EDITORIAL PAGE — Equities, aging and the corporate agenda

Canadian equity markets have had a good run so far this year, notwithstanding the bout of skittishness that clipped more than a few dollars from the share price of some highflyers in recent weeks.

Resource stocks fared well partly because some investors did not want to miss the next Bre-X or Diamond Fields. A more important factor was the weak domestic economy, which served to highlight the strong performance of companies turning out products for export, such as metals and minerals.

The fact that Canada’s economic recovery is being driven by exports has not escaped the attention of institutional fund managers — which is where demographics come into play. Our population is aging and pension funds have amassed billions of dollars looking for a home. Inflation and interest rates are low, which means fund managers are scouring the equity markets to find investments that offer better-than-average returns.

The irony here is that while labor leaders rail on about downsizing, free trade and “the corporate agenda,” their pension-plan managers are less politically correct and love the end results. Four of Canada’s five largest pension funds are from the public sector, which means unions and government workers benefit from the improved performance of the restructured and downsized private sector in which they invest. But, oh how the fur flies when the private sector asks government workers and unions to share in the pain of building a healthier Canadian economy. But we digress.

The ongoing search for good returns has prompted some fund managers to look beyond Bell Canada and other investment-grade securities. Speculative stocks have crept into the mix, as have companies with expansion plans that involve emerging economies. As this trend continues, fund managers will have to place more emphasis on due diligence and risk management, as will retail investors.

When markets are hot and the bulls are running, fundamentals can go out the window. How else to explain the $40 share price of Fortune Minerals during the lengthy wait for results from Mazenod Lake, Cartaway’s run-up to $26 on hallucinatory eyeball-assays, or the growing list of juniors with a higher market capitalization than some senior producers?

Worse off yet are shareholders of Timbuktu Gold, who bought into hot drill results from a gold project in Mali, only to find those numbers have now been called into question by regulators. Investors in Naxos Resources are in a similar bind, with trading halted indefinitely until an independent audit of the company’s unconventional assaying methodology has been completed.

But those cases are the exception, rather than the norm. The interesting part of the market downturn is that it was largely confined to stocks that were either over-valued or over-promoted. As such, the downturn was more of a reality check than a full-scale market correction.

With pension funds continuing to swell as the domestic economy contracts or remains sluggish, it is a safe bet that investors will remain interested in export-oriented, resource companies with international growth strategies.

It will be interesting to see if union pension funds are put to work “aiding and abetting” the global economy their owners profess to hate. The politically correct option, we suppose, would be to buy government bonds in provinces that have yet to downsize and cut spending . . . if one can be found.