JMRD Market Observer for March 24th, 2017 – Second Liberal Budget more fine-tuning than fiscal overhaul

March 24, 2017

In This Week’s JMRD Market Observer

 

 

  • The Canadian Budget – Second Liberal Budget more fine-tuning than fiscal overhaul

  • Tax Season Update

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports

 

 

The Canadian Budget – Second Liberal Budget more fine-tuning than fiscal overhaul

 

Highlights

 

  • The Liberal government’s second budget stayed on message, reiterating a goal of inclusive growth. If there are notional themes to this second Liberal budget, they centre on innovation, skills development, community development and gender-related issues.

 

  • Granted, there’s also a certain “wait and see” element to this budget, necessitated by the intense uncertainty around the future direction of US tax and trade policy under a new American administration.

 

  • A deficit of $23.0 billion is now estimated for the outgoing fiscal year, equivalent to 1.1% of GDP. Larger deficits are projected over the coming two years. The budget envisions a $28.5 billion deficit for 2017-18, amounting to 1.4% of GDP.

 

  • That’s to be followed by a $27.4 billion shortfall in 2018-19 (1.2% of GDP). The net fiscal impact of policy decisions taken since the fall statement are fairly negligible over that two-year window, given offsets within the existing framework or via projected revenues.

 

  • Bottom line figures explicitly build in a $3 billion “adjustment for risk” in each of the coming five fiscal years, sufficient to cover a roughly 0.6%-pt miss in real GDP growth.

 

  • Control for prudence and the underlying deficit tallies in budget 2017 are remarkably similar to those presented in November. All told, the cumulative underlying budget shortfall for the six-year period covering 2016-17 to 2021-22 is now estimated at $127.8 billion, a snick better than the aggregate deficit of $129.5 billion set out in November.

 

  • The debt-to-GDP ratio moves ever so slightly higher, from 31.5% in the outgoing year to 31.6% in each of the coming two years, ending up a bit below 31% by 2021-22. That might not be the lowest ratio amongst the exclusive ‘AAA’-rated sovereign club, but is reflective of a federal government with good long-term fiscal sustainability.

 

  • There were no major tax changes and no change to capital gains treatment, no move on asset sales or airport privatizations, and a bit more information on the Canada Infrastructure Bank.

 

  • There are a lot of bonds to auction in the year ahead—a record $142 billion in fact. That would see the debt stock grow by $39 billion. But by and large, the borrowing program effectively extends the current quarterly run-rate of bond supply/operations. The bulk of supply and 32 of 44 planned auctions will be in the 2-, 3- and 5-year sectors. There is an extra 30-year nominal bond auction thrown in for good measure and two switch buybacks planned out the curve. Ultralongs could be considered if conditions are favourable.

 

  • The national economic forecast looks a fair bit brighter today, if still uncertain. The private sector consensus (taken back in December) saw Canadian real GDP growing at 1.9% this year and 2.0% the year after. Given the strength of recent data, it’s reasonable to assume that some forecasters are boosting expectations for 2017 growth relative to what they were thinking in December. Meanwhile, the anticipated level of nominal GDP is really little changed vs last fall’s economic update, a welcome change from the write-downs in the past two budgets.

 

See the full article.

 

Infra spending & 2017 Federal Budget – no changes to previously announced programs (which are very material)

 

Federal budget 2017 – impact on infra (neutral vs. Fall Economic Statement in late 2016). In a nutshell, same spending commitments but more granularity on where the government will be allocating its capital. As you recall, the Fall update promised an extra $81 bln in spending spread over 11 years – i.e., the Long-term Infrastructure Plan (namely,$25.3 bln / $21.9 bln / $21.9 bln / $10.1 bln / $2 bln on transit, clean air/water, social infra (education, recreation, health, affordable housing), transportation links, and rural communities). All-in, assuming that the money is spent, infrastructure spending as % of GDP would be jumping to almost 8% (vs. 2.2% now). So obviously large numbers but not incremental vs. already announced programs.

 

See the full article.

 

SNC Lavalin is held in the JMRD DIG Basket and North American Energy Partners is held in the JMRD All Cap Basket. 

 

As we highlighted above in the first section, despite the rumours leading of the budget release, there was no change to the tax treatment of capital gains – to the relief of most long-time investors.  The attached report contains an explanation of some of the specific changes announced in the Budget.

 

See the full article.

 

 

TAX Season Update

 

We wanted to let you know that this week the JMRD Team emailed out all gain/loss reports for all personal taxable accounts. These reports were sent by Joe Di Brita and Matt Aalbers from the JMRD Team.  In the past, you may not have received many emails from Joe and/or Matt so we suggest checking your junk mail folder if you think you should have received a gain/loss report but didn’t. 

We also wanted to pass along that final T3 slips will be sent by reporting companies by the end of next week.  We continue to encourage clients with taxable accounts to wait until the first or second week of April before filing taxes, just to ensure that the last slip does not arrive unexpectedly, after the fact. 

Please do not hesitate to call any team member if you have any questions on tax matters.

 

 

JMRD Basket Corner

 

DIG Basket

 

TransCanada Pipelines (TRP)More Hurdles Ahead for Keystone XL, TransCanada Head Tells Trump

 

All-Cap Growth Basket

 

Boyd Group (BYD.UN) – Results largely in line with NBF and Street BYD reported Q4/16 revenue of $360.5 mln (vs. $380 mln est. & $312.5 mln Q4/15), adj. EBITDA of $32.6 mln (vs. $33.1 mln est. & $28.5 mln Q4/15) and adj. DCPU of $1.88 reflecting a 7% payout (vs. $1.48 est. / 9% & $1.55 / 8% Q4/15). Results were consistent with the Street’s estimates of $362.4 mln top line and $33.2 mln EBITDA.

  • SSSG (Same store sales growth) and profitability resilient:  Q4 SSSG on a same-FX basis was +4.5% (as anticipated) and adj. EBITDA margins 9.1% (vs. 8.9% est.), highlighting the company’s relative predictability and sustainability despite some headwinds (relatively warm/dry weather for the period, glass franchise impacted by downward industry pricing).

 

See the full article.

 

New Flyer Industries (NFI) – Q4/16 revenue was US$623 mln (US$600 mln est. & Street’s US$625 mln) and adj. EBITDA US$77 mln (US$74 mln est. & Street’s US$80 mln, but there was an outlier at US$92 mln… the rest between US$74-US$77).

  • We saw outperformance from both of NFI’s verticals… Bus manufacturing US$59 mln vs. our US$57 mln on record deliveries and healthy margin per bus (US$59k vs. US$45k last Q4); Aftermarkets US$18 mln versus our US$17 mln, which is a nice print as the business is seeing negligible organic top-line growth given so many transit authorities are buying new buses, which in the short term erodes demand for parts. The stock hit an all-time high this week.

 

See the full article.

 

Milestone Apartment REIT (MST.UN) Milestone Apartments REIT and Starwood Capital Group Agree to Revised Going Private Transaction

 

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

 

 

 

 

 

Economic Calendar

         

Monday March 27th – None

Tuesday March 28th – US S&P Case-Shiller Home Price Index, US Consumer Confidence

Wednesday March 29th – US Pending Home Sales

Thursday March 30th – US GDP Q4, US Initial Jobless Claims

Friday March 31st – Canada Real GDP; US Chicago ISM

 

 

Earnings Reports

 

Monday March 27th – None

Tuesday March 28th – None

Wednesday March 29th – None

Thursday March 30th – Dollarama

Friday March 31st – Blackberry

 

 

Have a good weekend!

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