2012 – Corporations vs. Governments

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2012 was a bad year for governments. From ongoing issues with the PIIGS, approaching debt ceilings and teetering on a fiscal cliff, many foreign governments found themselves in less than enviable positions. Analysts, economists and other financial professionals did not ignore this information when providing predictions on the direction of the market:

“The world economy will experience a brutal slowdown.”, “Every European country will be in recession in 2012, and probably in 2013.”, “Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.”

“Quotation attributed to Felix Zulauf of Zulauf Asset Management and Lauren R. Rublin’s “Barron’s 2012 Roundtable, Part One,” Barron’s, January 16, 2012.

“Investors already fretting about the health of the world’s biggest economies now face another worry: disappointing earnings. ‘The pillar of strength is US corporate earnings, and now we’re seeing signs that that is cracking,’ says Morgan Stanley’s chief stock analyst.”

Jonathan Cheng, “New Jolt Looms for Investors: Earnings” – Wall Street Journal, July 9, 2012.

The reality for governments is that they have a tremendous amount of debt on their balance sheets. The solution to reducing their debt is to increase revenue from income taxes or decreasing spending. However, this has proven to be a very delicate balancing act.

The reality for global corporations is quite the contrary. They are flush with cash, hold lower levels of debt, have lower labour costs and have borrowing costs that are still close to all-time lows – a recipe for increased profitability. When a corporation is more profitable, it is perceived to be worth more and the stock price subsequently may rise.

Canadian stocks S&P/TSX Composite 7.19% 

US stocks S&P 500 13.04% 

International stocks MSCI EAFE & Emerging Markets 15.06%

Note: Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Rates you will find on your portfolio statement will be net of fees. Data sources: Dimensional Fund Advisors, iShares.

2012 was a great year to be a shareholder/owner.

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