"Real Estate Bits - 2"

Now that 2009 is in the history books, it is a good time to assess the trends playing out in the economy and in financial markets. Whether you're an investor, run your own business or are preparing to make general financial decisions in the coming months, these trends will affect you.

Scotia's team of analysts believes that the worst is behind us as we find some firm footing to keep climbing out of one of the toughest recessions to hit in decades. The trick is to not get overconfident and start thinking that the recovery is going to go straight up. After all, some of the risks that triggered the downturn are still lurking, as are new risks that arise as global policy-makers begin to unwind a lot of the emergency measures that were put into place to avert what could have been a much deeper downturn.

The Economy:

"As Canadians, we should be thankful that the economic and financial storm that wreaked havoc in many other countries did not have the same destructive force here. We should also be thankful that the economic recovery is about to get underway and will gather strength in the months ahead," notes Warren Jestin, Chief Economist for Scotiabank.

"The other good news," Jestin suggested, "is that the fundamentals in Canada are as good as in any country, if not better." A good part of the rally in the economy is being driven by the need to replenish inventories, which in turn, is causing many industries to ramp up production after severe cutbacks during the weakest months of the recession in late 2008 and into the first half of 2009. The auto industry, for example, is gearing up after idling a lot of manufacturing. Other drivers of the rebound, notes Jestin, are government spending, especially previously announced infrastructure spending.

But a nice bounce from inventory rebuilds and government investment doesn't mean the economy is necessarily set to move into a higher gear and stay there, he adds. "Through the winter and right into the spring, however, consumers will gain more confidence and spending will gradually rebound, allowing for a broadening of the economic revival, both here and in other major nations."

The Markets:

Stephen Uzielli, Portfolio Manager with ScotiaMcLeod's Portfolio Advisory Group, says the same kind of cautious optimism should be applied to the equity markets.

While he says the markets have issued a clear signal that the worst is over for the economy and we should not expect a return to the lows seen in the stock market in March of 2009, Uzielli also says some wild mood swings have been at play that are overreacting at either end of the pendulum.

First it was the market overreacting on the down side, then the opposite happened. "Stock market investors were essentially discounting everything going wrong in the global economy that could possibly go wrong," he says.

"Clearly, everything wasn't going to go wrong and everything didn't go wrong. In the aftermath, there have been times in this rebound where the rally in equities was so strong that it was as if investors were saying everything that could possibly go right would go right and of course that is not a likely outcome either."

There may be some pullbacks along the way, he cautions, with economic reports that show a weaker-than-expected rebound being the trigger.

How To Take Advantage Of The Re-Bound:

Here are four ways you can take advantage of the rebound in the coming weeks and months, courtesy of Warren Jestin and Stephen Uzielli:

1. Don't expect an inflation surge or much change in short-term interest rates. Where rates are expected to climb is on longer-date maturities in government bonds, however. That means that there is a risk of higher fixed-rate mortgage rates over the next year.
2. The loonie is likely to continue strengthening as commodity prices rise and Canadian exports recover. It will remain very volatile, but may reach parity or higher, particularly if the U.S. dollar weakens more broadly against world currencies as global investors become increasingly concerned about enormous U.S. fiscal and trade deficits.
3. Stocks remain very attractive for longer-term investors. Equities have had a large surge from their lows of March 2009. It would be greedy to expect the move to continue at this pace but on a fundamental basis, the market is not overvalued at this point, even if it may be a little bit ahead of itself.
4. Pullbacks in stocks are unlikely to be deep or long, so investors will have some great opportunities to increase exposure to stocks when there are inevitable retreats.

To get more insights from Scotiabanks thought leaders, visit scotiabank.com/helpmeinvest.