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A Canadian expert’s fearless forecast for 2008

One of Canada’s leading analysts predicts that things will be a little rough in the first half of the year, but there’s light on the horizon.

We like predictions that come with an honest disclaimer. We know of one Internet columnist who offers a tongue-in-cheek money-back guarantee that all predictions will be wrong (he writes about football and the column is free). We don’t ask that much, just a frank look at the future from someone with convincing credentials.

That’s what we get from one of Canada’s best-known analysts, Mr. Gordon Pape, with his “Fearless forecast for 2008” in the Internet Wealth Builder. Mr. Pape’s experience with the markets gives his observations extra weight, but he’s willing to admit that future events are never chiselled in stone.

“Making predictions in these uncertain times is something of a fool’s game,” asserts Mr. Pape. “The world never unfolds in the way we expect. Even trends that appear to be clearly established at the start of a year can suddenly go into reverse as unforeseen events change the dynamics.”

Last year, Mr. Pape thought that U.S. stocks would do better than the resource-heavy S&P/TSX Composite Index. And the Nasdaq exchange did beat the TSX — “but by the time the exchange rate was factored in, Canada was once again the best place for your money. Well, at least I fess up to my mistakes!”

And who’s going to be upset about a turn of events that comes out in Canada’s favour?

“But it’s a new year,” proceeds Mr. Pape, “and I’m a glutton for punishment so here are my fearless predictions for 2008.”

A rough first half

Mr. Pape is certainly not sugar coating his predictions. “The first half will be rough,” he states flatly.

“There’s too much uncertainty in the markets right now for my comfort level. Credit is still very tight and expensive and there are undoubtedly more bombs from the subprime mess still waiting to explode.”

When year-end financial results start coming out later this month, adds the analyst, there are liable to be some nasty surprises that will rock the stock markets.

“I would not be surprised to see one or more sharp corrections between now and spring, with major indexes falling 5 per cent to 10 per cent, perhaps even more. Investors will need fortitude and patience to ride it out.”

Happily, this is a bad news-good news scenario. It gets better.

Second half rally

“The second half will see a market rally,” says Mr. Pape. “By the time second-quarter results come out, the full extent of the subprime damage should be known and credit should start to loosen again. Investors hate uncertainty, so even if the subprime news is worse than expected, they’ll welcome a clearing of the air.”

By mid-year, he believes, we should also see signs that the U.S. housing market is stabilizing, which would be another welcome piece of news. Another bit of good news could come from the U.S. presidential race.

“The election of a popular, middle-of-the-road president who pledges to get the country out of Iraq will also help boost confidence. By the time December rolls around, stocks should be enjoying a strong rally.”

Between the rough first half and the brighter conclusion to the year, four big stories will be unfolding in 2008. Here’s how they’re liable to turn out.

TSX will be the winner

“The TSX will outperform the S&P 500,” predicts Mr. Pape. He does not expect any of the major North American indexes to enjoy double-digit gains in 2008.

But the TSX appears to be in a better position to take a run at double-digit returns. U.S. markets are bound to held back by the inevitable weakness in the housing and financial sectors in the first half of the year.

“Canadian financial stocks may also come under some pressure,” says Mr. Pape, “but it won’t be anywhere near as bad as the situation south of the border. Our energy and mining stocks should help keep us in the black, although I expect a lot of volatility in both sectors.”

Interest rates going down

“Interest rate trends don’t normally reverse themselves quickly,” writes Mr. Pape, “so I expect we’ll see further reductions, at least in the first half of the year.

“In the U.S., lower rates will be driven by growing worries about the credit crunch and fears of a recession. In the case of the Bank of Canada, weakness in the manufacturing sector and concerns about a higher loonie if the rate spread with the U.S. narrows will tilt the odds toward further easing.”

Following on the heels of lower interest rates should come higher prices for bonds.

Good first half for bonds

The bond markets finally turned around in the second half of 2007, explains Mr. Pape. “In fact, they actually outperformed stocks in the latter part of the year.” That is due to continue.

“Lower interest rates and stock market fears will continue to fuel demand for high-quality government issues in the first half of 2008. Look for yields to drop and bond prices to rise.

“Bonds will outperform equities in the first half of the year,” continues the analyst, “but the situation will reverse itself in the second half.”

And finally, the 99.56-cent question (as of yesterday, at least) — what about our dollar?

The loonie settles down

“The loonie will stabilize,” states Mr. Pape in the Internet Wealth Builder. “We could see a modest advance for the loonie in 2008 if oil prices continue to rise but don’t look for a repeat of 2007. A Canadian dollar of US$1.15 just isn’t on.

“When our buck touched US$1.10 for a brief time last year, politicians hit the panic button and, with the help of remarks from Bank of Canada governor David Dodge, succeeded in jawboning the loonie back down to below parity.

“I expect it to trade in a range of US95¢ to US$105 in 2008, ending the year at around US$1.03.”

Thus we will continue to have a strong loonie, but not a crazy, runaway loonie.

“So there!” concludes Mr. Pape. “I’ve gone out on some very long limbs. We’ll review these predictions 12 months from now and see how I fared.”

Our guess is that investors who follow Mr. Pape’s prescription for patience through the uncertain days ahead will fare just fine. Prepare yourself for the bad as well as the good and even if a few of these predictions go wrong, you won’t.