What the Smart Money Has to Say About 2007

We cannot classify “smart money” — financial institutions with huge trading machines — as a market indicator. But, we cannot ignore these managers of large pools of money either, which is why there are plenty of surveys of money managers out there.

So what does the smart money have to say about 2007? In a nutshell, the consensus is that 2007 should be another good year and that investors still like stock markets. However, it seems as though the “big bang” effect of previous years has been somewhat deflated.

More specifically, sectors with the highest likeability factor in 2007 will be technology and health care. Sectors liked the least are expected to be energy, utilities, and materials. Although investors have had a love affair with the second group for the past two years, judging by the recent market performance of commodity and utility stocks, the “relationship” has definitely gone sour.

In addition, money managers in both the U.S. and Canada expect that, in 2007, large caps will finally outdo small caps, while stocks from emerging markets will keep much of their allure.

Of course, whenever investment opinions are given, prudent experts must address potential risks as well. As it turns out, the list of risks seems to be much longer for 2007 than it was in previous years.

Topping the list of threats, in no particular order, are terrorism, lower corporate earnings, the slowdown in the U.S. housing market, a weak greenback, inflation, and the associated risks of recession. Of course, money managers are also afraid of indecisiveness when it comes to cutting interest rates, which the Street already got a glimpse of last year.

What will this lukewarm view of the coming year in the markets mean to Canadians specifically? Well, we cannot ignore that our economy is intertwined with the U.S. Meaning, risk factors, such as a slowdown in the U.S. housing market and weak U.S. dollar, are bound to spill over.

Also, we are already acutely aware of the beating that commodities and utilities have been taking of late. However, at the time of inflation and terrorism threats, we are also aware that one commodity has the potential to emerge again — gold! Whenever there are threats to overall monetary systems, investors realize that paper money is just that — paper. At these times, gold (and silver to some degree) is viewed as the only real money the world has ever had. So, we remain very much bullish on gold in the coming year.

I agree with Canadian and U.S. money managers about emerging markets, but I beg to differ when it comes to small caps lagging large caps in 2007. We might see the distance between the two groups narrow, but certain facts about small caps remain that may keep the gap present. To name just one benefit, when it comes to growth potential, small caps have room to grow. And growth potential is one of the major drivers of stock prices.

Canadians should be wary of buying into companies whose earnings might be adversely impacted by currency exchange rates. In addition, although money managers predict that the health care and technology sectors are likely to post significant gains in the coming year, we advise caution to Canadians.

In Canada, companies operating in these sectors are prone to mergers and acquisitions, which are taking their head offices outside our borders. In addition, not only are head offices moving to greener pastures, so to speak, but operations are often also being outsourced to places where labor is cheap, such as India.

True, there are short-term benefits to investors in potential takeover targets. But in the longer term, Canadians will have to watch the factors that impact non-domestic economies. These factors expand not only the potential benefits of investment opportunities, but also the potential risks. Such expansion may or may not be to investors’ liking, but regardless, they should be prepared for it.