Market Review for 1st Half of 2017
The Positive Momentum for Global Markets
With Dutch and recent French elections going according to plan and Donald Trump firing the FBI director for investigating his dealings with Russia, it’s hard to sometimes remind ourselves that the global economy matters more than politics. The health of the US economy and earnings matter more than the recent political woes and the Federal Reserve’s constant spotlight.
The U.S. economy is bouncing back after a hiccup at the beginning of the year. With solid employment numbers and retail numbers that were also strong. Discretionary spending grew at its fastest pace in three months. With the U.S. GDP growth set to be greater than 3% annualized this year, the June increase was expected and on schedule. The added benefit of the U.S. dollar falling to a 7 month low also allows the Fed to increase rates (which it raised rates by 0.25% in June) without unbalancing global trade.
The global economy performed well in the past 3 months with both developed and emerging economies reporting stronger growth and showing the effects of fiscal and monetary policy. World trade volumes grew again in the 1st quarter of this year capping a 5% increase in the last 9 months which is the largest increase since 2011.
As China has been devaluing its currency for the past few years, their export sector and specifically their factories have started to benefit again from a very competitive exchange rate as their exports rose 8% year over year in April. Their domestic economy also posted decent numbers thanks to their growing consumers as evidenced by domestic retail spending growing by 11% year over year in April. With their housing stabilizing recently, they are projected to grow 6.9% this year.
Canada’s economy posted a headline grabbing 3.7% annualized GDP figure in the 1st quarter of 2017 sparking discussions to raise rates domestically. However it is important to note that we still over rely on domestic consumption that is being fueled by debt as Canadian’s are one of the most indebted consumers around the world. As housing makes 17% of our GDP, the latest numbers to come out of the Greater Toronto Area are a 12.2% decline in housing prices from April’s highs. However, the Toronto housing market is still up 6.7% year over year compared to the high of 33% in April.
If you have any questions, please do not hesitate to ask us.
Sources: Thomson Reuters, Bloomberg, Google Finance, Trading Economics, Seeking Alpha, National Bank, Yahoo Finance, CFA Institute
The most notable developments this month have been the following:
Canada’s economy continues to be stronger over the past 3 months that have sparked talks about the Bank of Canada raising interest rates for the first time in years. In addition, our labour markets have not seen job creation at this rate since 2013.
- The best performing sectors in the past quarter are Consumer Discretionary, Utilities, Healthcare and Industrials.
- The Canadian dollar rose past quarter against the US dollar. It stands at $0.77148 versus $0.74749 from 3 months ago. An increase of $0.02399 or 3.2%. Many managers we have talked to are tracking the Canadian dollar between the ranges of $0.60 to $0.80 versus the U.S. dollar when making their currency predictions.
- In the past 12 months ending in May, Canada has created roughly 26,000 jobs per month on average, which is the best since 2013.
- The one blemish on the job growth however is that wage date has shown very little change in comparison.
- The Canadian housing market has been cooling from its frenzy pace with a growth rate of 6.6% year over year in June. It is a welcome relief, but even with latest cool down according to the Teranet-National Bank house price index, residential homes have tripled since 2000 with Vancouver at 3.7 times and Toronto at 3.4 times causing affordability in those two cities to dwindle.
- There have been hints by the Bank of Canada that an interest rate hike may be on the table. Like the U.S. Federal Reserve, we can expect that a lot of factors will be considered before a hike transpires. One of the major catalysts will be the timing of the recovery of oil prices. Not a necessity, but a likely roadblock if it does not recover.
- Current crude oil (sweet) prices are at $46.04 per barrel, a decrease of $4.20 or 8.36% from $50.24 in the last 3 months.
- Gold fell but not as steeply in the past 3 months, as it went from $1,254.00 to $1,242.30 equating to an $11.70 drop or just under 1%.
The last quarter continues to improve for the U.S economy which explains the Federal Reserve’s decision to raise rates in June while increasing their growth forecasts. As jobless claims continue to lower and many companies revising their projections up, there should be continued upside in the US economy.
- The best performing sectors in the past 3 months are Financials, Industrials, Healthcare and Technology.
- As expected, the Federal Reserve hiked rates at its last meeting in June. The rate changed from 1.00% to 1.25%. There are expectations of 1 more rate hike in 2017.
- Industrial output has increased by 5% annualized in the last quarter, the biggest jump in 3 years.
- The U.S. labour market continues to get better as non-farm payrolls jobs increased for an 80th consecutive month in May. The jobless rate stands at 4.3% which is the lowest in 16 years.
