**September 4th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- NBF Asset Allocation Strategy – Chinese puzzle
- NBFM Forex – Loonie weakness to persist
- Canadian Flows: ETFs ride the Roller Coaster
- NBFM Fixed Income – Forecast Revision: BoC to stand pat in September
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Asset Allocation Strategy: Chinese Puzzle
Rattled by uncertainty about the Chinese devaluation of the Yuan and the bursting of its stock market bubble, the S&P 500 entered correction territory but rebounded late in the month to record a loss of ‐6.0%, which is the worst monthly performance since September 2011. Volatility didn’t spare the S&P TSX which recorded ‐4.0%.
The US dollar index lost 4.1% at the height of the panic as investors were expecting the Fed to postpone its monetary tightening, but as the market caught its breath, it bounced back to post ‐1.6% for the month.
Asset allocation strategy
- There is uneasiness about the way the Chinese authorities are handling the popping of their stock market bubble. By itself, the correction in the Shanghai Index is meaningless for world equities at large and the average Chinese consumer, as it only represents a tiny fraction of household assets.
- Overall, we think the question investors must ask themselves is: are the developed market economies solid enough to withstand a Chinese deceleration? We think the answer is a cautious “yes” ‐‐ for now.
- In light of the recent events stemming from China, and stock market volatility, we think it is wise to maintain a little bit of extra cash while we wait for the dust to settle and we get more clarity about the situation.
- In the U.S., we prefer mid‐caps over their larger counterparts, as we think they are best positioned to take advantage of domestic growth, and are also more insulated from volatile international markets and lower foreign profits caused by a strong U.S. dollar.
- We prefer an allocation towards developed market equities over their emerging market counterparts.
(Full report attached)
NBFM Forex (September 2015) – Loonie weakness to persist
- A looser yuan peg and subsequent devaluation of other currencies in the emerging world took the trade-weighted USD to levels not seen in a dozen years. The dollar rally, though already extended, still has legs due to diverging monetary policies between the Fed and other major central banks. Above-potential GDP growth slated for this year and continued strength in employment have got us ever closer to a first interest rate hike by the Fed in almost a decade.
- Interestingly, the USD’s gains in August were not at the expense of the euro and the yen, both currencies benefitting from unwinding of carry trades amidst the global stock market rout. It’s unclear, however, if those low yielding currencies can maintain the pace if financial markets stabilize. Both the Eurozone and Japan are seeing tepid growth and below-target inflation. So, expect the BoJ and ECB to continue running their printing presses at full speed over the next several quarters, something that should weigh on the euro and yen.
- The Canadian dollar remains under pressure. The outlook for oil prices is dull due to excess supply and weak global growth. Monetary policy is also not favourable with a widening US-Canada yield differential likely to hurt the currency. The large current account deficit and dependence on short term capital flows to finance it, are also not encouraging. Complicating matters is the upcoming federal elections which promise to add a dose of uncertainty. We expect USDCAD to trade in the 1.30-1.40 range through the end of next year.
(Full report attached)
Canadian Flows: ETFs Ride the Roller Coaster
Monthly update on the Canadian ETF sector and recent trends and fund flows.
Canadian ETF Flow:
- ETFs resumed their billion dollar per month flow trend in August with creations of $1.2 bln
- Rising volatility fears seem confined to emerging markets, based on flows to international ETFs
- Currency-hedged U.S. equity is making a comeback as the Canadian dollar tests new lows
- The ETF market is still burgeoning, with new launches, new providers and a handful of delistings
- Canadian ETF assets now stand at $84 bln, a slight decline from last month because of significant market volatility.
- In such times it’s no surprise that bonds remain in demand, with creations amounting to $448 mln.
