A new year is upon us as January brings in new political leadership lead by President Trump and a new set of economic and political uncertainties. Though there are many people that are scared, we do not foresee a doomsday scenario but rather an opportunity for the new administration to enhance the economic welfare of the US. They are our biggest trading partner and with Trump focusing on ripping up NAFTA (North American Free Trade Agreement) it has everyone wondering what will happen with our partnership. So far, it seems that most of the plight is directed towards Mexico due to their massive wage inequality.
The mandate is to reduce taxes, tighten immigration and “protect” American jobs (make manufacturing overseas more expensive). All this is in line with his original plans, although he is receiving more political push back the further he goes.
Canada had a pleasant surprise with President Trump approving the Keystone Pipeline project that was put on the shelf by President Obama. Oil prices were down a bit for the month but it seems like it may be stabilizing as OPEC’s production cuts are making an impact with Russia cutting more than expected recently.
We hope you enjoy this month’s market review and if you have any questions, please do not hesitate to ask us.
Sources: Thomson Reuters, Bloomberg, Google Finance, Trading Economics, Investopedia, National Bank, Yahoo Finance, Forbes
The most notable developments this month have been the following:
A couple of headlines in Canada this past month were the approval of 3 pipelines Trudeau signed off on and the upcoming anticipated changes in NAFTA. Economically, Canada has posted a few bright spots to start the year. Exports unexpectedly rose with higher numbers primarily in the materials sector as global demand grows, thus pushing the loonie higher. While oil prices were down for the month the price does appear to be stabilizing with OPEC putting forth a serious effort to keep prices above $50. On the downside, unemployment approached 7% again and with a currency strengthening we can continue to post positive results.
– This month’s best performing sectors are Telecommunications, Basic Materials, Utilities and Financials.
– Canadian dollar closed higher at $0.768, up 3.22% against the US dollar.
– PM goes against his word and approves 3 pipelines that angers environmentalists.
– Oil went down for the month, but looks to have stabilized around the $50 mark.
– Unemployment rises to 6.9% again from 6.8% with jobs being lost in the agriculture sector.
– Canada had its first positive trade balance since 2014, mostly due to higher metal, potash, and iron ore exports.
– Canada left its overnight lending rate unchanged as expected, would like to see inflation at 2% before it considers a raising rates.
The new President wasted no time in making changes and we should expect more as we get deeper into this new administration. Other than the immigration policy being under heavy criticism, he plans on implementing more pro-business policies. However, the uncertainty continues to be the problem of what he will do next and how will everyone react. During all this, the U.S. economy continued to expand at the end of last year according to the Bureau of Economic Analysis. As Q4 GDP showed growth of 1.9% annualized and is expected to increase to a target of 2.2% for 2017.
– This month’s best performing sectors are Consumer Discretionary, Basic Materials, Technology and Healthcare.
– US factory activity and manufacturing were up.
– The labour markets continue to be strong with the private sector now accounting for 84.7% of total employment, which is the largest share since the early 1960â€™s.
– The wage inflation rate came in as 2.9% in 2016 (7 year high).
– Continued strength in consumer spending, housing and now business investment offset weaker trade numbers.
– Inflation over 2%, highest since June 2014.
– President Trump re-iterated his desire to build a wall between the US and Mexico border. Most people are unaware that President Bush started the wall and had built 700 miles already. President’s Trump’s initiative would therefore only extend an existing wall.
– NAFTA executive calls for separate agreements for each country.
Key People in Trump’s Camp
All People in Trump’s Camp
The rest of world does appear to be on a wait and see approach. They are waiting on a new US trading policy, the outcome of BREXIT and future of the European Union. Interest rates remain low and steady and economics do not suggest this will change soon. China has mentioned that a high tax on US exports will hurt their economy, but will strengthen their ties with the rest of the world. The US should be weary of placing themselves in a dark room to quote the president of China.
– China’s GDP Annual Growth at 6.7% for 2016 is within their government’s expectations. This was 0.2% lower than in 2015 as it continues to become a more mature economy.
– Russia’s unemployment rate fell to 5.3% last month providing a positive surprise on market expectations while its exports increased by 4.9% (11 month high).
– EU unemployment decreased to 9.6% below the 9.8% the market expected, with most unemployment falling in Croatia (15% to 11.4%), Spain (20.7% to 18.4%) and Portugal (12.2% to 10.2%).
– EU GDP beats expectations where growth picked up in France, Belgium, Latvia and Lithuania. Germany, the biggest economy in the Euro Area has yet to release their numbers.
– Central banks from the EU, Japan, India and the United Kingdom all left their rates unchanged.
– The UK’s Parliament has yet to fully agree on the BREXIT exit strategy with various deadlines in its sight that need to go smoothly in order to go ahead with the proposed exit sometime in 2019.
Eye on the month ahead
– Will BREXIT play out? Will the UK put together an agreed upon plan or will there be chaos? With all of Europe watching, a transition could deter other countries from breaking out of the EU.
– NAFTA will likely come to a close soon, many wonder what will the new agreement look like?
– Can Oil prices stabilize, or will further production cuts be required?
– Will the US implement a tariff on imports and how would the rest of the world react?
We continue to believe that a globally balanced portfolio is the best approach. 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. Further diversification outside of publically traded securities can also potentially enhance returns while minimizing the volatility of a portfolio.
NAFTA what is it?
NAFTA or the North American Free Trade Act was implemented by creating a trilateral trade bloc between Mexico, the United States and Canada and came into effect on January 1st 1994. This superseded the Canada-United States Free Trade Agreement which did not include Mexico. It was originally signed by President George H.W. Bush, Prime Minister Brian Mulroney and President Carlos Salinas in 1992. Prime Minister Jean Chretien was elected in 1993 and did not agree with NAFTA, but negotiated two supplemental agreements to fast track the bill.
The agreement was meant to slowly phase out tariffs on exports over the borders (most US-Canada trade was already duty free) and protect intellectual property in each country. Also, it allowed for transportation to pass through the US from Mexico to Canada and vice versa. Left out of the agreement, was agricultural products (which is common for international trade agreements), which benefited Canada the most as we export a lot of agriculture to the US and Mexico.
Donald wants to tear it up, Bernie Sanders wanted to tear it up, Hilary Clinton said it has not lived up to its promises. One way or another NAFTA was on its way out. Given that Mexico and Canada are too completely different economies it would be expected that two separate agreements will come out of this.
Mexico has been the biggest benefactor of NAFTA, manufacturing plants have increased by 15% since NAFTA and trade within North America has increased by 118%. Also, 80% of their exports are now going to the US.
The effects on the US are up for debate with increased trade but also a decrease in jobs, as many manufacturing ones did leave to Mexico. It has helped their services deficit as Mexico and Canada are net employers of American labour but has resulted in the US now importing approximately $100 billion from the others.
Overall, if you were to look at the three countries combined, NAFTA has probably improved the combined total economy. There was very little change between Canada and the US, with very similar demographics and stages of development. A more drastic change was between Mexico and the US, two countries in close proximity with significant gaps in average wages and development. Although Mexico has closed this gap, it would be likely that separate agreements will be set up between the three countries as the US tries to “protect” its jobs.
Lightening the mood, but with a serious message
Konrad, Justin and Merriel
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