Issue #53 – Q3 Market Update

The ripples of fear resonate across the North American West Coast as acts of terrorism struck Las Vegas and Edmonton this past weekend.  Meanwhile, the DPRK sees Donald Trump’s speech at the UN as a declaration of war, further increasing tensions around the Korean Peninsula.  The precariousness of NAFTA negotiations increased further as the US imposed a tariff of more than 220% on Bombardier products.

Yet despite this doom and gloom, the Canadian stock market is back in the black for 2017 after a strong September while Mr. Trump’s tabled tax cuts add hot air to the US stock bubble.  In light of recent events, we will review the past quarters’ performance of major investment asset classes as well as the year-to-date performance figures on our major allocations.

MARKET DATA


 As at Sept 1st

Level

YTD(C$)

 

Level

YTD(C$)

Toronto (S&P/TSX)
Global (MSCI)
Oil - WTI (US$/bbl)
CAD to USD

15635
2001
51.67
0.8018

+2.3%
+6.0%
-3.8%
+7.8%

New York (S&P500)
Emerging  (MSCI)
Gold (US$/troy oz)
Cdn Bonds - FTSE

2519
1082
1280
1016

+4.4%
+16.4%
+11.1%
+0.5%

INTERESTING LINKS


TECH :  BBC
Dyson to make electric cars
BUSINESS : Financial Post
US Marijuana prices plunge
TECH :  NY Times
Uber Loses License for London, UK

 


Canadian Equity
The S&P/TSX, Canada’s most widely cited stock index, reversed earlier losses and is now up 2.3% on the year. The consumer discretionary, industrials, and technology sectors all lead posting double-digit growth while the considerably larger energy sector and the healthcare sector hover near double-digit losses. Even financials have returned to black thanks to Stephen Poloz’, the Governor of the Bank of Canada, interest rate cuts as well as strengthening economic data.

Despite this increase, Canadians continue to pile on debt, increasing the debt to disposable income ratio up to 167%. Perhaps more worrisome is that the bulk of this increase has come in the form of non-mortgage debt, like consumer credit cards and term loans.

Our target allocation for Canadian equity, the BMO Canadian Low Volatility ETF (Ticker: ZLB), continues to outperform the general market despite its lower overall risk. This fund posted a +7.31% year-to-date return thanks to avoiding this year’s dogs, like the energy sector.

Meanwhile, our Cambridge Asset Allocation fund underperformed our expectations due in large part to energy allocations in Canada and poor performing stocks in the US This fund is currently on our watch list and may be removed in the near to mid-term, having only advanced 1.53% year-to-date.

Canadian Bonds
The fixed income space continues to be very difficult in Canada due in large part to the surprise rate increases by Stephen Poloz. Citing strong economic growth, he raised rates a second time this year in mid-September, once again causing a shock to the bond market and sending it quickly into negative territory. At present, the FTSE/TMX Canada Universe Bond index is showing a +0.5% year-to-date return, indicating that bonds made less returns than their interest payouts. In this light, our decision to hold cash in lieu of bonds continues to pay off with high interest savings accounts yielding 1.75% per annum with no market risk.

Our preferred Canadian fixed income position, the TD Income Advantage fund, is up 0.88% on the year, beating its benchmark. Our global fixed income fund, the PIMCO Monthly Income fund, posted an impressive +6.07% year-to-date return despite the headwinds introduced by the rising loonie. All things considered, we are pleased with the performance of these two positions compared to the markets.

United States
Our neighbours to the South continue their wild ride on the stock market with several indices up double-digits. Canadian investors did not partake as much in this increase due to the sudden rise of the loonie following the interest rate increases. For Canadian investors, only the tech-heavy Nasdaq remains up in double-digits while the Dow and S&P500 posted +5.2% and +4.4% returns year-to-date.

Amid much anticipation, Mr. Trump released his tax reform plan which cuts corporate tax rates by almost 15%, and increases the threshold before income taxes are levied for individuals. If this proposal is passed into law as is it could be a boon for shareholders and rightly justify the sky-high valuations we are seeing on the markets.
Our target allocations with significant exposure to this market are the RBC QUBE Global Low Volatility and Edgepoint’s Global Growth & Income. Both have performed well, posting healthy returns of +6.02% and +9.0%. Although both our key positions in this space outperformed their respective indices, under-allocation to the US in the wake of the Trump presidency diminished our overall rate of return. As many of you may recall, we reduced our exposure to this market in February 2017 although we still kept an allocation larger than the average Canadian’s.

