2018 – off to a fast start
Global markets enjoyed an impressive start to the year. Looking at the table below clearly demonstrates the value of global diversification in every time period captured by this table.
|January ’18||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||– 1.59%||+ 3.68%||+ 2.82%||+ 4.69%/yr.||+ 1.95%/yr.|
|S&P 500 (C$)||+ 3.85%||+ 17.06%||+ 11.07%||+ 18.41%/yr.||+ 9.66%/yr.|
|S&P 500 (U$)||+ 5.62%||+ 23.91%||+ 12.28%||+ 13.52%/yr.||+ 7.43%/yr.|
|MSCI EAFE (C$)||+ 3.23%||+ 17.41%||+ 5.35%||+ 9.53%/yr.||+ 2.60%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of January 31, 2018
In the United States the S&P 500 Index posted an impressive 5.6% gain while the S&P/TSX Composite Index is up 1% in the same period (local currency terms). Meanwhile, WTI crude oil prices have climbed 6.7%, gold was 2.7% higher, and the Canadian dollar appreciated 1% versus the U.S. Dollar in January.
In large part, these gains were driven by strong and improving fundamental drivers including accelerating global economic growth, stable inflation, gently rising interest rates and bond yields, recovering commodity prices, a softer U.S. dollar, healthy earnings growth and the successful passage of legislation in the U.S. that significantly reduced corporate taxes in that country. As a result, investor sentiment has jumped to a seven year high. The fundamentals are expected to remain supportive through 2018 which supports the investment strategy to maintain an overweight to equities. Any material pullback in markets should be viewed as an attractive opportunity to put cash to work. The market has not experienced a pullback in excess of 5% for over 18 months. I encourage investors to be prepared for such a pullback and suggest that any such correction is likely a function of short-term profit-taking and should be temporary in nature given the risk of a recession in the near-term remains very low.
The S&P 500 (which represents more than half of the global equity market capitalization) is approximately 1% cheaper on a blended 12-month P/E basis than it was a month ago as a result of improved earnings. Until bond yields are considerably higher than they currently are, yields and equity valuations should retain their positive relationship. Therefore the overweight equity bias is retained with a preference for international regions (including Canada) at the expense of the U.S. The commodity sectors (materials, energy) and financials are likely to comprise the top three performing sectors in 2018.
Moving on to monetary policy and the Canadian dollar, the Bank of Canada (BoC) raised its policy rate by 25bps last week and also provided a slightly more hawkish outlook. The BoC upgraded its assessment of the level of spare capacity in the economy, it upwardly revised its global growth forecasts, raised its inflation forecasts, and also slightly increased its 2018 and 2019 Canadian economic growth forecasts. It is expected that the Canadian dollar at around US$0.80 will remain a reasonable level for much of 2018.
British Columbia’s coalition looks to be cracking. Last summer, British Columbia’s New Democratic Party and Green Party signed a Confidence and Supply agreement in order to form a provincial governing alliance. That agreement was premised on a number of tenets, including commitments to targets on greenhouse gas emissions. Now, Green Party leader Andrew Weaver is concerned about reaching those targets following the NDP’s courting of liquefied natural gas investors. Mr. Weaver has taken a hardline stance on the subject, and if the agreement is broken, then British Columbians could be back to the polls within a year of the last election.
In summary, ensure your portfolio matches your needs. Anticipated liquidity needs over the next year should be extracted from the variable return market and set aside in interest bearing securities. This ensures you don’t have to liquidate a “good” investment at a “bad” time. Income requirements over the next two to three years can likewise be set aside in interest bearing securities to make the encroachment on capital less likely. The portion not needed for your liquidity or shorter term income needs should be invested in an actively managed and geographically diversified portfolio.
Finally, a new investment is coming to market that Brie and I are continuing to do due diligence on. The focus of the portfolio is global innovation. It will invest in areas such as blockchain technology, cybersecurity, artificial intelligence, genomics, healthcare, autonomous vehicles and e-commerce. If you would like to discuss this opportunity further, please give us a call.
We are here to help. Please let us know if we can!
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group