painful) and as we see a return to global growth we’re likely to see commodity prices rise in response.
- Most important for investors, the bulk of the bad news appears to be fully priced into current stock valuations. Many veteran money managers with strong track records are identifying excellent values and a number have said recently that they are able to buy good quality assets at prices well below their real value.
What I’m recommending today
While the easiest profits may be behind us, I still see good opportunities in quality stocks with attractive dividends, with strong coverage should profits decline. Even after the recent runup, for example, the dividends on all the Canadian bank stocks are well over 4% and the dividend on BCE is over 6%. The dividends on these stocks not only generate good income but also provide a buffer should markets move down.
As well, I like the value in investment grade corporate bonds and high yield bonds. While the greater volatility in these requires a stronger stomach than government bonds, the gap between the interest rates on these and government bonds is at historically high levels, even after narrowing over the last while.
Going forward, expect continued volatility and headlines that will cause alarm. As a result, I am focusing on well known companies with strong balance sheets and on building balanced, diversified portfolios – one of the important lessons from 2008 was the critical importance of true diversification across different asset classes. I am also monitoring any signs of significantly higher inflation or a pattern of corporate earnings coming in below forecast, either of which would cause a rethinking of our portfolio strategy.
In light of what’s happened in the last year, all investors need to take a hard look at their risk tolerance and financial situation. I would be happy to sit down to update your financial plan and discuss any changes arising from this process.
In conclusion, I want to express my thanks for your patience and understanding through what has been an exceptionally difficult period. All of us have found ourselves challenged over the past nine months – and I look forward to being able to look back on this last while as a once in a lifetime test of our discipline and resolve.
Best wishes for a relaxing and restful summer – and remember, should you have any questions whatsoever, my team and I are here to take your calls.
Name of advisor Phone number
Originally posted 2009-06-22 09:20:21.
About ClientInsights.ca A breakthrough in client communication Not long ago, clients read what you sent them. Today that's changed. In the You Tube world we live in, many investors would prefer to hear from a portfolio manager directly. And instead of reading an article on tax saving or estate planning strategies, more and more Canadians would rather watch an expert discuss the topic. Clientinsights.ca was developed in response to these changes - to deliver information in the form that investors want to receive it. It provides over 150 short video interviews, each about 4 to 6 minutes - you can email them or watch a video along with clients to start a meeting. No matter how you use it, Clientinsights.ca is designed to help you take client communication to a higher level. Dan Richards Founder and CEO, Clientinsights.ca Read more from the author/contributor here.
Tags: Beginning Of Summer, Business Sentiment, Canada Day, Corporate Earnings, Decade, Depression, Economic Growth, Economic Indicators, Forecasters, Global Economies, Global Markets, Job Losses, July 1 Canada Day, Market Bottom, Personal Views, Pessimism, Prospects, Recession, Resumption, Second Half, Wall Street, Wall Street JournalPosted in Dan Richards | No Comments »
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