December 2000
According to Chinese astrology, the year of the Dragon is a time for grandiose, ambitious projects, a time of excitement and exhilaration when we tend to throw caution to the wind. Yet, things can appear better than they actually are and in the year of the dragon, success as well as failure is magnified.
Looking back on this year’s flurry of mega-mergers, stock market excesses, elections, budget surpluses and tax cuts, it does appear as though the spirit of the Dragon has made its mark. It has certainly been an eventful time for investors. As the year winds up, I wanted to comment on a few of these themes and share some exciting news too.
Mergermania
The financial services industry was very much caught up in this year’s wave of mega-mergers. By far the most important was that of AIM and Trimark. Now, all eyes are on Mackenzie Financial Corp. It has been the subject of takeover maneuvers by CI Funds Inc. for some weeks now. In fact, many of you may have already received letters from CI about this. Unfortunately, this is not a friendly merger and Mackenzie is actively courting other potential partners. For the time being, it is business as usual. But don’t be surprised to hear announcements coming up in 2001.
What do these mergers mean for you, the mutual fund investor? Ultimately, it amounts to good news since it opens the door for assets to move freely from one company to the other without penalty. That means more choice and flexibility in the management of your investments. And for advisors, it simply means one less fund company to follow, something I certainly will not complain about!
Tax cuts
The Federal Liberal mini-budget, announced just prior to the election, was packed with good news for investors. In addition to the overall decrease in marginal tax rates, Paul Martin announced that the capital gains inclusion rate would be reduced to 50%. That means only half of the capital gains earned outside your RSP will have to be included in your taxable income – good news indeed!
Also, the maximum foreign content in RSPs is scheduled to increase to 30% from the current 25% as of January 2001. Although you have had the means to get around these limitations for sometime, it has meant additional costs.
In the markets
In post Y2K, the high tech stock craze sent the markets on one long dizzying ride to nowhere. The NASDAQ index which tracks mostly high technology stocks was at roughly 2800 in late November 1999. After climbing to a high of 5132 in March 2000, it was right back down to 2800 a year later in November of this year. So what happened? Call it the Dragon effect.
Blinded by unreasonable expectations at the outset of the year, investors continued to buy up the price of high tech issues until values were so high they had no place to go, but right back down. And down they went. Summertime brought a short rally, but that was soon quashed by other worrisome developments. Oil prices were well on the rise, creating fears of inflation and more interest rate hikes. The political situation in the Middle East was looking dangerously unstable. And to make matters worse, company after company had begun reporting lower than expected earnings. Investors responded by pushing values to lows which were just as excessive as the earlier highs. The high tech sector was the hardest hit, but the chilling effect reverberated throughout the broader market.
There is a silver lining to this story. Many stocks that had so long been overshadowed by the high tech craze have acquired new allure. Those investors with well-diversified portfolios and a long-term focus (that means you!!) have benefited from this. I have said that good value doesn’t go unnoticed forever. Well, this holiday season, it is the value managers who will be rejoicing the most. Time has finally proven them right.
So what can we expect in 2001? Analysts are screaming that most technology stocks are now wildly underpriced, including our fabled Nortel. Be that as it may, these stocks are not expected to produce the same eye-popping results they have been able to conjure in the past. Nor is the broader market likely to produce anything better than single-digit returns. Such predictions may seem disappointing, but they are in step with historical averages. After the wild ride we have experienced over the last couple of years, we are returning to some normalcy. What could be more comforting at the dawn of the new millennium!
Introducing Louise
I am pleased to announce the addition of a new assistant. Louise Langdeau has been working with me for a few months now so some of you will have had occasion to speak with her already. She has considerable experience in financial services and will be mostly dealing with the fund companies and PEAK at the administrative level, allowing me to devote more time to YOU.
Thank you!
At this time of year, I want to take the opportunity to thank you again for making my job such a pleasure. You are all so good about demonstrating your appreciation for what I do and I can’t tell you how important that is to me.
ALL THE BEST IN THE HOLIDAY SEASON!!
