JMRD Market Observer for December 2nd, 2016 – Asset allocation strategy: The Trump Era

December 2, 2016

In This Week’s JMRD Market Observer Market

 

 

  • Asset Allocation Strategy: The Trump Era

  • NBFM Forex Strategy: How high can the USD go?

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

Asset Allocation Strategy: The Trump Era

 

Highlights:

 

  • When taken as a whole, whether we look at Mr. Trump’s fiscal, immigration, or trade policies, inflation is expected to go up eventually and the importance of the rise will be a function of the magnitude of the plans. As for GDP growth and unemployment, these will depend on how much Mr. Trump’s immigration and tariffs legislation will undermine the positive push from fiscal policies.

 

  • The U.S. economy seems to be gaining traction with positive economic number surprises which, combined with the Fed’s policy divergence with other major central banks, should act as a floor for the greenback’s value.

 

  • For crude prices, the OPEC deal will generate some support as the possibilities of a supply glut become more remote. However, USD strength will act as a headwind and, as such, we still expect the range witnessed since Q2-2016 to persist for the time being.
  • A stronger dollar, combined with rallying cyclicals and climbing real rates, was challenging for gold. The downside potential remains intact and, therefore, we suggest covering the long position to go back to neutral.

 

  • The S&P500 was not spared from the extreme moves following the November 8 results as it briefly reached the overbought territory. However, we are aware that a much friendlier environment is in place for equity markets and we suggest covering the short position to go back to neutral.

 

Full report attached

 

 

NBFM Forex (December 2016) – How high can the USD go?

 

Highlights:

 

  • While the trade-weighted USD has levelled off after hitting a 14-year high, still-favourable yields mean it has room to run. If, as we expect, U.S. growth tracks above potential for the next few quarters, the Fed will be in a position to raise interest rates faster than what markets currently anticipate. In that context, the euro has room to depreciate more, possibly testing parity with the greenback next year if political developments on the old continent get markets to once again question the viability of the Eurozone. Uncertainties brought by the formal start of Brexit-related negotiations will weigh on the British Pound but also on the common currency. The yen also looks vulnerable next year in light of the dull economic outlook in Japan. The yuan will remain under pressure as the People’s Bank of China deals with capital outflows and sinking foreign currency reserves. All told, the trade-weighted USD has the wind in its sails. We now expect the big dollar to remain stronger for a bit longer than we had initially anticipated and have accordingly adjusted our currency forecasts.

 

  • The Canadian dollar has seen better days. Already under pressure from a surging greenback and still-soft oil prices, the loonie also has to endure the Bank of Canada’s dovish rhetoric which is causing U.S.-Canada spreads to widen. The large current account deficit is also a concern for the currency, more so considering it is being financed entirely by short term foreign capital flows which can reverse on a whim. We expect USDCAD to head towards the upper end of the 1.30-1.40 range over the next 12 months.

 

Full Report Attached

 

 

JMRD Basket Corner

 

DIG Basket

 

Toronto-Dominion Bank (TD) – TD reported an underwhelming operating performance, the macroeconomic trend that favours the bank – an overweight exposure to the recovering U.S. economy – causes us to resist the temptation to downgrade the stock to Sector Perform. The Canadian banking sector trades at a premium P/E, relative to recent valuation history. These two macro factors – an overweight exposure to the U.S. relative to peers and a generalized increase in Canadian bank P/E multiples – cause us to overlook the disappointing micro factors (weak operating performance on both sides of the 49th parallel). Thus, we reiterate our Outperform rating and boost our price target to $66 from $62. Our price target is 11.8x our four quarter forward EPS estimate one year from today, a 5% premium to the average of TD’s rated domestic peers. TD currently trades at 12.3x our forecasted EPS over the next twelve months (NTM), a 3% premium to peers.

 

Full Report Attached

 

All-Cap Growth Basket

 

Premium Brands (PBH) – Premium Brands Holdings Corporation announces acquisition of Island City Baking, Conte Foods and Lorosa Fine Foods

 

Uni-Select (UNS) – Uni-Sélect acquires 11 locations; Room for more The acquisitions of Pacific Parts Ltd. and Autobody Supply Co. add a total of 11 locations. Terms were not disclosed but we estimate a combined purchase price of ~$15-20 million with an acquisition multiple consistent with past transactions (5-8x for Parts and 6-9x for Paint) as confirmed by management. We are pleased to see continued execution of a growth strategy that increases density in key markets and expands the footprint. With US$260 million in unused credit at the end of Q3/16, strong cash flow and leverage at ~1x, we see room for more (and potentially larger) acquisitions.

 

Full Report Attached

 

U.S. Growth Basket

 

Facebook (FB) – Facebook working on a plan to pick news from favored media partners

 

United Health (UNH) – Shares of UnitedHealth Group, the largest U.S. health insurer, rose as much as 3.95% to a record high of $158.12 on Tuesday after the company issued a better-than-expected earnings forecast for the coming year. UnitedHealth, which is in the process of exiting the government’s subsidized market for health insurance, known as Obamacare, said on Monday it expected to earn between $9.30 and $9.60 per share in 2017, excluding items. Analysts on average expect earnings of $9.16 per share, according to Thomson Reuters

 

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

 

 

 

 

 

 

 

Economic Reports

 

Monday December 5th – US ISM Service Sector Index

Tuesday December 6th – US Factory Orders

Wednesday December 7th – Bank of Canada Interest Rate Announcement;

Thursday December 8th – Canada Housing Starts, Building Permits and New Home Price Index; US Initial Jobless Claims

Friday December 9th – US Consumer Sentiment

 

 

Earnings Reports

 

Monday December 5th – Hudson’s Bay Co.

Tuesday December 6th – Bank of Montreal, Laurentian Bank of Canada

Wednesday December 7th – Dollarama

Thursday December 8th – Broadcom

Friday December 9th – None

 

 

Have a good weekend.

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