Investment Insights

As has been the case during most of my career the markets continue to climb a “wall of worry.”  We can look back at 2016 as a pretty good year for Canada and the US and many other markets.  But 2016 did not start out that way with sharp market sell-offs of up to 15%.  Investors who stayed invested ultimately made back those losses and made profits.  But investing is never straight forward and there are always worries of what can go wrong.  Over time the best defense to these gyrations has always been a thoughtful well diversified professionally managed portfolio which takes into account an investor’s unique circumstances and tolerance for risk.

Trump.  The current big worry on many people’s mind.  The markets have initially welcomed the election of what they see as a business friendly president who is anxious to improve conditions for business to prosper in the United States.  He promises to bring in major tax reforms which will be business friendly and to spend large amounts of money on upgrading infrastructure.  His major focus is to create jobs in the United States, and he is willing to take jobs away from other countries to do that.  He wants to open trade agreements like Nafta to re-negotiation.

The problem is that President Trump is volatile and makes decisions rashly.  He seems as likely to strike out to protect his ego and impress his followers, as to make decisions that benefit the United States.   On top of this he and his family have huge potential conflicts of interest between their business empire, and running the United States, that Trump has shown little willingness to correct.  This puts further doubt as to the legitimacy of every decision he makes.  The chances of him making a serious mistake seems high.  This brings confusion and volatility to the markets.  Trump can change the value of a corporation with one tweet.  Time will tell if he is an asset or liability to the markets, and the fund managers will be watching him closely and making adjustments accordingly.

President Trump has indicated that he believes many of the jobs that have been lost in the United States have moved to other countries who are using unfair trade practices.  There could be some truth to this, but probably most of the jobs have been lost to permanent changes in technology.  This will be an interesting trend to watch going forward, from the perspective of the markets, and also for the impact on society.  It is predicted that there will be huge job loss over the next 10 years because of technology.  Many job classes such as truck and cab drivers may disappear because of automation.  If a new factory is built, but relies on robots and automation, it will not bring back many jobs.

The United States is in fairly good shape economically.  Housing prices continue to improve in most areas, interest rates are low, and any increases in interest rates would show confidence in the economy.  Unemployment is at historically low levels, business earnings are strong, and manufacturing is increasing.  On the other hand government debt levels are very high, any interest rate increases will make servicing the debt much more difficult, and stock valuations are already high.  We are also late in the current economic cycle that started after the crash of 2008.

Canada’s economic performance will continue to be closely tied to the performance of the United States, as they are by far our largest trading partner.  We are also their largest trading partner, and so changes to Nafta could hurt Canada, but also easily hurt the US.  Interest rates are being kept low to accommodate economic growth, but the manufacturing sector in Canada has so far not helped us much as was hoped.  Oil prices have recovered from their lows over the last two years and are getting closer to the break even point whicy would make oil sands production profitable.  There is no certainty that oil prices will continue to rise as there is still an issue with huge worldwide oversupply.  Also manufacturing continues to become more efficient and more electric cars are going to reduce the demand for oil.

Equities in some European regions are attractively valued, but overall there are a numbers of threats to corporate earnings, including persistently low growth and inflation and stubbornly high unemployment.  In addition, growing political uncertainty and doubt about the future of the euro all heighten risk, leading me to be underweight international equities.

I am also underweight emerging markets as broad pockets of stress are evident due to high debt levels and slowing growth, and a strengthening U.S. dollar may increase risk.

Based on the above outlook, I would have the following assessments, while still keeping a well-diversified portfolio.

• Stronger emphasis on U.S. equities and cash

• Regular or neutral emphasis on Canadian equities

• Reduced emphasis on international, Europe, emerging market equities and bonds.

• Underweight the Canadian dollar as the US dollar likely continues to rise.