Although this monthly letter is to give market views, one cannot help but comment on the events of

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Although this monthly letter is to give market views, one cannot help but comment on the events of

Unko - Andrea Lavergne

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C.F.G. HEWARD INVESTMENT MANAGEMENT LTD. THE GOOD, THE BAD, AND THE UGLY...DUCKLING INVESTMENT OUTLOOK OCTOBER 10, 2001 Although this monthly letter is to give market views, one cannot help but comment on the events of September 11, 2001. The most recent New Yorker's magazine conveys the current darkness that has enveloped the Western world markets with a completely black cover, and only shadows of the twin towers barely perceptible even to the keenest of eyes. Not one of their legendary cartoons dress the pages within. The period of economic conditions can only compare to a deep mourning. We have met with many strategists, economists, and analysts in the past few weeks to discuss possible scenarios for world economies and stock markets. The title of this monthly comment does not refer to them, but to something one of our New York friends had to say. In an effort for the New York based firm Arnhold & Bleichroeder to get back to business-as-usual , Bill Schmick was the first to come to Montreal to share his outlook - and yes, he did fly here! One of the most relevant comments which inspires this piece is that markets can take good news, and the markets can take bad news, but one thing that capital markets cannot tolerate is uncertainty. And uncertainty has raised its ugly thhead in the aftermath of September 11 . The fact that uncertainty exists is driven home by the following disclaimer which appeared ...

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Publié par	Unko
Nombre de lectures	80
Langue	English

Extrait

C.F.G. H

EWARD

NVESTMENT

ANAGEMENT

OOD

THE

AND THE

GLY

...D

UCKLING

NVESTMENT

UTLOOK

CTOBER

10, 2001

Although this monthly letter is to give market views, one cannot help but comment on the

events of September 11, 2001. The most recent New Yorker's magazine conveys the

current darkness that has enveloped the Western world markets with a completely black

cover, and only shadows of the twin towers barely perceptible even to the keenest of

eyes.

Not one of their legendary cartoons dress the pages within.

The period of

economic conditions can only compare to a deep mourning.

We have met with many strategists, economists, and analysts in the past few weeks to

discuss possible scenarios for world economies and stock markets.

The title of this

monthly comment does not refer to them, but to something one of our New York friends

had to say.

In an effort for the New York based firm Arnhold & Bleichroeder to get back to business-

as-usual , Bill Schmick was the first to come to Montreal to share his outlook - and yes,

he did fly here!

One of the most relevant comments which inspires this piece is that

markets can take good news, and the markets can take bad news, but one thing that

capital markets cannot tolerate is uncertainty.

And uncertainty has raised its ugly

head in the aftermath of September 11

The fact that uncertainty exists is driven home by the following disclaimer which

appeared on a research report sent to us by National Bank Financial:

"Note to our readers: The human tragedy of September 11 has had and

will continue to have enormous economic and financial repercussions.

Attempting to gauge its impact on sectors of the economy or regions of

the world is a highly perilous exercise at this point, so soon after a

tragedy having so little precedent, and with such uncertainty

surrounding the prospects of military engagement. In the circumstances

we ask for our readers' indulgence with regard to our views and

comments."

It also appears in this overseas report from Pereire Tod Limited:

Visibility at many companies is close to zero

"The risks of the market not spotting early warning signals have risen

sharply. One of the innocent victims of the terrorist attack on New

York’s World Trade Center was the I/B/E/S computer that stores

analysts’ earnings expectations. There is a 10-day black hole in revision

activity after 11 Sep., which is only just beginning to be filled. The

hiatus in revision activity is not simply the result of computer damage.

We imagine that analysts are making very few company visits at

present, during what in normal times is the peak of the corporate

communication season. Security worries on the part of the analysts (and

their potential hosts), transport difficulties and the fact that the

executives they hope to see may well be busy revising budgets and

financing strategies have combined to reduce corporate visibility more

than ever. It was hardly crystal clear before 11 Sep. In many sectors, we

would currently rate it non-existent. Any guess is as good as another.

