The end of the TSX Venture BEAR market?

By Ryan Fletcher
Director
Zimtu Capital Corp.

For the past year there has been no shortage of bad news in the media – from the European sovereign debt crisis, to a potential Chinese economic hard landing to the U.S. fiscal cliff (and even the potential for the end of the world with the Mayan apocalypse). Naturally, people tend to pay more attention to bad news and we perceive negative news as more important or profound than good. While there may be some credence to some of the negativity over the past year, it may be a surprise to some that global equity markets were surprising strong in 2012.

Equity markets around the globe rallied in 2012, with some of the strongest returns coming from markets in Europe; markets that were supposedly in the heart of the storm. In Germany, for example, the DAX Index returned an impressive 29.1% on the year, which was supported by mostly double digit gains across the rest of the Europe. The strongest returns in Europe, however, came from the most unlikely of places - Greece, with the ATHEX index leading Europe and jumping 33%.

It was not Europe alone that rallied. Around the globe, counter to what all of the negative media would suggest, markets rallied. In Japan, the Nikkei jumped 22.9%; in India, the BSE Sensex 30 Index popped 25.7%; and in the U.S. the Dow Jones advanced 7.3% and the Nasdaq added 15.9%.

TABLE: 2012 MARKET RETURNS

	YTD	1 Mnth	3 Mnth	6 Mnth	1 Yr
North American Indices
S&P/TSX Composite Index	4.0%	1.6%	0.9%	7.2%	4.0%
S&P/TSX Venture Composite Index	-17.7%	0.0%	-8.5%	2.5%	-17.7%
S&P 500 Index	13.4%	0.7%	-1.0%	4.7%	13.4%
Dow Jones Industrial Average	7.3%	60.0%	-2.5%	1.7%	7.3%
Nasdaq Composite Index	15.9%	0.3%	-3.1%	2.9%	15.9%
European Indices
FTSE 100 (UK)	5.8%	0.5%	2.7%	5.9%	5.8%
CAC 40 Index (France)	15.2%	2.4%	8.5%	13.9%	15.2%
DAX Index (Germany)	29.1%	2.8%	5.5%	18.6%	29.1%
Asian Indices
Nikkei 225 Index (Japan)	22.9%	10.0%	17.2%	15.4%	22.9%
Hang Seng Index (Hong Kong)	22.9%	2.8%	8.7%	16.5%	22.9%
Shanghai SE Composite Index (China)	3.2%	14.6%	8.8%	2.0%	3.2%
BSE Sensex 30 Index (India)	25.7%	0.4%	3.5%	11.5%	25.7%
S&P/ASX 200 Index (Australia)	14.6%	3.2%	6.0%	13.5%	14.6%

 As at December 31, 2012 - Price Returns in Local Currency
Source: Bloomberg

Despite the wall of worry, commodities also fared quite well with gold up 7.1% over the year, silver increasing 9.0% and copper up 4.2%; with big percentage gains also seen in zinc, natural gas and agricultural commodities such as wheat and soybeans.

TABLE: 2012 RETURNS - COMMODITIES

	As at 31-Dec-12	YTD	1 Mnth	3 Mnth	6 Mnth	1 Yr
Energy
Crude Oil - WTI Spot (US$/barrel)	$91.82	-7.1%	3.3%	-0.4%	8.1%	-7.1%
Crude Oil - Brent Spot (US$/barrel)	$111.94	4.1%	-0.1%	-1.2%	15.4%	4.1%
Natural Gas - Henry Hub Spot (US$/MMBtu)	$3.44	15.4%	-0.6%	12.4%	25.5%	15.4%
Precious Metals
Gold Spot (US$/oz)	$1,675.35	7.1%	-2.3%	-5.5%	4.9%	7.1%
Silver Spot (US$/oz)	$30.35	9.0%	-9.2%	-12.0%	10.4%	9.0%
Base Metals
Copper - LME Spot (US$/lbs)	$3.59	4.2%	-0.9%	-3.7%	2.8%	4.2%
Nickel - LME Spot (US$/lbs)	$7.71	-9.2%	-3.4%	-7.7%	1.8%	-9.2%
Zinc - LME Spot (US$/lbs)	$0.93	12.2%	1.0%	-0.7%	9.0%	12.2%
Agriculture
Corn - 1 Month Futures	$6.98	8.0%	-6.7%	-7.7%	3.8%	8.0%
Wheat - 1 Month Futures	$7.78	19.2%	-7.9%	-13.8%	5.3%	19.2%
Soybeans - 1 Month Futures	$14.19	18.4%	-1.4%	-11.4%	-6.2%	18.4%

As at December 31, 2012 - Returns in US Dollars
Source: Bloomberg

With global equity markets booming and some commodity prices still on the rise one could have expected that the TSX Venture would have had a decent year. The exact opposite, however, was the case as fear and uncertainty gripped the market and capital fled the higher risk small cap sector. The S&P/TSX Venture Composite Index posted a decline of 17.7% on the year and many companies struggled to raise capital to continue their exploration programs or were forced to complete excessively dilutive financings.

Success in investing on the TSX Venture requires a unique combination of hard work, experience, smarts, timing and the ability to work contra the herd. As investors, typically we pay more attention to, and give more credence to bad news, perhaps because we’re wired that way.

2012 was not a bad year for global equities. This may be a surprise to some, given the barrage of bad news we have been fed over the last year. Small cap markets typically follow the large and mid-cap markets and the performance of the major global large cap indices in 2012 is positive moving forward for the small caps. There are many companies on the TSX Venture that are trading at levels not seen since the height of the fear and panic of the 2008 financial crisis. Those willing to walk contra the herd may see the opportunity.

S&P/TSX Venture Composite Index – 3 Years

Ryan Fletcher
Director
Zimtu Capital Corp.

Ryan Fletcher is a director of Zimtu Capital Corp. (TSXv: ZC; FSE: ZCT1), a Vancouver-headquartered public investment company that creates, invests in and grows resource companies. Mr. Fletcher has been responsible for identifying and sourcing projects, structuring companies and investments, marketing group companies and business development. He is a graduate of the University of British Columbia Okanagan with a Bachelor of Arts in Economics. Before joining Zimtu in 2009, Mr. Fletcher worked as a consultant for publicly listed mineral exploration and development companies and a boutique private investment firm focused on the mineral exploration sector.