Rational Advisor

THE GLOBAL INVESTMENT OUTLOOK – CAPITAL MARKETS UPDATE (October 3rd, 2007)
From RBC Capital Management

Credit crunch a significant challenge to economic cycle, but robust policy responses are available and are being deployed. Threat should pass, allowing expansion to continue with mild growth/low inflation.

Long period of unusual calm for economy and markets suddenly ended by credit crunch. Forecasts lack prior clarity and markets return to more “normal” levels of volatility.

Believe that current policy responses targeting crunch in markets are appropriate, and that more robust tools are available when and if needed. Crunch will dampen near-term growth, but not throw economy into reverse unless policies fail to unclog markets/restore confidence.

Inflation expectations – until recently the greatest threat to the expansion – continue to moderate as credit crunch represents a drag on near-term potential for growth.

50 bp cut in fed funds rate shows Fed’s resolve to battle crisis, but does not commit it to further reductions unless necessary. Around the world, whatever plans had existed for incremental rate hikes are now suspended. Cycle of rising rates that began 3 years ago is now complete.

Valuations in fixed income markets near equilibrium, but central bank rate cuts typically cause yields to rise. Window for additional gains in long bonds is closing as monetary policy is eased.

Attractive valuations limit downside potential for equities as long as recession is avoided. As credit crunch passes, attention should return to attractive fundamentals. Most major equity markets trade below valuations consistent with durable economic growth, mild interest rates and low inflation. A cut in the fed funds rate has, in the past, been a catalyst for sustained stock market rallies following financial shocks.

Rationals views - basically they are saying that equities are still good, with fed rates lowering and potentital for Bank of Canada to stop increasing rates - bonds also look good. THe governments are doing the correct thing to get through the sub-prime fiasco. However we are not out of it yet

Other points from discussions I have ahd with them, at 62 cents the Candian dollar was about 20% undervalued,, now it is about 20% overvalued on a purchasing parity basis. Theya re sayign that the Candian dollar is overvalued and can stay that way for about 6 months.

Enjoy

Rational

Comments RSS