In many ways, today’s markets are like the autumn weather — unsettled and hard to read. We are in the midst of a difficult recovery that is likely to last for months to come.

A year ago, the world struggled through the credit crisis, a period of deep uncertainty when the global economy teetered on the edge of collapse. Momentum then shifted dramatically this past March; and, in recent months, we have witnessed one of the strongest rallies in equities and corporate bond markets since the 1930s.

The third quarter of 2009 saw most international markets post positive performances — supported by easing credit markets, notable equities issues and improving consumer confidence. There is increasing evidence that the worst is, indeed, behind us. But it’s far from smooth sailing ahead.

For example, Canada’s recent economic performance is a reminder of its struggle to pull out of an ugly recession. Gross domestic product fell by 0.1% in August, following a flat reading in July. Retail sales spiked nicely in September, and there’s increasing sentiment that this bodes well for economic growth. Job losses are easing, and the real estate and construction sectors continue to improve.

Data from the U.S. indicate the recession there is over, as the world’s largest economy reported annualized growth of 3.5% in the third quarter of 2009. In the Asia-Pacific region, Japan, Hong Kong, Taiwan, Singapore and New Zealand all marked the end of their recessions in the second quarter. In Europe, Germany, the region’s biggest economy, also pulled out of the slump, along with France and Sweden.

So, what will 2010 have in store? Are we poised for a rapid, V-shaped recovery? Or will it be more like a W, with a false start, stop and stumble? Will it be a U-shaped recovery, with a longer trough? Some days, there seem to be as many theories as there are letters in the alphabet.

It’s tempting to urge clients to take profits and batten down the hatches following the market’s recent gains. My simple message: stay invested. The market has far to go to reach the highs of mid-2008. In Canada, the S&P/TSX composite index has soared by about 54% in value since March — but it must climb another 30% to reach its June 2008 market peak of more than 15000.

Meanwhile, the bellwether S&P 500 composite index — an index of the largest, publicly held companies traded in the U.S. — must rise by 42% to reach its October 2007 high of 1565. Yes, markets may be choppy in the near future, but there is still considerable upside for opportunistic investors.

I urge you and your clients to look beyond Canada’s borders, as our market is dominated by three sectors: financials, materials and energy stocks, which, combined, make up more than 75% of the value of the S&P/TSX composite. Investors that limit their outlook to Canada will be underweighted in some key sectors, including health care, consumer staples, telecommunications and technology. Given recent gains, it’s an opportune time to review client portfolios and rebalance to ensure an appropriate asset mix.

Quality, blue-chip stocks of companies with strong balance sheets continue to trade at a discount, and we are finding value in many markets — especially Europe. Britain is one of the cheapest markets in the world, with many stocks trading at earnings ratios well below the norm.

Future share price gains will be driven by good business decisions rather than the market simply going up en masse. Fund managers will earn their keep in this kind of market, as the easy gains of an early-stage recovery are done; now, the value of hard work, stock analysis and research will win out. IE



Don Reed is president and CEO of Toronto-based Franklin Templeton Investments Corp.