JMRD Market Observer for January 22, 2016 – All Cap and DIG Basket UpdatesJanuary 22, 2016
**January 22nd Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- JMRD Diversified Income & Growth Basket & JMRD All-Cap Growth Basket Q4 Update
- BoC keeps rates unchanged while waiting for the federal budget
- NBF Economics & Strategy Special Report: Sub-1% growth for Canada?
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Diversified Income & Growth Basket & JMRD All-Cap Growth Basket Q4 Update
What a start to the New Year. It was only a few weeks ago that the Team was putting together the year end results for 2015. The past few Market Observers have been filled with details on our Baskets and those results seem so out of date because of what has transpired thus far in January.
Below are updates on our two Canadian mandates with a focus on past performance (2015) but you will also find details on how they are currently positioned for the year ahead.
Before getting to that, the Team thought it timely to provide a few reminders:
Top Investment Objectives for 2016 and Beyond
Our objectives have not changed from the last five years and we will simply repeat them here with relevant updates.
- Investors must continue to focus on their individual risk / reward profile.
- Protecting portfolio values to the downside and minimizing risk continues to be our primary objective for 2016 – preserve that capital
- We are constantly trying to avoid the ‘big mistake’ as we like to say in our investment committee meetings.
- Investors must have an investment plan and stick to that plan.
- Review your Investment Policy Statement (IPS) and ensure your asset allocation is up to date and appropriate. Please feel free to talk to us for clarification on this very important point.
- The ‘Annual Financial Planning Review’ and ‘Two Year Client Check-Up’ each client is set up for will provide timely opportunities for clients to review or implement plans.
- Focus on income and get paid to wait: for cash flow, invest in companies with growing dividends and interest paying securities. However, we would caution in ‘reaching’ for yield and only looking at a particular investment’s income but also the investment’s cash flow and strength of the balance sheet, in addition to other factors.
JMRD is available to answer any and all of your comments and questions and are working on some additional information pieces that will be sent out in the coming weeks.
JMRD ALL-CAP GROWTH BASKET (ACB): Posts a 16.4% gain for 2015
JMRD Wealth Management Team is pleased to provide the ACB Basket return of just over 16% for 2015. The All-Cap outperformed the TSX Composite Total Return Index which posted a loss of -8.3% over the same period. In Q4 alone, the ACB was up 6.65% versus a benchmark return of -1.4%. Since we launched the ACB Basket at the start of October 2013, it has returned 16.81% annualized, to the end of Q3 2015. The TSX Composite Total Return Index has an annualized return of 3.80% for the same period.
The main contributors to the All Cap Basket performance in 2015 were: CCL Industries – a specialty packaging company, Constellation Software, Boyd Group – an auto collision repair company and Stella Jones – a maker of hydro poles and rail ties. Each of the aforementioned companies conduct a substantial portion of their business in the US, which is stronger economically and the currency has been a tailwind as well.
The main laggards were Concordia Healthcare, which was unfortunately brought down by the Valeant Pharmaceuticals, whose drug pricing practices came under scrutiny. Badger Daylight was also a detractor. Its excavating business is firmly tied to the energy sector and with oil prices hitting lows throughout 2015, its operations suffered. Both stocks have since been sold from this Basket.
You can see the current holdings below.
- For clients interested in the Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up and wish to do so.
- The minimum purchase for the new Basket is 4 Baskets or $53,500, with subsequent purchases of 1.5 Baskets, or about $20,000 at current prices.
JMRD Diversified Income & Growth (DIG) Basket: 2015 Update
2015 proved to be a struggle for the TSX, especially dividend paying stocks. The TSX total return index was down 8.3% last year and the exchange traded fund that tracks the top dividend payers in Canada was down 12.97%. The DIG basket was down 7.8%. Dollarama and Metro were standouts in the portfolio in 2015 due to their defensive, consumer-staple characteristics. This was overshadowed but the exposure to Whitecap Energy, which despite having one of the better balance sheet in the oil sectors, had a down year. Until the start of December it was actually holding its own for the year. We still own Whitecap as our only pure energy producing exposure in the basket. Our exposure to Gibson Energy and Pembina Pipelines earlier in the year also hindered the Basket’s performance. We sold these names at higher levels in the second half of 2015.
Below is a snapshot of the current holdings. The current annual cash flow is $411 for a yield of 2.96%.
We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting. The current value of one DIG Basket is approximately $14,000 making the minimum initial position approximately $28,000, which is two Baskets. This amount will continuously change as the prices of the DIG Basket components do fluctuate. Subsequent purchases can be made in one Basket increments.
JMRD Baskets: Final Thoughts
After reviewing each of our four Basket offerings over the past few weeks, we continue to suggest that clients have a good mix of investments that are diversified by asset class, geography and currency. Diversify, diversify, and diversify.
BoC keeps rates unchanged while waiting for the federal budget
As we had expected, the Bank of Canada left the overnight rate unchanged at 0.50% today. While the Bank acknowledged that the decline in commodity prices represented a setback for the Canadian economy, it remained confident of a turnaround in fortunes: “The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.” The BoC nonetheless presented a much downgraded outlook for Canada’s economy: The central bank lowered its growth forecast for 2016 to just 1.4% (from 2.0%), and even lowered next year’s forecast to 2.4% (from 2.5%). The downgrade this year was largely due to investment whose contribution was lowered from -0.2% to -0.5%, i.e. a larger drag on the economy than initially thought. Even exports were downgraded, but thanks to lower imports (due to a much depreciated currency), trade is now contributing more to 2016 growth than in October’s MPR. Inventories are now expected to be more of a drag than previously thought. Gross domestic income is now expected to fall 0.2% this year (versus +1.2% in October’s estimate) largely due to a much downgraded outlook for commodity prices. The quarterly growth profile not surprisingly shows a much weaker 2015Q4 (flat versus +1.5% in October’s MPR). The first half of 2016 was also lowered significantly. The central bank opted not to give quarterly forecasts for the second half of the year and 2017. Potential GDP growth was left unchanged for 2016 at 1.4-2.2%. Ditto for 2017 which remains at 1.3-2.3%. The BoC now expects the economy to return to full capacity by the end of 2017, contrasting with the prior forecast for slack to be eliminated by around mid-2017.
