Experience. Intelligent Investing.

F E B R U A R Y 2 0 1 5
During the past few weeks I have been asked one question
more frequently than any other: what could derail the stock
market run? It is a difficult question to answer, as market
derailments are usually caused by problems investors are not
yet aware of. However, I can think of plenty of issues likely to
cause meaningful market volatility.
1. Predicting the timing of the Feds next rate increase
is currently markets primary preoccupation. If I were
forced to make a prediction, I would have to pick
September 2015 (just so we are clear). Chair Yellen
has been deliberate in her efforts to prepare markets
for the eventual rate rise. I think she would only make
THE DECISION to increase rates if she felt markets were
ready to accept the tightening. June might be too early,
judging by the current excessive market tantrum caused
by strong US employment data.
2. GREXIT - current bailout negotiations are difficult and
there is a distinct possibility they might fail. If the Greek
government resorted to a referendum, there is a good
chance Greek citizens would choose exit from the euro
region. I give this outcome a very low probability, but it
would cause plenty of uncertainty as investors deal with
the ramifications.
3. Lack of oil price recovery, or worse, another meaningful
decline in oil price would prolong economic hardship in
Russia. The appalling murder of Boris Nemtsov right near
Kremlin might act as a catalyst for the dissident movement
to gain traction. I am not sure what combination of
circumstances could destabilize Putins government, but
the fact that no one believes it to be possible is a risk in
itself.

EXEMPLAR CANADIAN FOCUS PORTFOLIO

to borrow BMOs Brian Belskis terminology to conclude that
we will most likely live in Chronic Uncertainty for many years
to come.
Having dwelled on the negatives, I believe there are good
reasons for markets to continue climbing. Current steep
energy price decline should eventually act as a global fiscal
stimulus. I expect the economy to re-accelerate in the second
half of 2015, with some progress made even in lagging
Europe - on the back of lower energy costs and a significantly
devalued Euro-currency. However, U.S. consumers will be
the major beneficiary of rising employment and favorable
energy environment. Thus my preference is to focus on U.S.
companies serving lower-income customers who benefit
disproportionately from the savings at the gas pump and
have a much higher propensity to spend these savings.
Canadian markets are currently more difficult to figure out
as the length and magnitude of current oil price correction
is a significant unknown. The Alberta economy will suffer
the consequences of depressed energy prices before lower
Canadian currency benefits manufacturers and consumers in
eastern provinces. As everyone who has talked to me knows,
I have been investing predominantly in Canadian companies
with exposure to US consumers for over a year. I will unlikely
broaden my focus until I have some certainty the oil price is
on the mend. At that point there should be opportunities in
more cyclical industries and companies which have suffered
from poor sentiment and lack of investor interest.
Thank you for your continued interest in the Fund. For further
information, please contact your regional Arrow Capital
Management representative.
Sincerely,

4. Increased frequency and severity of terrorist attacks

could distract political leaders from urgent economic
problems.

Veronika Hirsch

Portfolio Manager
Arrow Capital Management Inc.

Unfortunately, these are just a few of the most obvious (to

me) issues markets might have to deal with. Please allow me
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