What a New Year it has become. As we put 2018 behind us, we look forward to what 2019 has to bring. The year has started off by rebounding from the worst December since 1931, to the best January since 1987. This came off the optimism of everything that brought down the market at the end of the year will be fixed throughout the coming year. With the US and China trying to work out a trade deal and with the US Federal Reserve holding off on interest rate increases. This has renewed hopes around these sensitive issues for investors, resulting in money pouring back into the market to take advantage of the lower prices.
As the numbers from various countries slowly get released, the market did get it right in stating that global growth is slowing, partly due to the US/China trade war and growth cycle is maturing. However, where most investors got it wrong, was that this does not appear that it will lead to a recession like many believed, but rather a slowdown. Looking back, a market correction which is a normal occurrence from year to year, made sense after the fact. We haven’t really experienced anything like it since 2015, which is less likely than it actually happening.
The US was front and center all year in 2018, starting with their trade war with China. This January it was stated the US and Chinese officials have begun to meet, in order to try and work out a deal to put an end to the trade war. This has really put a strain on the Chinese economy, slowing their GDP growth to 6.4%, the lowest levels since 2008 when it was slightly above 6%. The US has not released their numbers, but it is expected to have slowed to 2.7% after posting above 3.4% in the second and third quarters of 2018. While the trade has helped in the slowdown, neither economy was expected to run at those levels consistently and was predicted to drop slightly even before the correction. With all this going on, the US Federal Reserve came out to start the year, by setting the stage that they would not be raising rate as quickly as previously thought. By the end of January, they came through on this statement and decided not to raise rates and would be now going with a wait and see approach rather than a predetermined rate path. This showed at least one part of the US government has a reasonable head on their shoulders, but if the last two years have taught us anything, for every step forward we must expect a step back. January brought us the longest US government shut down ever! Which has lasted an outstanding 35 days, until recently when they decided to sign a 3-week extension, so they can try and reach a deal on looming US/Mexico border wall. By the end of this, the cost to the government could be in the billions and might have been cheaper to just build the wall.
China, taking the brunt of the trade war has taken to action pledging to slash taxes on small firms to try and stimulate their economy. They have also plan to step up fiscal spending this year and loosening fiscal policy. The Chinese in the past have been very active in creating stimulus whenever the economy appears to be slowing and once again are quick to try and help their economy. If a trade deal cannot be reached, they will most likely push for many expansionary measures with further government spending and monetary easing. This is a bullet in the chamber that the US does not have as their rates are extremely low and they have already done a large tax cut to start 2018.
We have been monitoring the BREXIT situation and they have gone through more votes of confidence, more votes on plans and more votes on votes then we can possibly count. At this point, we are not sure if this is a British government or a season of Survivor. At this point, Plan A of Brexit has been voted down and they are on Plan B, which they are working on but are under the gun with the March 29th deadline looming. With every coming to a head we know a few things, there is presently no good solution for BREXIT and a hard exit would be bad for both Britain and the EU. Knowing this, we are leaning to the most likely solution would be to kick the can down curb and extend the deadline. This has been a mess, but it appears the majority of the damage has already been done as financial institutions have shifted and moved about a trillion US dollars’ worth of assets outside of Britain and into the European Union. This represents about 10% of the total UK banking assets and many of the large institutions have already moved their head offices out of London and into different areas of the EU.
While globally Canada was one of the worst-performing economies last year, 2019 has started with a bang. Which is great to see, but we still have a lot of work to do to get our sluggish economy moving. In Canada, we have three main segments of business, Real Estate, Manufacturing and Mining/Oil and Gas. We are coming off a very gloomy picture, but hopefully, there can be some renewed optimism this year. Firstly, real estate while slowing does not appear to be crashing. This unfortunately, is the biggest wheel in our economy, as it is also tied to our financial sector (the fourth largest segment). The Canadian government knows this and is doing everything it can to prevent a real estate crash, with tighter lending, higher rates and tighter investment property rules they trying to keep the prices from rising too high which would most likely lead to a crash. While your house may not be appreciating by leaps and bounds like it has to the past 10 years, at this point very slow growth or stagnant prices would be preferred. Secondly, the manufacturing is a delicate area and why we have always been preaching that the government should be more competitive. The Canadian government announced last year that they would be cutting taxes on businesses to “keep pace” with the US. This move is vital, given the current US protectionist view. Lastly, our struggling mining and oil/gas sector hopefully will feel some relief this year. This could be the key to a strong year for Canadian companies. Last year, the macroeconomic trend was the US was going to aggressively raise rates and cut taxes, with this it would be expected that the US dollar would increase in value. An appreciating US dollar is a headwind for commodity prices and will dampen any rise and worsen any drop. From an outsider looking in it would not make much sense to invest in a Canadian oil company if you expected
1. The Canadian currency to depreciate vs. the US dollar
2. The commodity to face some headwinds.
This gets amplified with a global slowdown and lesser demand for oil. Fast forward to this year, we have a US Federal Reserve that will not raise rates as quickly and is on a wait and see approach. Also, maybe the slowdown isn’t as bad as expected. The results? The Canadian dollar has appreciated about 3.9% vs. the US dollar this year, oil has appreciated about 16.5% this month and gold has increased about 2.4% this year. While the month is a small sample size and this trend may not continue for the entire year, Canadian resource companies might have a brighter year than last year.
In summary, both China and US want a resolution to the trade war because it will benefit them both, BREXIT seems to be one of the biggest blunders in history, we are more optimistic on Canada than in the past and they should probably just give Trump his wall because it will probably be cheaper in the end.
We would like to thank everyone for battling the elements and coming out to our Poker event in January. The grand prize winner, in the end, was Malcolm Wong, a client and potentially the best accountant on the east side of this continent. Malcolm, battled back many times through the night getting down to his last chip numerous times. But he survived clinging to the timeless quote: “All I need is a chip and a chair” – Maryanne F.
Konrad, Justin, and Merriel
More articles and information is available at www.lkwealth.ca
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, Reuters
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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