JMRD Market Observer for December 1, 2017 – Asset Allocation Strategy: A bull market for Christmas?

December 1, 2017

In This Week’s JMRD Market Observer

 

  • Asset Allocation Strategy: A bull market for Christmas?

  • Canadian Economic Highlights of the week

  • JMRD Investment Beliefs

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

Asset Allocation Strategy: A bull market for Christmas?

 

Highlights

 

  • Despite new highs and expensive valuations in certain markets, the macroeconomic environment makes the case for an overweight in equities over their fixed-income counterparts.

 

  • For one, U.S. activity exceeded expectations in Q3, GDP now is forecasting a growth of around 3.5% for Q4 and there is no indication that the trend will falter next year – barring any unforeseen shock. Additionally, inflation remains fairly contained and should help central banks in maintaining a fairly accommodative stance.

 

  • A hike in February is almost a certainty, but weak inflationary figures will push the Fed to wait for more consistency in CPI growth before modifying its strategy.

 

  • In Canada, no hikes are anticipated in December, but the BoC could cause a surprise and tighten the monetary policy as early as January 2018.

 

  • For crude oil, we expect much more resistance in the coming months as any incremental dollar will be met with increasing selling pressure from producers as higher demand expectations stemming from global synchronized growth are now priced-in.

 

  • As for the Canadian dollar, we now think that taking a neutral approach towards currency hedging is the right approach, despite high speculative length crude oil, as the currency pair could weaken in light of a BoC hiking earlier than what the market expects.

 

  • We call for patience and maintain our bias in favour of Canadian equities, despite our level of conviction diminishing in light of consistent downward revisions to S&P/TSX Energy earnings. For Emerging Markets, we believe pros and cons balance out, and we bring back our recommendation to neutral.

 

See the full article

 

 

Canadian Economic Highlights of the week

 

Canada: Highest inflow of workforce-ready immigrants in the OECD: It is fairly well-known that Canada’s population growth, which at 1.2% annually is the highest of the mature OECD economies, relies heavily on immigration. What is less well understood is the extent to which we diverge from other countries in the quantity of talent entering our country. The OECD estimates that of the 272,000 people to whom Canada granted permanent resident status in 2015, 170,000 were “economic category” admissions — people selected for “their ability to become economically established in Canada”. That is well above the number of economic-category admissions to the U.S. — a country 10 times our size — and similar to the combined intake of the rest of the G7 (France, Germany, Italy, Japan, U.K.)! In other words, 63% of immigrants admitted annually to permanent residence in Canada are ready to join the labour force. For the U.S. the proportion is only 13%, for Germany a minuscule 4%. Little wonder that Canada continues to outpace the rest of the OECD in the growth of its prime-age workforce and in household formation. See the full article

 

Canadian economy regaining momentum in early Q4: Despite a moderate advance in October, Quebec’s gain of economic momentum over the last three months is the biggest among the four largest provinces in Canada (Ontario, Quebec, B.C. and Alberta – top table). This is why, on a quarterly basis, Quebec’s early start in Q4 at least equals those of these other provinces (middle chart). It is reassuring to see that Alberta’s recovery restarted early in Q3, after having seemingly stalled in Q3. Also encouraging is the fact that the indicators that contributed the most to October’s advance overall in Canada (employment, nonresidential building permits and average weekly earnings) did so in a majority of provinces (bottom chart). This bodes well in Q4 for household revenue and consumption and business investments.  See the full article

 

Canada: Private employment surging: The Canadian jobs report was well above expectations and the details of the report are impressive. Private corporations added 72K employees in November, the strongest monthly gain in 3 years. Full-time employment posted another impressive performance. As a result, the Canadian labour market generated a massive 231K full-time jobs over the past three months, making this streak the strongest since 2006. Not surprisingly, average hourly earnings increased at a fast pace for a fourth consecutive month in November (+0.4%, seasonally adjusted). On annualized basis, it’s running over that period at an astonishing 5.6% pace (middle chart) a development consistent with the unemployment rate flirting with a record low (which is 5.8% in November 2007). This labour market tightness is also confirmed by the CFIB survey showing that in the fourth quarter 63% of corporations see shortage of labour as their main concern and 41% of them expect to increase wages in the next year by more than 2.5%, both percentages being at their highest level in the current expansion (bottom chart). This, bodes well for hiring and wages that should translate in good performance for consumption. All in all, this report supports our view that the Bank of Canada understated the current tightness of the labour market* and the central bank should set the table for a rate hike in January in its interest rate decision next week. See the full article

 

 

JMRD Investment Beliefs

 

Just in case you missed reading the Market Observer the past couple weeks, over the summer months, the principals of the JMRD Team, who form the JMRD Investment Committee, set about to articulate our Team’s investment beliefs.  We have been a Team for over 10 years and largely have the same investment views.  However, with added members to the Team and an ever changing investment world, we wanted to dig deeper into our key beliefs.  Our team has processes in place and holds regular strategy conference calls in order to improve our investment decision-making process. We feel that testing and confirming our investment beliefs provides the solid foundation on which to make important investment decisions on an ongoing basis. 

 

Belief #8.  Technological advancements within the financial services industry are occurring at a rapid pace.  Incorporating these technologies into our business will improve efficiencies and enhance our service offering but we also believe that the human element of wealth management is irreplaceable.

