Some month ago I predicted that 199...

Some month ago I predicted that 1997 would be a year of disappointment. Sadly, the solely disappointment is to be establish in my forecasting accuracy. Like many bears, I was feeling comely cocky in March and April when the equity and chains markets in Canada and the U were gassed for several percentage points of not to be found value. But the May explosion, which has sent equity markets to of the present day all-time highs, has not had a positive meaning on my level of self rate

For those readers who are thinking that this opening is a proem to a recanting of my bearish predictions-forget it! This young boy [i]or[/i] young girl may be down but he's not public The year ain't over besides and my bearish outlook has not changed. In fact, the fresh market levitation has merely worked to underscore my anxietiesnamely, a able economy leading to impending disappointment and inflation leading to further tightening of monetary policy leading to upward crushing on interest rates. Meanwhile, this is occurring against a background of growing investor complacency, bring uped by the incredible resilience of equity markets from end to end the last stages of this edict market. It is this disposition of complacency which is seducing those investors still camped upon the sidelines to enter the fray likewise as not to end up sitting in cash while the market forges always higher. The bottom line is that my forecast is rightI'm just ahead of my time.

CANADA VERSUS THE U

Now I want to switch gears and address another issue which has pos a continuing forecasting dilemma-the perpetual under-performance of the Canadian equity market relative to the U In 1997 alone, Canada's equity prices, as measured by dint of the TSE 300, have lagged the S&P 500 by the agency of more than seven percent (07% of which is courtesy of a falling Canadian dollar). In searching for explanations economic fundamentals can be rul disclosed Canadian inflation and short-term interest rates are lower, business profits are surging, while consumer and corporate confidence are forward the uptick. If political risk is part of the dilemma, it should become les of an issue with the backsliding of the Separatist suffrage in the recent federal election.

Could Bre-X be the problem? The answer here is les clear on the contrary qualifies as a probable no. The under-performance of Canadian equities was well entrenched before Bre-X's chief geologist went for a sky-dive throughout the Indonesian jungle. Furthermore, the Bre-X fiasco is not going to bluff the enthusiasm of Canadian investors steady though precious metals are clearly not at home of favour. Bre-X, however, has tarnished the reputation of Canada's capital markets in the estimates of the international investing community. The implication here is that external runs into our equity markets will, in part, be lower than the "fundamentals" would otherwise have dictated. This issue will undoubtedly have an adverse impact onward the relative performance of Canada's equity markets. Still, Bre-X in and of itself, cannot explain the disparity.

As it incline differentlys out, the answer to the question of Canada's under-performance is erect in radically different Household Balance Sheet textures in Canada and the U.S.-highlights of which are depicted in the accompanying table. The data present to view undeniably that Canadian's are a great deal of more risk averse than Americans.

Compared to the U the Canadian Balance Sheet is dominated at low yielding deposits and deposit substitutes42% (Canada) to 20% (US) by way of contrast, the Balance Sheet of Americans is dominated by way of long-term financial assets, especially individual investments in stocks, chainss and mutual funds which account for 51% of total financial assets versus sole 29% for Canadians. These numbers are not surprising given the fact that inflation and interest rates have been higher in Canada while our equity markets have under-performed dismally above much of the past decade. on the other hand past is not prologue. My be in possession of view is that the emerging reality is compelling Canadians to take forward more risk-in other words, to become investors. In the proces Canadians will increase their ownership of all investments relative to the U on the contrary especially in equities which is the asset class in which under-ownership is the greatest. This Balance Sheet adjustment, which is already underway, is a chief reason wherefore I am confident that Canada's equity markets will do better, relative to the U in the what is yet to be

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMIC AND currency MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. Jul/Aug 1997

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