The halftime report 2007

Markets around the world continue to appreciate. For four and a half years now, the market has more than recovered from the long bear market stemming from the technology bust. Investors in the markets have enjoyed the recovery since 2003.

A walk through the world markets

According to the MSCI, if we look at the developed markets, 21 of the 23 markets showed positive returns for the first 6 months of 2007. The best market for the first half of 2007 was Finland with a whopping 21.6% return. Next was Singapore with a close 19.9% return and rounding the top three was Germany at 18.8%. The European markets have been especially strong this year as 8 of the top 10 markets were in Europe.

Canada finished mid-pack in 11th place with a respectable 7.5% return. The biggest market in the world, the US placed 14th at 6.3%. Only 2 countries posted negative returns. Ireland was at the bottom of the list with a 1.1% loss and Italy finished with a marginal loss of 0.01%.

Bonds take a hit

While the equity markets in Canada and around the world continue to run, bonds in 2007 took a slight setback because of rising interest rates. For the first 6 months of the year, the Scotia Capital Bond Index is down 0.8%. For the past 7 years, the bond market has enjoyed a steady consistent bull run. Interestingly enough, the last time the bond market was negative, was back in 1999 and the following year markets started their painful decline.

A strong Canadian dollar

According to Morningstar data, for the last 5 calendar years from 2002 to 2006 (inclusive), the Canadian dollar has enjoyed a steady rise against the US dollar. For the first half of 2007, the Canadian dollar has shown one of its strongest moves against the US dollar appreciating almost 9%.

The strong Canadian dollar has hurt investors who have invested globally especially in the US. For example, the MSCI World Index posted a 7.03% return if you take currency out of the equation. However, Canadian investors, when you bring it back to Canadian dollars, just broke even with a 0.1% gain. Although global investing is important for diversification reasons, the strong dollar has taken away from the global performance.

My two cents

I’ve now been writing the halftime report for seven years and my standard disclaimer for the halftime report has not changed: “The past is the past and it does not tell us what is in store for the future”. Here are some of my thoughts about the halftime report really tells us:

1. Buying patterns tell us that investors will probably chase the best performing investments. After all, it is human nature to seek winners as opposed to losers. While it may seem intuitive to buy more winners and sell the losers, remember that everything goes in cycles and typically the winners become the losers and the losers become the winners.

2. The best and worst markets are typically the riskiest. It’s a simple law of investing. In order to get to the top or bottom of any list, it requires a higher level of risk. If you are a conservative investor, you should probably avoid these markets, categories, and funds that provide stellar returns because they can also provide stellar losses.

3. It is probably a great time to take some prudent steps to manage your portfolio. Instead of chasing winners, take profits. Don’t forget to rebalance your portfolio and reassess your tolerance for risk. At the end of the day, you can never go wrong with diversification. It is a tired story but one that I will continue to preach. Don’t get caught with too much of anything.

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