- Current GDP growth revised up to 1.4% annualized in the 1st quarter, with some expecting growth above 2% annualized over the coming 2 years.
- But not everything is going well, as trade which was contributing growth towards the 1st quarter GDP numbers has been sluggish as per the April data.
- Residential construction also looked weaker as housing starts fell. This could be as a result of the increased borrowing costs from the Federal Reserve raising rates or it could be a temporary slowdown. Time will tell.
The global economy has been moving upwards in the right direction by both advanced and emerging economies. Expectations set by many analysts continue to project global GDP growth to be around 3.5% annualized for both this year and next.
- Current GDP in the Eurozone is 1.90% with last Quarter producing a 0.6% GDP result, showing that the Eurozone is heading in the right direction as the previous quarters have been 0.5%, 0.4% and 0.3% respectively.
- Unemployment rate in the Eurozone fell to 9.3% (8 year low) from 9.4% from the previous quarter. It was 9.6% at the start of 2017.
- China’s exports unexpectedly rose 8% year over year in April while their domestic economy also posted decent numbers due to internal consumption has China posting 6.9% GDP numbers year over year with targets for 2017 being set as 6.5%.
- As a result of the positive number above, China’s stock market the Shanghai 240 has rebounded and bounced back from its lows in May of this year.
- In June, the UK had an election with the goal to strengthen their resolve on Brexit, but the outcome was the opposite of what Prime Minister Theresa May had in mind and a majority government was lost complicating the upcoming Brexit negotiations.
- The UK GDP expanded to 2% year over year in the 1st quarter of 2017 following a 1.9% growth in the previous period. Business investment increased for the first time in over a year, while household spending slowed and net trade contributed negatively.
- Unlike the UK, French elections in April were less scary for the global economy as Emmanuel Macron won the presidential vote.
Eye on the Month Ahead
- With the added complexity of an election loss in the UK, how will Brexit be affected and what sort of penalties will be implemented by the Eurozone on the UK’s economy?
- The re-drafting of NAFTA is still upon us, we have already seen added tariffs by the US on Canada’s lumber industry.
- When will oil prices stabilize and move upwards, or is demand waning as the supply glut continues into 2018?
- So far Trump’s proposed tax plan and health bill failed to gain traction and it may be some time before any real changes take place.
We continue to believe that a globally balanced portfolio is the best approach with equities favoured over fixed income as bonds enter into a difficult long term environment. We favor the US over Canada as the U.S. economy continues to outpace ours and if they continue to raise interest rates this would lower the Canadian dollar further. However, there is talk that Canada may raise rates and the loonie has been increasing its value versus the greenback in recent months. While Canada will be intriguing in the short term the long term growth prospects are limited. The Eurozone presents an opportunity as valuations are more attractive than our US counterparts. Lastly, further diversification outside of publically traded securities can also potentially enhance returns while minimizing the volatility of a portfolio.
Famous Investor Spotlight
While many people may not think of the Terminator as an investor he has actually made more of his fortune through investing than acting or body building. In fact he became a millionaire at the age of 25 in 1971 and it wasn’t until 1984 when Arnold has his first million dollar movie contract from Conan the Destroyer. Arnold, while living in California noticed very quickly that many actors and people in the gym were very vulnerable to not being able to find work and he did not want to find himself in that same position. From there he took a very disciplined approach to investing and with all his savings from body building purchased a six unit apartment complex where, he lived in one and rented the rest. From that he built enough equity to sell that block and purchase a 27 unit apartment block and so on. He was disciplined in his approach and had a long term vision with a calculated investment plan. Here are some of his tips for investing:
- Have a vision
Arnold would set specific goals with a timeline and would put 110% effort into achieving that goal.
- Don’t listen to the naysayers
It’s easy to think of negative scenarios, a friend of his couldn’t understand how he had the guts to buy the rental property. His friend couldn’t fathom taking such a large risk.
- Think big
Always dream big.
- Work hard
Schwarzenegger says there is no substitute for hard work.
- Research before you invest
He studied the real estate market for a long time before purchasing his first property.
- To be successful, you must be brutal with yourself and focus on the flaws
You can only be successful with your goals if you realize what you are weak at. For Arnold it was his calves, he put so much focus on improving them he cut off all his sweat pants to always show his calves as a reminder.
- Give something back
When he became governor he donated his salary back to the state.
Konrad, Justin and Merriel