Hence, we see an enhanced risk of analysts finding themselves way

behind the curve, which means that there will be some genuine, out-of-

the-blue, unpredicted surprises during the 3Q01 reporting season.

“Solid” cyclical companies that look “safe” on the basis of their end-

August earnings revision rankings could well provide the biggest

upsets."

Phew! If that isn't the epitome of uncertainty!

Many portfolio managers today have never

been through such an uncertain time and, as one of our economist friends noted, "It will

be interesting to see how they (the young'ons) react."

Speaking of young-ones, there is a

story that almost all of us have been told in our pre-school years - The Ugly Duckling.

is the story of a little duckling (in disguise, because he is really a "swan-ling") that is so

ugly he is ridiculed and is an outcast - no one wanted him.

As this little bird grew up, he

developed into a beautiful swan!

Why is this relevant?

Because

no matter how ugly the head of uncertainty is, it will

not last forever

That is not to say that things will return to being great in the short-term.

No one really knows the short-term impact with clarity. Central bankers are flooding the

markets with liquidity in an effort to accelerate the process of recovery.

Ducklings do not

turn into swans overnight.

The process takes time.

IXED

NCOME

Governments may begin to run deficits again instead of the surpluses that were taken for

granted.

All of a sudden, the potential for further tax cuts has dried up.

Governments

may go from being net purchasers of bonds to net issuers of bonds resulting in a

correction of the supply-demand issue on long-term bonds.

This could drive long-term

rates up.

USA

"Stratospheric valuations out of the blue, fuelled by creative accounting rules with some

managers focusing more on the stock price than the business plan, are gone.

For many

IT stocks down 80-90%, it is still far from clear that the buy-the-dips strategy that worked

so well from 1995 to 1999 is appropriate."

Clement Gignac, National Bank Financial Sept, 2001

Good stock pickers should benefit during these times, as undervalued situations are

examined with a two-year view.

Many situations appear cheap on an absolute price

basis, but are still far from recessionary valuation levels.

One must recall that the last

recession in 1990-91 was less abrupt and widespread than what is taking place at this

time.

Some stocks are only back to the Asian crisis levels reached in 1998, when the

U.S. economy pulled the world out rather swiftly.

Paying close attention to very long-

term charts and data at this time is particularly important.

"The central driving force behind the US economy's move from boom to virtual standstill

in the space of less than 12 months has been corporate retrenchment."

Dresdner Kleinwort

Wasserstein

The outlook for business investment still looks rather negative.

Profits, new orders and

business investment in general continue to drop.

Rising unemployment and a continued

weak stock market may undermine consumer confidence and households' propensity to

spend.

There is already a glimpse at evidence that consumers did not spend their tax

rebate cheques.

EAFE

Developments in Europe have been a tad more positive than the rest of the world markets

if not only on the currency front.

The Euro has benefited from the faltering U.S. dollar,

increasing returns in the European portion of our portfolios.

According to Cazenove &

Co. of London, the European economy was starting to stabilize before the events in the

U.S.

So far, Italy and the U.K. are the only G7 economies where unemployment is still

falling.

While this may change in the future, the strength of the consumer in the United

Kingdom may enable them to avoid a technical recession.

For instance, retail sales

growth may slow from its current 6% rate to around 2-3% by year-end.

An interesting comment from Cazenove further corroborates our views on the uncertainty

and high valuation of the U.S. market:

"Given such uncertainty, the only useful service that can be offered is to try to establish

some meaningful valuation yardsticks in order to put equity market moves into context.

There are numerous methodologies for assessing appropriate valuations for markets.

Our U.S. economist has studied 13 criteria for the S&P 500, of which two - the Fed

earnings model and the ratio of S&P 500 prospective earnings yield pre write-off to AAA

bonds - suggest possible fair value for the U.S. equity market.

