JMRD Market Observer for September 11th, 2015September 11, 2015
**September 11th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- BoC Policy Monitor- BoC, comforted by trade data, keeps rate at 0.50%
- Government Credit – Slip slidin’ away: Disappointing growth a persistent problem for Canadian budget makers
- Multiple Asset Class Basket: August Monthly Review
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
BoC Policy Monitor- BoC, comforted by trade data, keeps rate at 0.50%
As expected, the Bank of Canada left the overnight rate unchanged at 0.50%. While the central bank acknowledged uncertainty about the pace of global recovery due to China and emerging markets in general, it seemed encouraged by “firm recovery” in the US in sectors important to Canadian exporters. Moreover, exchange rate-sensitive exports are regaining momentum according to the BoC. The C$’s depreciation is indeed helping “absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy”. Looking ahead, the BoC thought dynamics of growth outlined in last July’s MPR remains intact. The central bank didn’t seem too concerned about the headline inflation rate lying at the bottom of the target range and core being close to target as it thinks transitory forces are at work. Bottom line: One month can make a huge difference in monetary policy. The Bank of Canada’s tone was indeed much less alarmist this time round. The sharp rebound in US economic activity and stronger Canadian exports seem to have given encouragement to Mr. Poloz who is also taking credit for earlier rate cuts which he thinks “are working their way through the Canadian economy”. While the central bank mentioned financial market volatility, it seems to be downplaying the recent deterioration in financial conditions. That said, the BoC didn’t entirely close the door for additional stimulus. It mentioned the adjustment to the oil shock will be complex and take considerable time. In other words, it is implicitly saying that monetary policy will stay highly accommodative for a long time.
One month can make a huge difference in monetary policy. The Bank of Canada’s tone was indeed much less alarmist this time round. The sharp rebound in US economic activity and stronger Canadian exports seem to have given encouragement to Mr. Poloz who is also taking credit for earlier rate cuts which he thinks “are working their way through the Canadian economy”. While the central bank mentioned financial market volatility, it seems to be downplaying the recent deterioration in financial conditions.
That said, the BoC didn’t entirely close the door for additional stimulus. It mentioned the adjustment to the oil shock will be complex and take considerable time. In other words, it is implicitly saying that monetary policy will stay highly accommodative for a long time.
(Full report attached)
Government Credit – Slip slidin’ away: Disappointing growth a persistent problem for Canadian budget makers
- Muted real growth, anemic commodity prices and natural disasters have been a potent trio in 2015. Fiscal pain has been most immediately observable in oil-levered jurisdictions;
- Ottawa’s 2015-16 budget balance is also under the microscope, given the upcoming October 19 election;
- Growth may pick up a little in 2016, but fiscally speaking, next year could produce an even bigger miss vs current thinking;
- Nationally, nominal growth could be barely 3% next year, substantially slower than the 4.9% clip built into the federal budget or the 4½% average pace the provinces eyed;
- That implies a nearly $5 billion hit to federal finances in 2016-17, on top of any pressure being felt in 2015-16 (Chart 1), potentially leaving less room to fund promises made by parties committed to balancing the books;
- Our provincial forecast update sees the level of nominal GDP in 2016 below budget everywhere outside of British Columbia. Add in below-plan commodity prices and you’re looking at a two-year $7 billion fiscal headache for the provinces;
- This pressure on federal and provincial finances does not incorporate any prospective stimulus measures;
- Revenue pressures needn’t result in a dollar-for-dollar hit to budget balances. Still, this isn’t what you want to see from a provincial government sector where debt-to-GDP sits at an all-time high. Economic weakness could also make credit rating agencies a little jumpy.
(Full report attached)
Multiple Asset Class (MAC) Basket: August Monthly Review
Attached is an update highlighting the strategy and performance of the Multiple Asset Class Basket for the month of July 2015. As a refresher, the Multiple Asset Class (MAC) Basket is managed by FNB Capital Asset Management in Montreal. The two principals of FNB are former NBF portfolio managers who decided to start their own firm. The two originally started the MAC Basket at NBF in 2005, took a hiatus from managing the Basket for a period of two years and returned in January of this year, taking over from Fiera Capital. The Team at FBN Capital uses a pension-like management approach with the MAC Basket with special attention paid to providing superior risk adjusted returns – striving to optimize returns with less volatility than the general equity markets. The MAC basket is a tactically managed portfolio which uses Exchange Traded Funds (ETFS) of various asset classes (cash, fixed income and equities and alternative investments) and geographies. We have also included a recent switch made in the Basket that highlights the risk management strategies employed by FBN Capital. (See attachment for more details.) MAC Basket August Monthly Review
OVERVIEW OF MARKETS
- The month of August certainly proves that the financial markets’ rollercoaster can be just as exhilarating as the real thing. All it took was a minor devaluation of the Chinese Yuan and a further slip in their growth rate to cause a full-blown market correction.
