“There are a number of junior companies, especially in the technology
and special situations space, which will do well for investors in 2014,”
said the lead analysts at Ubika Research in their 2014 economic outlook.
The interview mentions the possibility of some downward surprises for U.S.
equity investors, where gold could be heading in the coming year, and whether
or not resource investing is dead.
SmallCapPower: Can you reflect on your
views from last year?
Ubika Research: Well, when we see what
we said in our Outlook for 2013, we think we were quite accurate in our
assessment. We mentioned that the US economy would surprise on the upside,
which it did. We also mentioned that stock markets would do better and
the overall health of the global economy would improve. We pointed out
the energy revolution in the US, which has the potential to make the US
energy independent, has strong, long-term positive repercussions for the
world’s biggest economy and for the global economy in general. We think
this trend will continue and will continue to benefit the US economy.
SmallCapPower: What is your outlook for
the global economy in 2014?
Ubika Research: We believe that 2013 built
a strong base and platform for the developed economies, particularly the
US economy. Even the emerging markets that struggled last year seem to
be stabilizing and look stronger this year. Europe has avoided the catastrophe
and is clearly not in a danger of breaking apart. We believe that 2014
could be finally a year after the Great Recession of 2008 in which all
major blocks of the global economy might post decent growth rates.
SmallCapPower: What is your outlook for
the stock markets in 2014? Where do we go from a year like 2013?
Ubika Research: Well, this one is easy.
Investors should certainly not hope to repeat the success they had if they
had exposure to the US stock markets. We believe that 2014 will still be
a relatively good year for stock markets globally. US markets will build
from here but gains will be much more subdued. We wouldn’t be surprised
in fact if markets gave away some gains in the early part of the year.
In fact, with expectations so high after a spectacular 2013, investors
are a little too upbeat about markets gaining from these levels again.
We would caution that there is a possibility of some downward surprises.
We feel more upbeat about some emerging markets such as India. We believe
that Europe will likely disappoint as investors come to realize that long-term
structural problems are still lingering.
SmallCapPower: After years of outpacing
the growth in the US economy, the Canadian economy has now started to fall
behind in terms of growth. What do you believe 2014 will bring for the
economy in Canada?
Ubika Research: The Canadian economy has
certainly struggled of late due to the slump in the resource sector and
a sluggish manufacturing sector. It did not help that the Canadian dollar
was near parity for most of the last 2 years, which also hurt exports.
With the US economy gathering steam and the loonie close to 92 cents, we
believe that the Canadian economy will get much needed relief as exports
to the US, its largest trading partner, become more competitive and the
growth in the US economy also pulls Canada along. We think the Canadian
economy will grow at a rate faster than anticipated by most experts.
SmallCapPower: What about the US economy?
Do you believe that the US economy has finally recovered from the nasty
recession and is poised for speedy growth in years ahead?
Ubika Research: As we had assessed last
year, the US economy did perform better than expected during 2013, especially
as the year progressed. This really has set up a strong platform to grow
from here. The underlying data related to many important macroeconomic
indicators have been improving for a while now. During 2014 we expect the
US economy to grow faster than the trend rate, more like north of 3 percent.
Having said that, we also would like to point out that not everything is
back to normal. The US economy still has significant amount of weakness
in the labour market that eventually translates into consumer demand, which
remains soft. We don’t anticipate that to change much and believe that
any political-oriented policy or monetary setup could derail the momentum.
SmallCapPower: What about other parts
of the world?
Ubika Research: The story in the rest
of the world is mixed. Emerging economies seem to be struggling but Europe
is stabilizing. Japan is riding a renewed optimism on the back of excessively
accommodative monetary and currency strategies pioneered by the government
of Japan. We believe that the grave threat of the potential break-up of
the Euro zone or the Euro- currency is not apparent. However, the structural
problems in Europe are far from over. The bond markets are being too optimistic
in pricing very low risk of default in many pockets of Europe. For the
emerging markets, the year 2014 will be prove to be quite rocky as monetary
tapering by the US Central Bank prompts capital flight away from these
countries to the US. We believe that the countries with strong domestic
demand will withstand the transition better.
SmallCapPower: You were quite positive
about gold last year but it had a really rough year. Where do you see gold
going from here?
Ubika Research: Yes, and certainly we
were wrong on that front. Gold suffered because the markets reacted sharply
to the prospect of monetary tightening that resulted in the rise in the
long-term yield without any sign of a meaningful inflation in the rich
world. It also did not help that gold had a frothy run in the last 4-5
years leading up to its highs. We believe that gold will continue to face
some headwinds during 2014 and could test lower levels. We don’t think
it will break $1100 and don’t see much upside from these levels this year.
We do believe that in the medium to long term the appeal of gold as an
asset class will continue to be strong. As inflation finally starts to
show up in and around the year 2015, one can expect gold to perk up again
to north of $1500/ounce levels.
SmallCapPower: Is resource investing dead?
Is there still a second coming for resource stocks?
Ubika Research: Anyone who says that resource
investing is dead has weak investment memory. Remember, resource investing
has always been cyclical. Commodities’ prices have historically shown wide
fluctuations. In our view resource investing is not dead, just the crazy
speculation oriented investing in anything and everything resource is probably
dead. We remain quite optimistic about resource investing at the current
time. Investors would need to be selective in their choices. It won’t be
that all commodities do well in coming years and within a commodity itself,
companies with producing and/or advanced-stage properties would be better
bets. It would also be important to find companies that have favourable
cost structure to produce and a healthy balance sheet, which means little
or no debt. Amongst resources, we like uranium, copper, coal, and potash.
SmallCapPower: The stock markets for large
caps have done quite well but juniors continue to struggle. Is there a
light at the end of the tunnel for junior stocks?
Ubika Research: If by junior stocks you
mean companies listed on the Toronto Venture Exchange, the answer is a
selective “yes”. We believe that a big portion, probably half, of all companies
listed on the TSXV that form the index will continue to struggle as they
are either too small for public markets or don’t have compelling investment
stories. There are, however, a number of companies, especially in the technology
and special situations, that will do well for investors. Even in the junior
resource sector, many companies now present compelling value at current
levels. We think that 2014 will be a better year for junior stocks compared
to the year that just ended and the Venture index will likely show a decent
gain this year.
SmallCapPower: Are there any specific
companies that you like that you can mention to our readers?
Ubika Research: Yes, we follow a number
of companies. In fact, we just published the “Ubika Watchlist” for 2014
that comprises 20 companies that we either cover, or have been picked by
experts who appear on smallcappower.com interviews. A few of our personal
favourites include Offsetters Climate Solutions Inc. (TSXV: COO), Argex
Titanium Inc. (TSX: RGX), Synodon (TSXV: SYD), Simba Energy Inc. (TSXV:
SMB), Meadow Bay Gold Corp. (TSX: MAY), and DealNet Capital Corp. (CNSX:
DLS). We encourage readers to view and follow the complete list, so please
click
HERE and you will be able to review all 20 names.
Disclosure: Some of the stocks mentioned in the Outlook are sponsored
companies and have paid
SmallCapPower.com a fee for coverage.
