Founded in 2007, AlphaNorth Asset Management is a Toronto based investment manager. The firm combines both bottom-up fundamental analysis and top-down strategy with technical analysis in the selection of investments offering the best risk/reward opportunities.
We have observed that over the past two months, the TSX Composite has outperformed the S&P 500 index. We have previously noted in our commentaries that this was likely to begin in 2013. In addition, the small cap indices notably, the TSX Venture index, have begun to outperform the TSX Composite. Although this outperformance has been modest to date, we expect that this will accelerate over the balance of 2013. We believe that as the economy rebounds and interest rates increase, investors will reallocate funds toward growth equities and smaller cap names will outperform.
It is interesting to note how quickly the U.S. has gone from a bankrupt nation on the verge of a fiscal cliff to the star of the global economic recovery. Despite the prognostications of the perma-bears, tax increases combined with spending cuts and improved economic growth have gone a long way to balance budgets in many jurisdictions in the U.S. Therefore, it seems the U.S. is not spiraling into a debt abyss as predicted by these bearish forecasters and as sensationalized by the media. The strength in housing, retail sales, employment, consumer confidence and ongoing global stimulus, which we have been highlighting in our commentaries, continues to play out and has resulted in U.S. large cap equity outperformance in 2013.
In our view, the current prospects are highly skewed in favour of higher prices for small cap equities. There are many indicators which support this: extremely poor investor sentiment, declining volumes, attractive valuations, improving economy, accelerating global growth, rising bond yields and insider buying, to name a few.
Although the consolidation which we noted in our January commentary has been more severe than envisioned, we are confident that equities have recently bottomed. European debt concerns hit equities hard as investors piled into U.S. debt resulting in a new all-time low for the 10 year bond yield of 1.44%. The extreme divergence of the earnings yield of 8% for equities compared to current bond yields is unsustainable. Investors should not be fooled by the mirage of safety in bonds. The European crisis will be resolved as are all market events. History has shown that those who capitalize on situations of investor panic such as the financial crisis of 2008, the crash of 1987 and the initial concerns in Europe in 2011 were greatly rewarded. Equity markets performed extremely well as fear dissipated. In our view, this time will be no different. Although, we cannot pick the precise bottom, we do not mind being early as the best performing days in history typically occur around major market bottoms. By calling a bottom early, we ensure that we participate in these “best days” as investors who wait for the smoke to clear will forgo substantial returns. Our current portfolio positioning ensures that we will benefit from these “best days”.
Equity valuations and economic data continue to be supportive of stronger equity markets in 2012. Although this continues to be our view, it is not a view that is shared by many. The same applies to our muted view on gold. This brings to mind one of our favourite quotes by the late John Masters, author and army colonel, which reads “You have to recognize that every ‘out-front’ maneuver is going to be lonely. But if you feel entirely comfortable, then you are not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature of the herd. Only if you are far enough ahead to be at risk do you have a chance for large rewards”.
We continue to hold a bullish view for Canadian equity markets over the next several quarters. The Fund is well positioned in securities which offer favourable risk/reward and it should benefit from company specific catalysts and a strong overall equity markets.
We believe that the odds strongly favour strength in North American equity markets over the next 2-3 quarters which will surprise many
As mentioned in previous commentaries, we have been becoming increasingly cautious with respect to the broader equity markets. During April, we locked in gains from a couple of our large winners, raising 10% cash…..We believe that investor enthusiasm will dissipate over the summer months, contributing to a market correction which should be used for adding to equity weightings.
We continue to hold a bearish view on equity markets, particularly in view of the recent powerful rally. We believe that equity investors continue to be overly optimistic about the economy and the severity of credit conditions in the U.S. which we believe will ultimately have a negative impact on Canadian markets. We are maintaining our cautious positioning in the near term in anticipation of deteriorating equity markets.
The majority of industry participants with whom we have recently communicated see tough times ahead for the small cap asset class. We take the contrarian view. The focus of our portfolio is on investments which are well financed with strong management teams. Accordingly, we believe that we will be able to generate significant gains from current levels.