The fourth quarter global investment setting came to be dominated by speculation about what would happen if the United States fell over the so-called “fiscal cliff”, which referred to the combination of automatic tax increases and spending cuts that would, if enacted, reduce the United States federal deficit by approximately US$1.2 trillion over a 10 year period. Failure to deal with the fiscal cliff would have impacted households who would have had lower disposable income because of higher taxes; as well as businesses in the defence, transportation, healthcare and other industries that rely on government spending. As such, market watchers had voiced concerns that the U.S. economy could see a contraction in GDP and a rise in unemployment.
Even though Democrats and Republicans had spent most of 2012 explaining the calamity that could have possibly arisen from toppling over the fiscal cliff, it was amazing to see that no agreement had been solidified until the New Year was ushered in, when finally U.S. lawmakers cut a last-minute deal to dodge the supposed fiscal cliff. The bill that was passed by Congress avoids the widespread tax increases and forestalls the sizable spending cuts. It is expected that President Obama will sign the legislation into law in the coming days. It remains to be seen what will be done to address the longer-term U.S. fiscal position as the focus now turns to dealing with the US$16.4 trillion debt ceiling.
In Canada, the focus was on mergers and acquisitions in the energy industry, as China National Offshore Oil Corporation (CNOOC) made a C$15.1 billion bid to acquire Nexen Inc. Given that this was the largest foreign takeover attempted by a Chinese state-owned company, the proposed transaction faced a great deal of scrutiny by the Canadian Government. The Canadian spy agency warned that such transactions by foreign state-owned entities could pose threat to national security. Moreover the government was concerned as to whether the deal had met the net benefit test. The test was somewhat ambiguous, and the government has since clarified the rules governing future acquisitions of Canadian companies by foreign entities.
The federal government’s maneuver to tighten mortgage-lending regulation, by reducing the maximum amortization period for a government-insured mortgage to 25 years from 30 years, amid concerns of an overheated housing markets and rising household debt levels has prompted backlash from mortgage brokers who claim that the new rules unnecessarily jeopardize the strength of Canada’s housing market and could eventually weaken the broader economy through lower housing starts. It is estimated that 17% of high-ratio borrowers who obtained a mortgage in 2010 would no longer qualify under the new rules.
Mark Carney, who has been the Governor of the Bank of Canada for nearly five years, announced that he will be leaving his seven-year appointment early to become the Governor of the 318–year-old Bank of England starting June 2013. Seeing as Canadian banks escaped the global financial crisis relatively unscathed, the UK will be looking to Carney to implement strong bank regulation, given the many breakdowns and scandals that have shaken its banking system, that now require an estimated $43 billion in emergency capital to shore up balance sheets against future losses.
Despite these ongoing changes in the national and global investment landscape, a thorough bottom-up approach to investing can help investors to preserve capital over the long-term. Of course, given the rapidly evolving macroeconomic influences and changing demographics, an idea of how these larger factors might affect return opportunities, will also serve well.
Garnet O. Powell, MBA, CFA
I am honoured to have been able to share with you my thinking on the investment process and would be delighted to hear your thoughts.