Portfolio Manager’s Commentary

Daryl Cooper

January 13, 2017

Portfolio Update
January 13, 2017

As we head into 2017, and the looming January 20th inauguration of Donald Trump as President of the United States, we take a look at back 2016 and a view forward for the year ahead.

2016: A Snapshot
It has been well documented by us here that from everything we saw through 2016, managing money cautiously was paramount. I have stated many times, we will do what it takes to be the guardians of your wealth. We will not expose you to the major market collapses of 40% such as experienced twice in the past 15 years that some traditional strategies do.

  • January was the worst January in history and we went to protect mode, cash.
  • February was just as bad until the G20 and the infamous Shanghai Accord pulled a rabbit out of the hat
  • March and April saw the indicators go cautiously positive again and we cautiously re-entered the market. Bonds still were the number one ranked asset class.
  • May to September were solid months
  • October to November 8th the markets sold off ahead of the US election
  • November 8th – Trump wins:
    • The world is shocked
    • The markets rocked
    • Sector rotation took hold as Energy, Industrials, Utilities and Consumer Staples all benefited from a Trump win
    • Defensive sectors like Telecom, Utilities and Consumer Staples, along with pharmaceuticals (Trump has promised to reign in their pricing) and the FAANG stocks all tumble. (Facebook, Amazon, Apple, Netflix and Google – Trump has promised to force them to repatriate their cash held overseas in tax haven countries like Ireland)
    • Bonds also sell off significantly

For the most part, Canada rode along for the ride; 80% of the TSX gains for 2016 were a result of two sectors: oil & gas and mining stocks (commodities). Canadian financial stocks started to participate in the last quarter of the year.

Our US stock and currency trade
When? October 12, 2016
Why?
1. To eliminate individual security risk ahead of the US election
2. To provide the most protection and flexibility no matter who won the election
3. Oil prices were steadying and any rise in the price of crude positively affects the Canadian dollar.
4. A Trump victory forecast a collapse of the US dollar and a severe drop in global stock markets.
5. We did not eliminate exposure to the US stock market; our equity component was and still is 34% US stocks. We just shifted to Canadian ETFs that invest in US stocks.
6. We did maintained exposure to the US currency as we invested the proceeds into unhedged Exchange Traded Funds (ETFs) of approximately 25%.
7. We lowered our exposure to FAANG stocks and invested into a more diversified portfolio of high yielding, large cap US companies.
8. We sought to eliminate individual US securities from our client’s portfolios so that come 2017 if they did not own any other US content they would not have to complete a T1135, Foreign Income Verification Statement, both a nuisance and sometimes expensive.

What: Did we replace it with?

  • ETFs – ZDY, ZWH, XMC, ZWE, mutual funds, Front Street Energy Infrastructure, Brandes Global Opportunities, and Mawer Global Small Cap
  • All are unhedged to the US currency
  • TXF containing such stocks as the FAANG stocks is hedged

What: Has happened since?

  • We sold on October 12th with the USD at $1.3236. The USD as of yesterday (January 12th) was $1.3130, meaning the trade worked in our favor to this point, as there has been a decrease of 1.18% between October 12 and now.
  • Even if the US currency would have been higher versus being in our favour we made the right move as our first thought was protection, but also, we profited more than the index and the currency.

What about a US currency portfolio?

  • We have a USD-only portfolio that requires a US$100,000 minimum. If you want direct exposure to the US for any reason whatsoever, we are available to accommodate this as a separate account.

What’s up for 2017?
We are well positioned for what appears to be setting up as a positive year. In Fixed Income we replaced one of our bond managers with another and also took positions in two ETFs (rate reset/floating rate preferred shares and senior loans) that will benefit from rising interest rates and pay a nice dividend along the way.

  • ScotiaMcLeod research continues to see bond yields go higher over 2017-2018 as a key element in their reflation thesis – stronger global economic growth, inflation, profits, commodities, etc
  • A move in 10-year US Treasury yiels towards 2.75 – 3% by year end 2017 and 3.25 – 3.5% by year end 2018 would not be surprising.
  • However, in the near-term a retracement in the large recent spike in yields is materializing, due in large part to stretched short positioning in bond futures on the part of short-term investors.

In Equities, we are invested in Europe, Britain and Japan for the first time in many years along with our Canadian exposure to energy, financials and other solid names. We continue to hold a 25% to 35% position in the USA through ETFs.

  • According to our indicators, the equity markets have been the recipient of cash flows from bonds and money markets. Indicators are more positive than at any time last year.
  • The Equity Research Department at ScotiaMcLeod is optimistic for the coming year.
  • That said we have recently raised some cash ahead of the January 20th inauguration. There has been a love affair in what is dubbed the “Trump trade” that has resulted in new market highs and big losses in bonds as long-term yields have risen. That has shifted the past week or more as the market digests the euphoric shift.
  • Once Trump is inaugurated, we will reassess and deploy the money market assets into the best sectors.
  • ScotiaMcLeod research favors the US banks, technology, consumer discretionary and industrial.
  • In Canada, financial services stocks, energy, and base metals should benefit from global growth.
  • International markets favor the developed markets over emerging

We look forward to talking to each and everyone one of you many times over the coming year. We are excited about the service matrix we have implemented that will see to your needs in every way possible.

RBI Bridging Formula
This is a process oriented business practice that we have designed and developed over the past 18 months.  We are a unique wealth management team offering a premium platform. We work with a select and limited number of clients we call AAA. Our offering is best served to those that either do not have the time or the expertise to manage money themselves.

Our services do not stop at Portfolio Management but include access to our Scotia Wealth Management team of specialists that includes:

  • Investments from ScotiaMcLeod,® a division of Scotia Capital Inc.
  • Banking services from Private Banking, The Bank of Nova Scotia
  • Financial planning from Scotia Capital Inc.
  • Estate and Trust planning from Scotiatrust,® The Bank of Nova Scotia Trust Company
  • Protection from Scotia Wealth Insurance Services Inc.

Daryl Cooper
Portfolio Manager
Director, Wealth Management