The big news this month is that BREXIT has been delayed! With proposal after proposal being shut down, Britain has decided to delay their infamous BREXIT, with approval from the EU as expected. We did predict this as the most likely scenario for the two sides as no progress was being made and a hard BREXIT is not a good scenario for anyone. This temporary solution is valid until the 14th of April and we would imagine this will get pushed back once again as there isn’t a viable deal currently out there. While this was once thought to be a big change in the economic landscape of Europe, companies have spent the last two years adjusting and preparing for a hard BREXIT, so a middle ground solution may actually be very positive for the market.
With the major macro event somewhat delayed, the two other large issues (US/China trade and US/Global interest rates) have subsided slightly. Starting with trade, the US and China continue to progress in trade talks and without any real news to report, the market is having a positive reaction so far. Nobody really knows how well the talks are going, but the fact that neither country has backed away completely is a positive sign that the two sides are getting along. This will continue to be an issue going forward and something worth monitoring. While China did report a lower projected GDP this year, their most recent factory number came back better than expected which may be a sign some areas are actually picking up and potentially that the global slowdown was slightly overhyped. However, this was only one indication of economic activity picking up in China and we will need to clear more hurdles before we give the all-clear, to an overhyped global slowdown. This continued trend upwards will help the recovery of Chinese stocks that have been beaten up and also semiconductor stocks.
On top of this, the US Fed has changed its stance once again! While rates have not changed, their view on where rates may be going has slowly shifted from increasing to flat trajectory. Let’s recap:
October to December 2018 – The Fed stated rates would continue to increase and the current rate was well below the neutral rate. Which would indicate they still have a lot of room to increase.
January to February 2019 – The Fed stated they would hold off on rate increases and that they were closer to neutral than previously thought. This would indicate that they are going to increase rates soon; however, there isn’t much room to increase.
March 2019 – The Fed stated they were at about neutral; which would indicate no rate increases unless the economy and inflation begin to run up or decrease rates if the economy starts to stutter.
This is very positive news for the market and stocks. This is positive because this should bring down short-term rates as the US Fed is indicating to the market it will remain flat OR potentially cut rates. Also, it could raise the long-term rates giving us a steeper yield curve (one of the greatest recession indicators out there); which would indicate a recession is further off than originally anticipated. Besides having a positive effect on the market, this would be good for the US Financials as they give out savings rates at lower short-term rates and lend mortgages at higher long-term rates, therefore increasing their profit spread. While these are positive indications, they are quick to change their stance and this should be monitored because if inflation ticks up, we could see a reversal of this idea.
This mentality has spilled over to Europe also, who took the slowdown in December to state they would wait longer to increase rates to allow the economy more time to pick up. Canada, has also taken a similar stance more recently with the consensus of analysts thinking Canada will keep rates locked well into 2020. The major Canadian banks have also indicated they are falling into this belief by slashing fixed mortgage rates over the last month. They are usually well ahead of the curve and if they are confident enough to lower rates, it would indicate they believe that rates are not going anywhere fast.
Slowly, it does appear we are putting some of the larger macro concerns at ease, which has allowed the market to creep higher and approach the high levels we saw last year. It also helps ease investor’s minds as there have been a few positive events around the world. China has introduced about $300 billion USD worth of tax cuts and social insurance programs along with their increasing infrastructure spending. This should help them keep their economy from falling too far behind. In the US, Robert Mueller summarized his report that it appears there is no clear evidence that President Trump colluded with the Russians during his presidential campaign. This may add a little political stability/consistency in the sense that the US president will most likely not be impeached. On top of all this, we have commodity appreciation this year with oil rising to almost $70 USD a barrel and gold remains around $1,300 USD. These are usually good signs of an expanding economy with inflation.
With all this positive news, it’s not a surprise that the market has seen appreciation. Even with all this, we are not out of the woods yet and we should take the end of last year as a reminder that things can change quickly. There are some warning signs out there and some things to keep an eye on. The US unemployment rate remains very low at 3.8% and seems to be somewhat constant rather than decreasing. It will be interesting to see the longer-term trend to see if they are able to add jobs to grow their economy. If this stalls, we will need to see wage inflation to keep the economy growing. Another growing issue is global debt, something not hitting the headlines just yet, as long as economies continue to grow this won’t be an issue, but a decline in GDP could really accelerate this issue. The US debt to GDP has remained around 105% for the past few years but is expected to increase to about 108% this year on the back of the recent tax cuts and increased military spending, however, this could be offset if GDP remains strong. Canada is not as high at about 90% of GDP, but consumer household debt has increased to about 176% of disposable income which is an all-time high. Japanese debt continues to grow and now represents 250% of GDP, which seems like a very high number. However China, which has a less transparent with their numbers, because they are both the lender and borrower on a lot of their debt, as one branch of the Chinese government lends to another which lends to another and so on. This makes official numbers seem a little skewed, but the Institute of International Finance estimates their debt levels to be around 300% of GDP. While these numbers are high, it is important to keep in mind interest rates are low and when interest rates were very high in the 80s, US debt to GDP was around 30%. As stated before, at these current levels, it is not much of an issue, but it is worth keeping an eye on.
In Canada, the prediction of the Canadian dollar is that it will continue to drop (currently $0.75 US), with one major bank predicting $0.63 vs. the US Dollar during this year. This is along with our thesis of the US dollar appreciating vs. the Canadian dollar. Our real estate industry remains lower as sales dropped another 9% in February, while prices remain somewhat constant, transactions are slowing down. This could be another reason the Canadian banks have decided to drop mortgage rates in the hope of spurring additional homes sales. On top of this, our trading partners continue to give us the short end of the stick. China has recently turned away another canola order, which represents a $2 billion a year export to China, this could be in retaliation to the arrest of the Huawei CFO last December. Also, the US steel and aluminum tariffs remain and no exemption has been made on our behalf, even with the signing of the new NAFTA or CUSMA (this deal still needs to formally pass through Congress on June 14th to be official).
In stock news, marijuana companies have recently run very hot this year after a cooling-off period at the end of last year. Interestingly, January marijuana sales have actually decreased from November and December of last year, which puts into question the actual demand of the market. There will be a few catalysts in the coming year, with Ontario opening physical stores this year and beverages coming to market in October, but definitely something to keep an eye on.
BITCOIN MANIA has returned with price breaking through resistance levels recently. Could we see another run on cryptocurrencies this year? It is possible, but something that we are wary of given its history and difficulty determining a legitimate value for each one. Either way, it hopefully will bring another interesting story to read about other than Trump.
Our current investment thesis is to have a balanced approach by investing in various asset classes to protect the portfolio from the increased market volatility that we are seeing. We preach a low volatility strategy in the public markets while remaining flexibility to take advantage of opportunities in high growth industries that have for the most part recovered from the 4th quarter of 2018. A good balance of alternatives inside the portfolio will also help reduce market volatility and provide a steadier return on investment inside a portfolio. For more information, please do not hesitate to contact us.
Lastly, I would like to bring your attention to a cause that I truly care about and have been personally affected by. My father passed away over 12 years ago from ALS (Amyotrophic Lateral Sclerosis or Lou Gehrig’s disease) and Justin, Merriel and I have participated, donated and helped raise awareness for this terrible disease. I am part of the executive committee for ALS Cup for a Cure, which is an annual co-ed charity soccer tournament that will be held on Aug 31st in Mississauga, Ontario this year. Our committee recently released a video on Facebook to help educate and spread the word about our cause. I encourage anyone interested in learning more to take a few minutes out of your day watch it. The video can be found here ALS Video. Thank you in advance for your support.
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.
Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.