 

 

JMRD Basket Corner

 

DIG Basket

 

Enbridge (ENB) – Enbridge announced a $1.5 bln private placement of common shares with three large institutional investors at $44.84/sh. Combined with $0.5 bln of concurrently issued sponsored vehicle equity, $4 bln of hybrid securities and at least $3 bln of non-core asset sales planned for 2018, ENB confirmed 5x D/EBITDA by the end of 2018, trending to 4.5x by 2020, and no additional follow-on common equity required to fund the remaining secured capital program of $22 bln through 2020. With the equity overhang removed, combined with a more prudent dividend growth outlook, we expect a near-term stock price recovery to $50+ (i.e., ~12x 2018e P/AFFO) ahead of the Dec. 12-13th Investor Days

See the full article

 

Keyera (KEY) – Keyera announced a new natural gas handling agreement with Murphy Oil and an updated capital investment program for its Simonette gas plant. In addition, the completed also announced a $429M bought deal financing that was well received by the markets.

 

Pembina (PPL) – Pembina Pipeline Approves New Capital Projects and Announces 2018 Capital Program

 

Royal Bank of Canada (RY) – RY reported Q4/17 core cash EPS of $1.92 vs. NBF estimate of $1.89 and consensus estimate of $1.87. We note the beat was driven by lower than forecast PCLs (+4c), a low effective tax rate (+6c), offset by weaker net trading and investment banking revenues (-$7c). RY also had a notable reserve release in the insurance segment that was not quantified (we assumed it added a couple cents to EPS). See the full article

 

Toronto-Dominion Bank (TD) – TD’s EPS shortfall this quarter (i.e., $1.36 actual vs. $1.44 expected), was disappointing, but not damaging to our view on the stock. We are willing to look through soft wholesale results (i.e., 3% Y/Y profit decline), since this business is volatile and since TD’s Canadian P&C (up 15% Y/Y) and U.S. P&C (up 18% in USD, adjusted) segments delivered much stronger performance, which was a consistent trend for most of the year. With both segments benefiting from a favourable margin outlook, consistent operating leverage and a credit outlook that remains supportive (we discuss the U.S. perspective below), we remain positive on the stock. See the full article

 

 

All-Cap Growth Basket

 

BRP Inc. (DOO) – Q3 results beat slightly: Revenue of $1,240 million announced today, was ahead of at NBF at $1,150 million and the consensus of $1,144 million (and up 15% y/y). Adjusted EBITDA was $199 million versus NBF at $198 million and the consensus of $196 million. Adjusted EPS was $1.05 versus NBF at $0.93 and the consensus of $0.94. F2018 revenue guidance was tweaked, but the bottom line guidance was essentially unchanged. BRP traded to a new year high on Friday, following the earnings release. See the full article

 

Boyd Group/Premium Brands/Dollarama – This week’s “Yield Hog” column in the Globe discussed three companies that have provided very great returns for investors but pay low yields. Boyd Group and Premium Brands are long-time positions in the All-Cap Growth Basket while Dollarama is held in the DIG Basket. Both continue to show favorable relative strength and have delivered good results and growth this year. See the full article

 

Shopify (SHOP) – This past week, Shopify reported its merchants experienced a record-breaking Black Friday, with peak sales exceeding $1 mln per min, up over 80% y/y. Mobile orders grew to 66% of orders, up from 58% y/y. From Thursday to Monday, we checked Shopify’s live video feed in order to provide some insight into the Black Friday + Cyber Monday data. In short, we estimate the entire weekend will account for ~$1.4 bln in GMV; ~16% of our Q4/17E GMV. Next, analyzing daily average GMV per merchant (ex-Black Fri. to Cyber Mon.), we take Q4/16A’s $150/day per merchant and apply that number to our Merchant estimate for Q4/17E. The net result of this past weekend + rest of the quarter at last year’s daily pace, suggests the upside GMV could be as high as ~$9.5 bln in GMV – NBF current estimate is $8.6 bln in GMV for Q4/17E. If the upside scenario proved out at a take-rate of 1.40% this translates to Merchant Sales of ~$133 mln (NBF estimate: $120 mln). Bottom line, we believe ~16% of GMV was accumulated in the past 5 days (Exhibit 1). In addition, data points from other retailers have all pointed to strengthening trends for e-commerce – bullish for SHOP. See the full article

 

U.S. Growth Basket

 

Broadcom (AVGO) – Broadcom Delays Higher Qualcomm Bid Until Next Year

 

MSCI Inc (MSCI) – Index Providers Rule the World – For Now, at Least

 

 

Retirement Corner

 

 

 

 

Reads of the week

 

 

 

 

 

 

 

 

Economic Reports

 

Monday December 4th – None

Tuesday December 5th – BOC Rate Announcement (CAD)

Wednesday December 6th – None

Thursday December 7th – Initial Jobless Claims (US)

Friday December 8th – Housing Starts (CAD), Employment Change (US), Unemployment Rate (US)

 

 

Earnings Reports

 

Monday December 4th – None

Tuesday December 5th – Bank of Montreal, Laurentian Bank of Canada

Wednesday December 6th – Dollarama Inc.

Thursday December 7th – Canadian Western Bank, Vail Resorts Inc.

Friday December 8th – Brick Brewing Co. Limited

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