- Although it is still too early to conclude whether or not the correction is behind us, we are of the opinion that the risk of contagion is minor. As is often the case, these short-term moves have more to do with investor emotions than economic fundamentals.
PORTFOLIO STRATEGY AND VOLATILITY
- Another double switch in August can be seen as “part two” of what we started back in July. By selling our remaining position in HAF, we are completing our objective of reducing some of the more illiquid and riskier components (like high yield, senior loans and preferreds) of the fixed income market. Then, by reducing our position in XMD, we are reducing our exposure to the resource sector
- By adding to XBB, we have increased our weighting to our core bond position, while the purchase of CVD introduces an interesting hybrid security to the MAC through its holdings of convertible bonds.
JMRD Basket Corner
Diversified Income & Growth Basket
Dollarama (DOL) – Last Friday it was announced that Dollarama will be added to the S&P/TSX 60 index. On Thursday, the company reported very strong F2Q results which included 7.9% same-store-sales growth vs NBF estimates of 5.8%. As such, EPS easily topped consensus. The shares traded at a new all-time high and increased over 13% on the week.
Manulife (MFC) – On Thursday, Manulife announced the formation of a 15-year pension distribution partnership with Standard Chartered PLC in Hong Kong. As part of the arrangement, the partnership grants MFC exclusive access to Standard Chartered’s individual and business customers to sell its Mandatory Provident Fund (MPF) products. In addition, MFC will acquire Standard Chartered’s Hong Kong pension business, which includes both MPF and Occupational Retirement Schemes Ordinance (ORSO, the voluntary predecessor regime to the MPF) businesses. As of June 2015, these businesses managed approximately US$2.4 billion in assets (with US$2 billion of that attributable to MPF products). MFC expects the transaction to close in the first half of f2016
All-Cap Growth Basket
U.S. Growth Basket
- “Your retirement income: What will the government provide” (Globe and Mail)
Week at a Glance
See Week at a Glance Report.
Reads of the week
- “Avoiding the Certainty Trap” (The Irrelevant Investor) There are no certainties in the markets. Otherwise there would be no such thing as risk.
- NBF Hot Charts – U.S.: Crude oil production is declining Commodity Watch – Oil futures have been whipsawing in recent weeks as market participants attempt to get a handle on supply-demand dynamics. With so much volatility, we want to point to the work done by our colleague Greg Colman (equity analyst Energy Services & Agriculture). According to Greg, who looked back at seven years of data: “the forward curve fails to accurately predict the range in which oil will trade 82% of the time”. His conclusion is that “we can probably bet that over the next six years, the price of WTI will probably only be between $41.95 and $60.77 (the current forward curve’s range) only about 18% of the time”. Our colleague’s analysis comes at an opportune time as something may actually be happening on the oil-supply front. According to the EIA, U.S. crude oil production was down for the ninth consecutive week through August 28 – and for the fifteenth time in twenty four weeks. As the today’s Hot Charts show, U.S. oil extraction is actually declining over a six-month period for the first time since shale production went exponential in 2012. (chart attached) Hot Charts
Monday September 14th – Teranet/National Bank Home Price Index
Tuesday September 15th – Canadian Existing Home Sales, U.S. Retail Sales, U.S. Industrial Production, U.S. Capacity Utilization, U.S. Manufacturing Production
Wednesday September 16th – Canadian Manufacturing Sales, U.S. CPI
Thursday September 17th – U.S. Current Account Balance, U.S. Housing Starts, U.S. Building Permits, U.S. Initial Jobless Claims, FOMC Rate Decision
Friday September 18th – Canadian CPI, U.S. Leading Index
Monday September 14th – None
Tuesday September 15th – None
Wednesday September 16th – Oracle Corp
Thursday September 17th – Adobe Systems
Friday September 18th – None
Have a good weekend!
Categorised in: JMRD Updates