- Far from reflecting a risk-off atmosphere, however, Equity ETFs in Canada still pulled in $676 mln, with only Canadian equity ETFs, China and other emerging market ETFs out of favour
(Full report attached)
Lower loonie lures Canadians to currency-hedged ETFs
NBFM Fixed Income – Forecast Revision: BoC to stand pat in September
After a data-packed week which saw GDP, trade and employment beat expectations, we no longer expect the Bank of Canada (BoC) to reduce its policy rate next week. As shown below, though GDP and commodity prices may have turned out to be softer than expected by the central bank over the first half of the year, the other components of our BoC dashboard have held up relatively well (see below). The August Canadian employment report released this morning was the last major piece of information that may have swayed the BoC. However, surprisingly strong gains in full-time employment and in Western Canada will have dissuaded Mr. Poloz from cutting rates again in September. Attached you will find our revised interest forecast for the coming year for Canada and the United States (where we still expect a rate hike before the year end).
JMRD Basket Corner
All-Cap Growth Basket
Alimentation Couche-Tard (ATD.b) – On Tuesday, Alimentation Couche-Tard posted a better-than-expected profit in the fiscal first quarter, crediting its cost-control efforts and contributions from both organic growth and acquisitions. The company said it earned $304.0M, or 53 cents a share, in the three months ended July 19, up from $269.5 million, or 47 cents, a year earlier. The latest results included a small foreign-exchange gain of $6.8 million. Adjusted to exclude items such as net foreign-exchange impacts and acquisition costs, earnings were 53 cents a share in the latest period, up from 48 cents a year earlier. The latest result was well above the profit of 46 cents that analysts were expecting. Revenue slipped 2.3% to $9.0 billion, largely reflecting lower prices at the gas pump. The company noted that same-store road transportation fuel volumes rose 9.4% in the U.S., 2.7% in Europe and 1.4% in Canada. Couche-Tard’s global convenience-store network includes close to 15,000 sites, and it is the largest independent convenience store operator in the U.S. in terms of number of company-operated stores. The company has bulked up through a string of acquisitions in recent years, notably acquiring Pantry Inc. earlier this year for $860 million to increase its footprint in the southeastern U.S.
- “No more pencils, no more books — for recent graduates fall is all about paying off debts” (Financial Post)
- “Students: How to budget, manage debt” (Moneysense)
Week At a Glance
See Week at a Glance Report.
Reads of the week
- NBF Strategy Comment for August 31, 2015: Fed still intent on hiking, China: Meaning of “more precise” measures?, Another rate cut in Canada
(Full report attached) Morning Strategy Comment
- “Canada’s banks rethink branches for a disruptive era” (The Globe and Mail)
- “Have Bonds Failed” (The Irrelevant Investor) Answer: No. “What investors can expect from bonds, is the dry powder they may provide when stocks experience something more than a ten percent sell off. The ability to rebalance into stocks as they go on sale is one of the main reasons why diversification works over the long-term.“
- “NBF Hot Charts – Canada: This doesn’t look like a recession” We realize that bad news sells, but is it accurate to use the infamous “R” word to depict the Canadian economy? The simple rule of thumb that a recession is defined as consecutive quarterly declines in GDP may be too simplistic, even more so in this particularly instance. Though real GDP was down 0.5% annualized in Q2, the non-energy sector (90% of the economy) actually expanded 0.6% on the back of a June rebound which saw no less than 17 of 20 industries reporting higher output. In the U.S., a recession according to the NBER is defined as “a significant decline in activity spread across the economy, lasting more than a few months, and visible in industrial production, employment, real income and wholesale-retail trade”. So far, industrial production is the only sector that has seen a significant decline in activity in Canada. We need to see economic weakness spread to the service sector to confirm the end of the economic expansion. As today’s Hot Chart shows, we were clearly not there in Q2 with service-producing industries showing a 2.3% increase in output. At this juncture, the scope and amplitude of the drop in economic activity so far in 2015 looks more like stagnation than recession, unless of course you work in the energy industry. (Full note attached) Hot Charts
Monday September 7th – Labor day – North American markets closed
Tuesday September 8th – None
Wednesday September 9th – Canadian Housing Starts, Canadian Building Permits, Bank of Canada Rate Decision
Thursday September 10th – Canadian Capacity Utilization rate, Canadian New Housing Price Index, U.S. Initial Jobless Claims
Friday September 11th – U. of Michigan Sentiment
Monday September 7th – None
Tuesday September 8th – None
Wednesday September 9th – Empire Co
Thursday September 10th – Dollarama Inc
Friday September 11th – The NorthWest Co
Have a good long weekend!