SmallCapPower.com interview with Mr. Steven Palmer of AlphaNorth Asset Management.
In your last interview, you talked about your fund and your investment methodology. You also commented on the market conditions and how you go about looking for good investment opportunity. We would like to ask you a few questions to continue the conversation in our monthly series- “Steve Palmer Interviews with SmallCapPower.com”.
SCP: With summer coming to an end and people back to work, do you think that markets will provide better indication as to the directions it will take for the remainder of this year? What do you see so far and how do you see capital markets faring in Canada and other parts of the world?
Steve Palmer: I think strength in equity markets will surprise many investors. We expect equity markets to rise over the next two to three quarters.
SCP: Do you think that recent reports from the US are optimistic and signal that probably it is not as bad as people were generally thinking just a few weeks ago and the scenario for the US economy experiencing the so-called double dip recession are remote?
Steve Palmer: A double dip recession is a possibility. However, we believe the odds of this are remote. In recent weeks, the GDP growth forecasts in the US have been lowered. We think this will now stabilize in the 2% range. The recovery will be modest compared to a typical recovery.
SCP: What is your outlook on Canadian markets, especially related to commodities?
Steve Palmer: We think commodities will be strong and currently favour investments in the energy and rare earth sectors. We are not gold bugs and believe that gold will underperform in the near term. Canada will likely be one of the best performing equity markets in 2010.
SCP: Which sectors you consider favourable for investment during the next few months? Has your outlook changed from last months in this regard?
Steve Palmer: Our outlook has not changed in the past month. In fact, markets are behaving as we projected. The TSX has climbed back above 12,000. We believe there is more upside over the balance of the year.
SCP: Last month you had expressed doubts about the strength in gold prices. Gold continues to stay strong. What do you think is giving gold such strength?
Steve Palmer: Gold has moved up a little bit, but on a percentage basis the move is small. Gold is only up 3.5% over the past month. Even if we are wrong and gold continues to move higher, we think there are other commodities which will do much better on a percentage basis such as oil and uranium for example. We think gold will have a tough time making new highs for the year.
For investors, what would you suggest to be a right investment approach with regards to small cap investing in current market which remains to be volatile and choppy?
SCP: Steve Palmer: I don’t necessarily believe that small cap equities will remain volatile. After the typical summer weakness which saw the TSX Venture index decline by approximately 20% from the end of April to early July, the TSX Venture has been moving almost straight up since that time. The TSX Venture is up 18% since July 6. We believe that the odds favour continued strength in this index into year end.
SCP: Are there a few companies that you think have good prospects or you have liked in the recent past?
Steve Palmer: Junior energy firm Primary Petroleum Corp (TSXV: PIE), which has a large land position in Montana which is highly prospective to host oil in the Bakken formation. Evidence continues to build which supports this thesis.
We have been adding significantly to our positions in Ucore Rare Metals Inc. (TSXV: UCU) and Stans Energy Corp (TSXV: RUU) over the quiet summer months. Both companies have very prospective properties hosting rare earth metals. Rare earth metals are used in the technology industry. China has been tightening their exports of these metals, the Western world is going to need to source new supply outside of China.
In recent years, emerging economies like China, India and Brazil have become much bigger and are growing at a fast clip. Do you think there could be ways to tap into their success from small cap investing perspective and if yes, how can that be achieved?
Steve Palmer: Continued strength in the BRIC economies (Brazil, Russia, India and China) will be the primary driver to push commodity prices higher. This will have the most beneficial impact on Canadian equities as the weighting of resource companies is higher in Canada than most countries. The majority of small cap Canadian companies are resource companies which will benefit strength in resource prices.
Disclosure (Steven Palmer):
I personally and/or my family and/or AlphaNorth Asset Management may own shares of the companies mentioned in this interview.