Murray Leith `

Vice-President and Director, Investment Research, Odlum Brown Ltd.

Large-cap stocks

Look to the U.S. to capitalize on its improving economy

One-year return, Odlum Brown Model Portfolio: 28.23%

murray Leith is known for worrying about downside risk, but he didn’t spend much time following last fall’s budget battle in Washington. “The really important thing is that the U.S. deficit has gone from 10-and-a-half per cent of GDP at its worst in 2010 to four per cent today,” says Leith, creator of the Odlum Brown Model Portfolio, a hypothetical equity portfolio whose holdings typically include between 40 and 50 large-cap stocks.

“The U.S. economy is making forward progress, and that’s what matters,” Leith asserts. “We’ve always been in the camp that the recovery is going to be long and drawn out,” he says. “That’s what we think we’ll continue to have in 2014.”

Leith has no time for what he calls today’s obsession with macroeconomics. “You would think with that obsession that there’s actually a strong correlation between the economy and the stock market,” he says. But Leith argues that there’s an inverse relationship between the two. He cites China, which has had one of the world’s worst-performing stock markets over the past few years but also one of the fastest-growing economies. “The reality is that stocks can do just fine in a muddle-through economic environment, as they have ever since the bottom in March of 2009.”

As of October 15, 2013, the Model Portfolio, which advisers and portfolio managers at $8-billion Odlum Brown might track closely or mine for investment ideas, had delivered a 15.3 per cent compound annual return since its 1994 inception. Over the previous year, it had gained 24.3 per cent, a performance that long-term investor Leith says was driven by decisions made before the 2008 financial crisis. Back then the portfolio diversified out of Canada by investing in U.S. multinationals at attractive prices.

Leith believes that if the Chinese economy loses steam, it could be positive for the U.S. and for stocks that Odlum Brown likes. “It’s going to mean less inflation, and less inflation means a tax cut at the pump for consumers,” Leith says. “It means less pressure on interest rates, which helps keep the recovery alive.”

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