November 2, 2016
The US Election is Running the Show
World stock markets remain challenged by the uncertainty surrounding the November 8 US election results.
Long-term bond yields which were up substantially in October are retreating along with the US dollar as investors fear that an FBI investigation into Hillary Clinton’s e-mails may tip the scales to a Donald Trump victory. As implausible as that sounds we are reminded of the surprise of UK referendum, also known as Brexit.
The markets hate surprises and they do not like uncertainty. Clinton with all her flaws is the stable choice for market watchers as she brings familiarity. Trump is a complete wildcard and as such the US dollar is taking it on the chin. The anxiety level should remain elevated until next week’s results.
Markets have adapted to the possibility of a December US Federal Reserve rate hike (odds now at 71% versus 12% in July), and we believe equity markets should be able to digest a +25 bps hike in the context of improving fundamentals. Last year’s December 2015 Fed rate hike turned out to be a “one and done”, but macro trends are much more supportive than a year ago which could enable the Fed to hike another time in 1H17. If markets don’t get a negative surprise in next week’s US election results, relief could drive markets higher into year-end.
In Canada, Bank of Canada Governor Poloz has left the door open to a possible rate “cut”. Canada’s economy has been sluggish and will likely remain so until we see a firm rise in resource prices. Resources are still the main driver of our economy. Manufacturing in Ontario is helped by a lower Loonie and so we could see relief in the way of a rate cut. A problem Ontario has that may be bigger than a rising Loonie versus the USD is the cost of electricity in Ontario where costs have risen more than 70% in the past 10 years, the most of any jurisdiction in North America. Poloz has to be careful to help massage the Canadian economy while not stoking a real estate fire that CMHC is trying to control in Toronto and Vancouver making the lowering of rates a double edged sword.
Oil prices are down again as OPEC once again failed to “seal the deal” on cutting production. $40 to $60 per barrel appears to be the new norm for now but then again, we don’t make predictions, we just pass them on and this is what we have heard by experts coming through our doors. Canadian producers have become more efficient and economical at extracting oil and as such we use Canoe Energy mutual fund to manage our equity exposure to this sector. Canoe has beaten all but two main producers in returns year to-date so it doesn’t make sense for us to try and bet on a few names and leave to a team that is well connected and operate out of Calgary.
> We have reduced our exposure to the US currency by eliminating US stocks from our non US portfolios. We have done so for many reasons: 1. This US election can cause some serious damage to the US currency in the short term if the markets don’t like the outcome or any possible fallout from the FBI probes. Both candidates carry risk to the US. 2. We can invest into the US more efficiently without the whipsaws of the currency through ETFs. We have traded in our US stocks for ETFs, some that are hedged and some that are not hedged. Two of the ETFs write covered calls and pay a yield of close to 6%. Another pays a yield of around 2.5%. 3. After this tax year you won’t have to file a T1135 Foreign Income Verification Statement after 2016 unless you specifically ask us to have US securities in your account or you have other US property.
> We are underweight energy
> We are neutral on gold
> We added in a global value component utilizing two of the world’s top value managers, Brandes and Mawer who access markets that advisors in Canada cannot.
> We added a dividend component to our Canadian equities.
> We have a small position in emerging markets.
The danger for most investors during these difficult times is the temptation to abandon a proven long term successful process in favour of whatever process has outperformed over the short term. What we do is correctly assess the “risks” within your chosen investment portfolio. If investors decide to abandon the process and adopt another process they expose themselves to the same risks they had in 2008-2009. This may not happen for many years or it could occur at any time and as such we remain ever vigilant to react to whatever the market throws at us in order to protect our client’s capital.
Director, Wealth Management
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