The BoC’s inflation forecasts were lowered, with headline inflation not expected to return to 2% before 2017. The central bank again lowered its forecast for global growth this year to 3.3% due in part to downgrades to the US. The BoC made clear those forecasts did not include the upcoming fiscal measures which it says should be positive for growth. Press conference: Governor Poloz started his press conference by saying that the deliberation about the rate decision began with a bias toward further monetary easing. However, the likelihood of new fiscal stimulus was an important consideration in the decision. At this stage, both the size and composition of fiscal stimulus are not known. Accordingly, the BoC cannot quantify the multiplier effect, but it is fair to assume according to Mr. Poloz that the expected fiscal stimulus will have a positive impact on the economy. The full impact of monetary policy easing and a weaker currency are still to be felt, and therefore there is still a lot stimulus in the pipeline. In that context, despite the risk and uncertainty that the economy is facing, the BoC decided to keep its policy stance unchanged. The Governor reiterated that the loonie is acting as a shock absorber for the economy and noted how much it is correlated with oil prices. Bottom line: The decision to stand pat on rates was not surprising to us.
Thanks to the sinking Canadian dollar, monetary conditions are the most stimulative in more than a dozen years and the BoC thought it was best to keep its powder dry in case there is a further deterioration in economic conditions. The downgrade to growth was also not surprising. The BoC lowered its forecast for investment in the aftermath of the commodity slump. Despite the loonie’s plunge, the central bank sees exports contributing less to growth that what it estimated back in October. In other words, the currency boost to exports will be more muted than first thought, perhaps due to lost market share and diminished production capacity. That said, the BoC sees trade as being more of a contributor to growth than in the last MPR because of slumping imports (due to the weaker loonie). Where do we go from here? The central bank highlighted some potential downside risks such as falling oil prices and “threshold effects on growth”. So, further easing cannot be ruled out. But, the future course of monetary policy will to a large extent hinge on what the federal government
(Full report attached)
NBF Economics & Strategy Special Report: Sub-1% growth for Canada?
- The persistence of low oil prices means that the Canadian economy will again disappoint in 2016. As was the case last year, the major drag to the economy is set to come from non-residential investment which, despite the already sizable decline, risks contracting further.
- Alberta more than any province will bear the brunt of the expected drop-off in business investment, keeping the province in recession. Saskatchewan and Newfoundland & Labrador should likewise gird themselves for another tough year, with negative real growth more likely than not. But with little to no direct exposure to the oil sector, the remaining seven provinces should fare better.
- Absent an enlarged/accelerated fiscal policy response from Ottawa, we expect a double-digit decline in non-residential investment to drag Canadian growth down to 0.9% this year (previous outlook 1.6%).
- Our downgraded forecast takes into account a fiscal policy boost along the lines of that earlier promised by the new federal government. The combination of weaker real/nominal growth and pledged stimulus would imply a federal budget shortfall of ~$25 billion. But with fiscal policy the best available option for combatting underlying economic vulnerabilities, Canada needs (and can afford) a more forceful and timely fiscal policy response in the upcoming federal budget. While no cure all, an enlarged infrastructure-focused stimulus program could help paper over oil-induced weakness and put off the broader stall in Canadian growth we now fear. Failing an added fiscal boost, the onus for supporting growth would once again fall squarely back to the Bank of Canada.
(Full report attached)
- Five signs you’re counting too much on CPP for retirement (Globe and Mail)
- “Why saving 10% of your income is no longer enough to ensure a comfortable retirement” (Financial Post)
Week at a Glance
Full report attached.
Reads of the Week
- “Stock Market Sell-Offs Without a Recession” (A Wealth of Common Sense) While losses in the stock market are never enjoyable they’re still the best chance most of us have to see large gains in the future. This is the paradox of investing that is so painful and counterintuitive for people to grasp. Lower prices mean higher yields and higher expected future returns when new cash is put to work.
- “Five things investors should not do in a bear market” (Financial Post)
- What’s Going On? (The Irrelevant Investor)
- “The Last Days of Target” (Canadian Business) The untold tale of Target Canada’s difficult birth, tough life and brutal death
- Highly recommended weekend read and a follow-up to last week’s memo from Howard Marks: “What does the market know?”
Monday January 25th – None
Tuesday January 26th – U.S. Consumer Confidence Index
Wednesday January 27th – U.S. New Home Sales, FOMC Rate Decision
Thursday January 28th – U.S. Durable Goods Orders, U.S. Pending Home Sales, U.S. Initial Jobless Claims
Friday January 29th – Canadian GDP, Canadian Industrial Product Price, Canadian Raw Materials Price Index
Monday January 25th – McDonald’s
Tuesday January 26th – Canadian National Railway, Metro
Wednesday January 27th – CGI Group, Methanex, Rogers Communications, Facebook
Thursday January 28th – Potash Corp of Saskatchewan, Amazon.com, Microsoft, Raytheon, Visa
Friday January 29th – MasterCard, Chevron
Have a good weekend!
Categorised in: JMRD Updates