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March Review April 5th, 2011 By Kim Mailey, CFP

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Some of the significant events that took place in the month of March:

• On March 11th, Japan suffered a devastating earthquake and the resulting tsunami that hit Japan combined to cause a sad and significant loss of life and an estimated US$300-billion of damage. With the loss of two nuclear power plants, factories face rolling power blackouts, which will result in global shortages of Japanese parts - from computer chips to car parts. Stock markets rebounded from a dramatic three-day plunge, as investors believe in Japan's ability to recover. I anticipate a contraction in Japan's second-quarter GDP, and then a sharp rebound in the latter half of 2011 due to reconstruction investment.
   
• The Middle East continues to be a hot spot
   
• The Canadian economy started the year on a strong note, with factories expanding production at the fastest rate since 2003 in January, boosting the overall economy by 0.5%. Gross domestic product grew at an estimated 4% annualized pace in the first quarter, following 3.3% and 1.8% in the previous quarters
   
• Canadians will now have a May election after Prime Minister Stephen Harper lost a confidence vote in the House of Commons.
   

First Quarter Review:

The first quarter of 2011 saw U.S. stocks markets turn in their best first-quarter performance in 13 years with the Dow up 6.4%, and the S&P 500 gaining 5.4%. Toronto's main stock index rose 5% for the quarter, buoyed by commodity prices, which rose for a third straight quarter.

	1st Quarter 2011 (in local currency)	1st Quarter (in Cdn $)	1 year to March 31st (in local currency)	1 year return (in Canadian $)
TSX Composite	+ 5.0%	+ 5.0%	+ 17.3%	+ 17.3%
S&P 500	+ 5.4%	+ 2.8%	+ 13.4%	+ 8.3%
MSCI EAFE	+ 2.7%	+ 0.1%	+ 7.5%	+ 2.6%

While the economy is continuing to show signs of recovery, the U.S. housing sector continues to struggle. New home sales fell to a record low and existing home sales and prices have also been weak. This is a tightrope the Fed will have to walk as they consider exiting from the current loose monetary policy.

The impact of Japan on global GDP. Japan accounts for 6% of global GDP and currently is the third largest country by GDP globally. Therefore, if Japanese GDP falls by 3.0% as a consequence of the earthquake (triple the economist's worse-case estimate), this will take approximately 0.2% off global GDP (which is projected to be 4.5% in 2011). From a global macroeconomic perspective, there are bigger influences on global GDP, such as the following:

• U.S. employment growth, in which our models are more optimistic than the consensus (suggesting more than 2% employment growth).
   
• The Grand Bargain in Europe, in which recent negotiations have brought some helpful agreements.
   
• Price pressures in China, yet core inflation is approximately 2%.
   
• Oil, in which our oil team believes there is approximately 4.5-5.0 million barrels of oil per day of spare capacity.
   
• The economic impact of the Japanese situation would be larger if there were widespread disruptions to supply chains, a threat that mainly affects technology sectors
   

Looking Forward:

I believe the next few months are likely to be a time of consolidation from the 1st quarter's gains. Investors should be prepared for the potential of "headline risk" this quarter on topics such as higher oil prices, supply chain disruptions from Japan actually showing up in some companies' results and guidance, further sovereign downgrades and/or bail outs (Portugal), and increased concern over interest rates at the end of the U.S. quantitative easing in June. These concerns could pressure the market in the near-term and keep its rise in check for the quarter before a resumed advance later in the year. Market dips of 5% are common and happen several times a year. I would caution against trying to market time what I believe could be a small consolidation in the markets as I anticipate strong support at these levels and a resumption of growth later in the year.

Investment Spotlight:

In the previous two monthly updates I have mentioned an investment in vague terms which was coming to the market and one that I thought offered an attractive opportunity to investors seeking a diversified exposure to Canada's highest yielding companies.

Now that the issue has started to trade on the TSX, I can provide you with a few more details. The security is called IndexPlus Dividend Fund and at the time of writing, it is trading at the issue price of $12 per share. The targeted annual yield for this security is a tax efficient 6.5% and is paid out monthly or can be placed on the dividend reinvestment plan.

Please click on the attached link to get a snap shot of the investment as of February 28th.

IndexPlus Dividend Fund snapshot as of February 28, 2011

I would welcome to the opportunity to discuss the merits of this investments in terms of your particular situation. Please call me.