Global Developed & Emerging Market Equities
Our over-allocation to global equities and emerging markets in particular is by far our biggest ‘winner’ for the year and has produced substantial returns for our clients. The developed markets outside of North America were buoyed by the prospect of increased GDP growth around the world, which buoyed the MSCI World index year-to-date return +6.0% in CAD. The combination of attractive valuations and more rapid economic growth made an irresistible combination for fundamental investors which drove up the MSCI Emerging Markets index +16.4% in CAD year-to-date.

Our target allocations to these positions produced equally impressive returns. The CI Black Creek Global Leaders fund is up a smashing 17.11%, while the RBC Emerging Markets fund is up 18.07% year-to-date.


Expectations for Q4
Historically speaking, November, December, and January are the kindest months for investors as companies release their year-end results, many of which are expected to be pleasingly surprising. A few important tailwinds compound this phenomenon and Q4 could produce positive returns for shareholders. These catalysts include:

  • Investment managers, many of whom are currently underperforming their benchmarks, may turn on the taps for risk and buy up more stock in an attempt to earn their bonuses.
  • Hedge funds which have taken on significant risk protected positions may begin to unwind these positions, thus adding more hot air to the U.S. bubble.
  • Worldwide economic growth has been strengthening and synchronizing across the globe.
  • As the Trump tax agenda makes ground, cautious optimism may push buyers into the market.


Summary
Overall, the summer has been kind to risk-takers. US Tech Stocks continue their meteoric rise with valuations not seen since the Tech Bubble of the late nineties while bonds fail to produce rates of return in excess of inflation. Despite having retrenched holdings in US stocks, our move to Global and Emerging market equities has more than made up for this misallocation. We expect moderately positive returns for Q4 on the back of a strengthening global economy and a falling Canadian dollar. That said, we continue to remain fearful while others are greedy, and look forward to being greedy when others are fearful.

Jean-François Démoré

CIM, CFP, MBA, HBCCS

Performance figures of major allocations as at Sept 30th, 2017                                                                                              

Individual Accounts

Fund Name

Category

Risk Level

YTD

2016

1-Month

3-Month

6-Month

3-Year

5-Year

10-Year

Inception

TD Income Advantage – F

Cdn Bond

Low

+0.88%

+4.63%

-0.41%

-0.86%

-0.36%

2.80%

3.89%

4.56%

4.63%

PIMCO Monthly Income - F

Divers. Income

Low-Med

+6.07%

+7.58%

-0.27%

1.09%

3.39%

5.56%

6.82%

No data

11.41%

Edgepoint Global Growth & Inc - F

Global Growth

Low-Med

+9.00%

+12.82%

2.14%

1.96%

5.62%

13.10%

16.60%

No data

15.13%

CI Cambridge Asset Allocation - F

Cdn Balanced

Low-Med

+1.53%

+7.73%

0.66%

0.03%

0.34%

5.81%

9.39%

No data

6.86%

CI Black Creek Global Leaders - F

Global Equity

Medium

+17.11%

+8.68%

4.15%

4.35%

8.96%

17.29%

20.43%

10.39%

10.20%

RBC QUBE Global Low Volatility - F

Global Equity

Medium

+6.02%

+3.96%

0.14%

-0.94%

0.86%

12.93%

No data

No data

13.86%

BMO Canadian Low Volatility ETF

Cdn Equity

Medium

+7.31%

+13.05%

1.56%

0.98%

2.40%

11.23%

15.09%

No data

-

RBC Emerging Markets Equity - F

Emerg. Markets

High

+18.07%

+2.18%

-0.32%

2.43%

7.00%

10.51%

11.64%

No data

8.05%

 Group Plans

Fund Name

Category

Risk Level

YTD

2016

1-Month

3-Month

6-Month

3-Year

5-Year

10-Year

Inception

DynamicEdge Balanced- A

Global Balanced

Low-Med

+6.56%

+0.42%

0.63%

1.26%

2.55%

4.92%

6.63%

No data

4.82%

Mackenzie Symmetry Balanced - A

Global Balanced

Low-Med

+2.66%

+3.79%

0.12%

-0.05%

0.01%

3.74%

6.15%

No data

7.08%

All performance is net of all management expenses ratios (MER) but before Fee-For-Service advisor compensation if applicable.   Source:  Morningstar.ca & TD Wealth

 

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Innova Wealth Management is a trade name of Aligned Capital Partners Inc. (ACPI). Jean-François Démoré, as an agent of Innova Wealth Management/ACPI is registered to provide investment advice in the provinces of Ontario, Quebec, and British Columbia. Investment products are provided by ACPI, a member of the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and the Canadian Investor Protection Fund (www.cipf.ca). All non-securities related business conducted by J-F Demore as a representative of Innova Wealth Builders is not covered by the Canadian Investor Protection Fund and is not under the supervision of ACPI.


The information contained herein was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities mentioned. The views expressed are those of the author and not necessarily those of ACPI.

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