The other 11 unfortunately

suggest either moderately or very expensive valuations for the U.S. equity market.

examples, using either book value or dividends as a means of establishing more normal

relationships suggests U.S. equity market levels substantially below current levels.

The

focus on the bond/equity relationship we believe is flawed and misleading.

Using

nominal bond yields and effectively a real earnings yield will give anomalous results.

However, investors are focusing on the relationship, and despite the caveat, European

markets appear the "cheapest" using the ratio."

On the international front, Japan is back in recession as the global synchronous downturn

takes hold.

The new Prime Minister's plan to clean up the economy is viewed with

skepticism as the 10 stimulus packages in the last 8 years have all failed.

If Koizumi

succeeds, in any case, it will be very painful for the economy at a time when global

demand has dried up.

The LDP may use the excuse of "bad timing" to delay the reforms.

"China will have to make the most fateful decision in its history. If they decide to play

games in our hour of need, the US can shut down its economy and collapse its society the

instant we stop accepting their exports.

In their present mood, the American people will

be willing to pay any price for oil to end the dependence on Arab suppliers and any tax to

buy the best possible national defense."

"The financial assets that immediately benefit

are: bonds, energy-related and defense-related.

Stocks and anything that involves risk

will take a hit in the short-term."

Criton Zoakos, September 11, 2001

Asia is perhaps impacted the most by the state of affairs in the United States and Japan.

They exported their way out of the 1998 crisis, but are now suffering the cutbacks of the

technology industry.

The USA and Japan account for over 30% of Asia's exports.

OUNTRY

LLOCATION

Monetary

Secular

Heward

Economy

Policy

Currency Valuation

Trends

Forecast

Canada

+/=

=/+

O/W

USA

=/-

=/+

U/W

Europe

=/+

U/W

Japan

=/-

=/+

=/-

U/W

Pacific Rim

=/+

U/W

Legend:

= neutral, + positive, - negative, O/W overweight, U/W underweight, M/W marketweight

LOBAL

ECTOR

LLOCATION

SSET

Q4 F

ORECAST

ENCHMARK

30/09/01

Financials

LOBAL

ALANCED

- I

NCOME

Telecommunications

Fixed Income

60%

72 %

Technology

Equity

40%

28%

Healthcare

LOBAL

ALANCED

- G

ROWTH

Basic Materials/Energy

Fixed Income

40%

55%

Industrial Products

Equity

60%

45%

Consumer Staples

LOBAL

QUITY

- G

ROWTH

Consumer Cyclicals

Cash

11%

Utilities

Equity

95%

89%

E EXTEND OUR THANKS FOR THE ASSISTANCE AND COOPERATION OF

Andersen Economic Research Ltd., Toronto

Ian Notley, Ridgefield, CT.

Robin Griffiths, HSBC/HSBC Investment Bank plc, London

Naydale Financial Services, London

Cazenove & Co., London

Colonial First State Investments, Edinburgh, Scotland

Morgan Stanley Dean Witter, New York

Canaccord Capital

Economap Inc.

National Bank Financial, Montreal

Dundee Securities Corporation

Edinburgh Fund Managers, Scotland

Henderson Investors Limited, London

ABTrust Fund Managers Ltd., Singapore

SG Securities

Bridgewater Associates

Arnhold and S. Bleichroeder Inc., New York

BNP Paribas

Deutsche Bank

Dresdner Kleinwort Wasserstein

Pereire & Todd

Note:

If you would like to discuss in more detail our views on global markets, please do not hesitate to

OR FURTHER INFORMATION CALL

1-800-567-5257

C.F.G. Heward Investment Management Ltd.

Chilion Heward

James Heward

Willem Hanskamp

Ronald Samo

Robert Bourdius

Helen Stein

Andrea Lavergne

2115 rue de la Montagne, Montreal, Quebec H3G 1Z8

Tel: (514) 985-5757 Fax: (514) 985-5755

407 Curzon Avenue, Brockville, Ontario K6V 7C1

Tel: (613) 498-2181

Email:

heward@heward.com

www.heward.com

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