The Path To Be Taken

The path to be taken is likely to be crucial on sovereign country management, central bank strategies as well as financial institution structure and last but not least earnings support in the markets. IMF global GDP growth is targeted at 4 % for 2010/11. We see growth balance and financial rectitude as key issues for highly indebted advanced and strong growth economies. Much is being made of high Greek rates but markets may in fact be signaling rising risk premiums in sovereign debt at large. Even in the run-up to elections, not grasping this reality would raise risk. We believe that especially during hard times, populations are more pragmatic than given credit for –the Canadian experience into the1990s and in many emerging economies post the 1997/98 debacle. Central banks appeared to capture the high ground in late 2008 / 2009 but now it is likely to be increasingly difficult to both argue that growth potential is improving and remain ossified in policies of extreme largesse.

Much like the U.S. constitution, the Securities Act of 1933 and the Securities Exchange Act of 1934 have withstood the test of time and been widely emulated globally. In an increasingly holistic capital market world, we see as untenable stronger transparency in equities and markedly less so elsewhere as Enron/Arthur Andersen a decade ago and now the much larger credit crises amply demonstrate. We expect the advantages accruing to financial institutions shrinking lines of business and strengthening capital over those attempting status quo business models. Multitudes of earnings are being reported with strong momentum turn since late 2009 but momentum expectations may prove premature for the latter half of 2010 with some estimates for S&P 500 operating earnings already close to levels last seen with global growth over 5%. We favor a quality of delivery and strong financial statement overlay to portfolios.

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