Investment Themes For 2010


As investors contemplate where to put this year’s RRSP and TFSA contributions, we thought it might be timely to look at the value and the direction of the U.S. dollar and its effect on your investment choices.

The global stock, bond, and commodity market recoveries experienced in 2009 were largely driven by low interest rates, increased money supply, and coordinated global government bailouts. Given the latest G20 pronouncements, these efforts will continue well into 2010, but they may not lead to similar financial market rebounds seen in 2009. Much of it will be dependent upon the relative performance of the U.S. dollar.

The Canadian dollar started 2009 at 81.77 US, and at the time of writing, it hit an inter-year high of 97.95 US. With accelerating U.S. fiscal and trade deficits, investors have enough evidence to believe that this trend will continue and could propel the Canadian dollar to above parity in 2010. The sliding American dollar has hurt much of Canada’s manufacturing and export sector but has driven gold bugs into a buying frenzy. Gold started 2009 at $883 US per ounce, and so far in 2009, hit a high of $1,123. One doesn’t have to look far to see predictions for gold prices reaching $2,000 or even $3,000 in coming years. It has also led to a rally in energy and other commodity prices which added to the 2009 Canadian stock market rally.


One of the key drivers for the falling U.S. dollar has been its ultra-low interest rate policy and money supply creation. It was a necessary strategy to prevent a complete financial meltdown, and in my view, the partial cause and blame will fall on the decisions by the U.S. Federal Reserve and treasury secretary to allow the collapse of Lehman Brothers, as well as unregulated short selling and unregulated credit default swaps. The former sent an unanticipated shock wave through counterparty institutions in Europe and Asia, while the latter allowed hedge funds to use predatory practices to drive stock and corporate bond prices into near free fall.

For a little bit of history, Lehman Brothers was the fourth largest U.S. investment banking firm with a February 2007 market capitalization of $60 billion, $639 billion in assets, and $619 billion in debt. When it filed for bankruptcy on September 15, 2008, it became the largest in U.S. history.

Unwinding the mess will continue for years. In the meantime, high unemployment and high housing foreclosures could stall the U.S. consumer in 2010, causing another decline in the U.S. stock market.

The U.S. dollar has also fallen against the Japanese yen and the euro. The euro/dollar exchange rate started 2009 at $.7154 and traded at the time of writing at $.6703.

For Canadian investors, Asian and European investments may provide a better return than U.S. investments. The exception will be U.S. companies with significant revenues derived from international operations. As the U.S. dollar falls, American companies with international revenues will see higher profits once exchange rates have been taken into account. Fortunately, there has been an explosion in passive investment vehicles called Exchange Traded Funds, or ETFs for short.

Ishares (, Claymore ( and, Horizon Betapro (, Proshares (, and Invesco Powershares ( have created hundreds of specialized ETFs that allow investors to structure investment portfolios to take advantage of specific sectors in most local and global markets.

For the more market-savvy investor, many of them also include instruments that allow investors to benefit from a decline (ETF short instruments) as well as leveraged exposure, i.e. twice the exposure with one investment. In addition, all of the websites have sites to help investors learn more about the use and deployment of individual or multiple structured ETFs. However, it might be wise to use a professional financial advisor to implement a strategy suitable for your own situation.

A word of caution is necessary regarding ETFs. Make sure you or your advisor fully understands the composition of each ETF. Some use derivative financial contracts to mirror an index or specific commodity.

As always, investors need to be cautious in their investment strategies for 2010. Interest rates may trend higher in the second half of the year causing bond prices to fall. Inflation-linked or real-return bonds or their ETF counterpart is one way to reduce that risk.
My belief is that investors should continue to maintain an overweight exposure to Canadian financial service companies (at the time of writing, insurance companies may provide a superior return than banks but exposure to both is warranted), energy (oil rather than gas but gas stocks may have a more speculative bounce), global infrastructure (including clean energy), and last but not least, gold and precious metals (probably the most speculative one in the bunch).

I have highlighted the above sectors because I feel that a declining U.S. dollar will drive commodities higher and global governments will focus their economic stimuli on job creation. Corporations seem determined to maintain output but doing so by maintaining existing job levels. Enhancing job creation will require labour- intensive projects such as road construction, bridge repair, and clean-energy programs. If you are putting up windmills, you still need the transmission lines and substations. If fuel cells or electric cars go into mass production, hydrogen refuelling centres or larger electricity facilities need to be built.

The American government, along with many of the other G20 countries, continues to put forward renewable energy initiatives, and investors could look for specific industries (natural gas pipelines, solar, hydro, wind, and geothermal). Think long term and outside the traditional stock market box.

Finally, one definition of a bull market is a rebound of 20 per cent or more from a previously established low. There can be no doubt then that 2009 provided investors with one of the best opportunities for global stock market rallies in decades.

The difficult question is whether this is the beginning of a long-term secular bull market or a cyclical bull market rally in a secular bear market. As in many previous global bull market rallies, the U.S. stock market should provide investors with clues to future global market performances. If the G20 economic and monetary stimuli stall, then a North American led rally would fizzle, and it would be wise to look at the next global consumerism wave building in Asia and India.

Steve Bokor is an investment broker with PI Financial, a member of CIPF.