The Future Looks Good, But Will Be a Long Time Coming

by Mitchell Clark, B. Comm.

Big banks are reporting better than expected numbers, but if you actually look at the real bottom line and not operational earnings, most still have massive loan losses to deal with. The financial sector is helping sentiment on Wall Street, but it is somewhat of an artificial performance considering all the taxpayer money they got.

I find it too early to get excited enough about the economy and the stock market to call a big bull market. The International Monetary Fund (IMF) hit it on the head with its latest report calling for a prolonged period of recession and sluggish economic growth. The IMF noted in its analysis that normal economic recessions usually recover very quickly, but when there is a systemic shock to the system, like the global financial crisis we just experienced, then economic recovery has tended to be much slower. So, a long, drawn out period of up and down economic growth seems as likely a scenario as anything.

And if this does happen over the next few years, equity investors have to have some solid dividend-paying securities in their portfolios. If earnings are flat, then dividend income becomes your only return on investment.

Previously, we explored in this column the kind of industries that might make up an ideal equity portfolio going forward. I think you have to have some gold, a pharmaceutical play, a big bank with a solid track record of increasing dividends, some agriculture in the form of a big conglomerate, and, finally, you have to have a basket of Chinese stocks.

Gold did move to the $1,000 per ounce level, but is now trading below $900.00. There are some very attractive buys in the financial sector right now. Agriculture is a more difficult sector in which to invest, but what you want to own is a large company (that pays a dividend) that operates in a multitude of businesses like grain handling, seed production and fertilizer sales, for example. We’ve already considered in this column a basket of Chinese stocks, which has done extremely well over the last month. I still contend that a basket of domestic, large-cap Chinese stocks will outperform other stocks over the near and long terms.

And, of course, you don’t want to ignore some special situation
investment opportunities. The alternative energy investment theme is still alive and well. If you can find a company that builds power plants in China, then I think you’ve got a good chance of making a lot of money.

So, from my perspective, the investing future looks good, but it’s going to be drawn out. That’s why you need to own dividend-paying securities; it’s going to be a rocky road for the stock market for the foreseeable future.