Shirley Won

Globe and Mail Update Published on Friday, May. 07, 2010 4:51PM EDT Last updated on Friday, May. 07, 2010 4:53PM EDT

After a week of volatility and fear, The Globe and Mail asked three money managers to look ahead to next week and beyond for their outlooks

Eric Sprott, hedge fund manager and chief executive officer of Sprott Inc.

Stock markets will eventually plunge through the March 2009 lows because the financial crisis that reared its head in 2008 and recently again with the Greek debt crisis is clearly not over, says Mr. Sprott.

“We pretended we solved the problem but we didn’t,” he said. “As you look six months forward, I think markets will sell off quite a bit, and in fact I would even…say we will probably break the old lows of March, 2009. That could be in a year. That is how grim it is.”

The financial crisis got papered over, but did not disappear, he contends. “We just essentially took it off the books of private enterprise or the banking system and gave it to governments. And of course the governments are being questioned because they have all these liabilities and own all this toxic waste so now people now won’t buy their bonds…The markets all of a sudden have come to appreciate that we have a problem out there, but we have always thought that there was a problem.

While reluctant to prognosticate on the markets next week because of what could transpire over the weekend, he noted that “we are in bear markets in probably the majority of countries right now. And bear markets don’t end quickly…

“The FTSE, CAC 40 and the Chinese market, for sure, are in a bear market. The Chinese market has been going down since August of last year. Most people are not aware of that. That is theoretically your leading economy and their stock market is in bear market.”

The world is now grappling with the fact that sovereign risk is a very major problem – that governments can’t repay debts that they have run up, he said. “That is why you have the crisis in Greece and that is why it has spread.”

If the European Central Bank (ECB) uses its so-called “nuclear option” of buying Greek government bonds “which is simply the printing of money,” then gold would skyrocket as well as silver, Mr. Sprott predicted. “I think the markets would continue to sell off because they realize that this formula would not work. This could be creating almost a hyper-inflationary situation.”

Ian Ainsworth, portfolio manager with Mackenzie Financial Corp.

Stock markets will remain volatile until there are signs that the contagion from Greece’s debt problem will be limited, said Mr. Ainsworth.

“But if we can limit this to Greece and get the European Central Bank to vocally support the other problem countries, then we could see a rebound [in markets] given what see in the U.S. economy,” he said, referring to Friday’s strong job creation numbers.

But there is also a problem in the Chinese economy lurking in the background because that country is going through a tightening phase. Its real estate market is inflated, he added.

“Their pricing has shot up from the stimulus that they created, and there is a lot of debt created in last 18 months in China that was created for infrastructure at the local level. It is fairly opaque and not transparent as to what the condition of that debt is. It is sizable but it is backed by land as collateral. As land prices start to go down, that could be an issue as well.”

Mr. Ainsworth is cautious on markets. “I think you have to be cautious,” he said. “It’s a fairly fragile financial structure that we've got in Europe and even in America with continued problems in commercial real estate and secondary mortgages. We face the risk of rising pressure on rates…at time when we are just recovering from the last crisis…

“But it could turn positive if we get some good economic numbers out of the United States, and some kind of comment from the ECB and China,” he said. “This is not to my mind as severe a situation as we had with Lehman. I don’t think this is as severe as the credit crisis created by the bubble in the housing market in the United States – at this point.”

Chuk Wong, a portfolio manager with Goodman & Co. Investment Counsel and manager of the Dynamic European Value Fund

Political and economic uncertainties plaguing Greece and other European countries will keep markets there on a roller-coaster ride in the near term and that sentiment will likely spillover into North America, said Mr. Wong.

“The markets will be volatile,” he said. “They will be more news… in the near term because of the uncertainty in Europe. It will affect North America because all markets are correlated. But Europe is going to be more volatile than in recent past.”

Political uncertainty is a risk too. The failure to obtain a clear majority in the Thursday’s British election raises questions about whether there is enough will to push ahead with fiscal restraint, while Sunday’s election in Germany’s most populous state could see voters indicate anger over the Greek aid package, he said. “Those are the near-term uncertainties and markets usually don’t like uncertainty.”

Over the medium term, there is uncertainty about Greece’s financial problems, and potential spillover into other euro countries he added.

“I think the market was hoping for the European Central Bank to be more pro-active or aggressive [in dealing with the crisis], and they are disappointed with ECB inaction right now.

“If the Greek situation gets out of control and there is contagion, perhaps we might have a bigger crisis,” Mr. Wong said.

Given what policy-makers learned from the collapse of Lehman Brothers in 2008, “my expectation is they should be more pro-active and come up with something to contain the crisis,” he said.

“With the currency depreciation in the pound and euro, I think that it is going to benefit Europe. I think that is something that market may be underestimating because it will help Europe as a whole to be more competitive on a global basis.”