The co-founder of JC Clark Ltd., whose flagship fund quadrupled since 1999, says North American stock indexes may fall 25 percent from their 2010 highs in the next year as government debt curbs growth.
Co-founder Colin F. Stewart has reduced investments in stocks with higher-than-average volatility, or price swings, including coal terminal owner Westshore Terminals Income Fund, he said in an interview at JC Clark’s Toronto headquarters. Stewart also pared holdings of companies with the closest ties to Europe, such as business software developer Open Text Corp.
“There’s been a sentiment change in the market from buying the dips to selling the rallies,” Stewart said May 28. “The problems in 2008 that investors had seemingly forgotten about are not gone,” he said. They’ve “been transferred from the private sector balance sheet to the public sector.”
Household and business indebtedness soared before the financial crisis that started in 2007, especially among financial institutions, as homeowner liabilities in the U.S., Canada and the U.K. jumped to more than 130 percent of disposable income. From 2007 to 2009, the national debts of 29 of the world’s wealthiest countries rose to 90 percent of gross domestic product from 73 percent, according to the Organization for Economic Cooperation and Development. The OECD projects the figure will approach 100 percent next year.
The S&P 500 declined 8.2 percent in May, its biggest loss since February 2009, as world equity markets slumped on concern austerity measures in Europe will jeopardize the global economic recovery. Fitch Ratings cut Spain’s credit grade to AA+ from AAA on May 28.
JC Clark’s C$175 million Preservation Trust, managed by John Clark, has returned 14 percent a year since its inception in 1999, compared with 2.1 percent for a combination of the S&P 500 and S&P/TSX Composite Index, according to the firm’s figures. Stewart manages the more Canadian-oriented C$55 million Focused Opportunity Fund, which has provided almost twice the return, excluding dividends, of the S&P/TSX since its inception in 2005.
Both funds’ ratios of shares owned to shares sold short are at their lowest level since before the crash induced by the failure of Lehman Brothers Holdings Inc. in September 2008. Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
Stewart gave even odds on a decline of 20 to 25 percent from the post-2008 highs of the S&P 500 and the S&P/TSX over the next year. That would leave the U.S. benchmark at as low as 912.96 and the Canadian index as low as 9,210.73.
JC Clark is holding on to more-defensive investments, or ones likely to beat the overall market, with dividends included, Stewart said. Canadian telecommunication companies BCE Inc. and Rogers Communications Inc. are among the funds’ larger holdings, as is Sears Canada Inc., which paid a special dividend of about C$376.7 million June 4.
While the funds have less invested in commodity producers than they would by mimicking the makeup of the S&P/TSX, Stewart said he does favor gold investments, including Barrick Gold Corp., the world’s largest producer of the metal.
“Given our concern over the government balance sheets and sovereign debt issues, we think there are a number of currencies on a global basis that are at risk,” Stewart said. “Gold is now becoming a currency in and unto itself. That’s a good safe haven for investors.”