The Gazette
December 24, 1999
by Paul Delean & Don MacDonald
Tech stocks will climb ever higher. They will never ever come down. So who wants to be a millonaire?
That's at least how it feels at the end of a wild 1999 on North American stock markets. It was a year when the long-running bull market in Internet and other technology stocks went into hyper-drive, leaving boring profit-making, dividend-paying blue chips in the dust.
In Canada, the pumped-up share price of a handful of issues - BCE Inc., Nortel networks Corp., JDS Uniphase and Celestica - fueled one of the most outstanding, if uneven runs for the Toronto Stock Exchange 300 composite index this decade.
But after a year like 1999, who's brave enough to make predictions about 2000? The two local money managers we called in for the The Gazette's semi-annual investment round table, that's who.
Benjamin Horwood, president of Value Contrarian Asset Management, recently talked about where we are and wher we're going.
| GAZETTE: | North American stock markets are having an outstanding year. What do you attribute this to? |
| HORWOOD: | Also, you've had a major recovery I resource prices. Look at oil, from around $10 a barrel last December to over $25 a barrel today. You've had a major recovery in nckel, aluminum and pulp, so obviously that's dragging up the Canadian economy. It's as simple as that. |
| GAZETTE: | Of course the big story continues to be tech stocks. All we read about in Canada is BCE and Nortel and the impact those two stocks are having on the TSE. South of the border, you have what some are calling tech mania or, at any rate, continuing tech strength beyond what anyone expected. Where is this going? |
| HORWOOD: | I sort of see it as two-tier market. You've got the tech area and you've got the rest of the market. I was reading some analysts' reports the other week that described the Canadian market as a train wit 300 cars. You've got two engines in front, Bell and Nortel, and you've got 298 cars pulling up the rear. And this analyst's report that I read said that, as of a week ago, the TSE, without Bell and Nortel, was up around 4 per cent in 1999. So it's a very deceptive market and obviously, this has frustrated a lot of investors, including a lot of money managers. I see many of these tech stocks that aren't linked to any value. And, eventually, value counts. That's the bottom line. I think we're going to look back on this part of financial history with disbelief just as the Japanese look back on the late '80s and their asset bubble in disbelief. But once you get out of that tech sector, there's a lot of incredible value out there and what I see happening n a positive scenario in the year 2000 is hopefully, we'll have a broadening of the market. |
| GAZETTE: | There is a tendence when people see stocks like BCE or Nortel or the big tech stocks in the U.S. rocket the way they have to feel disappointed and want to get in on the action. But they also feel afraid of getting in at the top. How should people think about participating in those stocks? |
| HORWOOD: | It's a situation based on hope and future projections. And what's incredible is you read in these prospectuses that the company lost $30 million over the last 3 years, has no hope of any profitability in the near future, yet has a market capitalization of $3 billion. In that area of the stock market, we're seeing speculative excesses. And speculative excesses can go on for a year, two years or three years but in the end value comes out. Because a lot of companies can grow but in the end if there's no profitability or there's no competitive advantage, someone is going to knock you off your pedestal. It's just a matter of time. These are shooting stars. |
| GAZETTE: | What sectors do you expect to be strongest in 2000? |
| HORWOOD: | I know a lot of people like to bash the Canadian banks, but basically you have institutions that have the ability to earn return on equity of 15 per cent or greater. You also have a high degree of earnings predictability over resource and commodity sectors. You have a nice dividend yield, most of the banks are yielding over 3 per cent. The Royal is now trading at 10.5 times next year's predicted earnings. Obviously, there are some negatives in the market and that's the time you want to be looking at these sectors, because eventually the negatives go away. What are the negatives? Obviously the mergers didn't go through. You've got new competitive threats from virtual banks like ING. You've got squeezing of their margins. And rising interest rates. You put all these factors together ad you have depressed bank shares. But these factors won't last forever. Just the other week, the chairman of one of the banks said that by the end of next year, the mergers will be revisited. It's not a question of if the mergers will occur, but when. Instead of complaining about the banks, go out and buy bank shares. It's as simple as that. |
| GAZETTE: | Do you see the Canadian market as more attractive than the U.S. in the coming year? |
| HORWOOD: | I would make a prediction, as a contrarian that Canada will be probably be in the top three best-performing major markets next year, just as Canadian investors are redeeming Canadian funds and piling into U.S. and foreign funds. I would be very surprised if Canada wasn't in the top three major world markets based on good growth in commodities, for example. If you look back in 1989, the TSE was up 21 percent late in the cycle when commodities were doing well. If you look at 1986, when the Canadian economy was firing on all cylinders, the TSE was up 28 per cent. If things work out, just looking at the Canadian economy, I wouldn't be surprised to see the Canadian market up 20 to 30 per cent. |
| GAZETTE: | There seems to be a lot of optimism about the way the markets are going. But what are the threats to this kind of Goldilocks scenario? |
| HORWOOD: | What could derail the party? Very simply, Alan Greenspan and the U.S. Federal Reserve raising interest rates. But the question is, will rate increases dampen the party or ruin the party? That's the million-dollar question. |
