The economy and investment opportunities should improve in tandem through the rest of the year and into 2005 says ABC Funds portfolio manager Irwin Michael.

In his latest quarterly newsletter the renowned value manager says, “It is our view that both the Canadian and U.S. economies have been building a strong base for the next run of economic improvement. While we expect some financial volatility and uncertainty to remain, we continue to foresee improving economic and investment prospects for the balance of 2004 and into early 2005.”

The risk includes inflation, fears of rising interest rates, the questionable longevity of a Canadian federal minority government, a too-close-to-call U.S. November presidential election, the Iraq uncertainty and international terrorism, but Michael notes that equity markets have nonetheless demonstrated remarkable resiliency.

“While many investors have been fixated on the unrelenting economic, political and investment uncertainty, corporate profits have been quietly improving,” he says. “Admittedly, although not totally across-the-board, the most recent quarterly earnings results have generally been quite good. Moreover, corporate balance sheets through prudent management and opportunistic fixed income and common equity financings are probably in the best shape in several decades.”

“In a nutshell, corporate profits have been improving due to a number of factors such as: declining production costs through greater labour productivity, significant administrative cost cutting, lower financing charges due to the lowest interest rates in almost 50 years and stable product selling prices. These bottom-line improvements appear to be holding and we expect that these trends should continue at least into the first half of 2005,” it says. “Moreover, if the North American economies continue to accelerate with 4%+ growth rates over the next year, we should expect increasing business operating leverage to produce even greater corporate profits. By extension, this should effectuate higher common stock prices.”

Michael predicts continued stock market volatility for the balance of 2004, but remains optimistic on the market outlook. He says he’s attempted to maintain a maximum 5%-10% cash reserve in the three ABC Fund portfolios. “We have made a number of security switches to take advantage of temporary market anomalies. At the same time we have persisted on our disciplined hunt for deep-value common shares to augment our portfolio returns,” he says, noting that it has sold Ampco-Pittsburgh Corp., Gaylan’s Trading Co., Gehl Company, Lassonde Industries, Norske Skog and Transat AT Inc. And, bought: Canfor Corp., Canwest Global Communications Corp., Laurentian Bank, Lionore Mining, Morguard Corp., and the Phoenix Companies.