**August 8th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- NBF Asset Allocation Strategy – August 2014
- Aston Hill Growth and Income Fund
- NBF Markets’ Review
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
NBF Asset Allocation Strategy – August 2014
Equity markets were hit by the rise in global risks at the end of July that sent most indices tumbling. After coming within a hair’s breadth of breaching 2000 points, the S&P 500 fell nearly 3% over the last week of the month, posting a total loss of 1.4% in July. Meanwhile, government bonds had a tough time playing their role of safe haven, with markets reassessing their expectations of future monetary policy following a slightly hawkish tone by the Federal Reserve. Ten-year treasury yields rose from a low of 2.44% to a high of 2.56% by the end of July, reversing the trend set in the first half of the month. Despite a pickup in inflation, gold prices fell from a high of US$1,339 per ounce to a low of US$1,282 over the period.
Asset allocation strategy
- Equities: Over the shorter-term, we recommend maintaining a prudent approach. Risks remain skewed to the downside and the probability of a further pullback cannot be excluded as seasonality becomes unfavourable to equities with the end of the summer approaching. Over the longer term, however, equities will continue to offer the best expected returns. We are maintaining our asset allocation stance over the 12 to 18-month horizon.
- Fixed income: With the Fed acknowledging that inflation is closer to its target and the job market continuing to improve, nominal yields are not appealing at current levels. If inflation begins to rear its ugly head, investors may want to hedge risks with real return bonds or gold.
- Commodities: Because of their very low price-to-book valuation, we continue to expect gold mining stocks to outperform the raw commodity.
Aston Hill Growth and Income Fund
In past Market Observers we have profiled the Aston Hill Growth and Income fund as a balanced mandate that is quite unique to other balanced funds in Canada. We have recommended this fund in many Tax Free Savings Accounts, RESPs and RRSPs over the past few years and it has performed well during that time. The attached piece provides a more in-depth analysis of the fund and gives some examples of the strategies that are employed which help to differentiate Aston Hill from others within its peer group.
NBF MARKETS’ REVIEW – July 2014
Volatility returned to markets during July after a three months hiatus, on concerns that interest rates in the U.S. will have to increase much earlier than many had anticipated. The concerns were kindled by the release of second quarter GDP report, which showed that growth in the world’s largest economy gaining momentum.
Other factors that also caused volatility to spike in July included considerable escalation in tensions in the Middle East and Eastern Europe, as well as a debt default in Argentina.
War activities between the Palestinian group Hamas and Israel intensified in July as U.S. led efforts to end the violence failed. Meantime, skirmishes between the Ukrainian army and Russian separatist rebels in the East of the country gathered steam and an Indonesian plane was shot down over Ukraine. The downing of the plane which is being blamed on the Russian separatists rebels drew worldwide condemnation and triggered the introduction of another round of sanctions against Russia and Russian businesses by the European Union, the U.S. and Canada. The broadening of sanctions caused investors to sell down their exposure to European companies, especially those that are directly impacted. Oceans away, Argentina defaulted on its debt for a second time in the last thirteen years and put investors on alert for possible contagion across emerging markets.
In normal times, the increase in geopolitical tensions would cause bond and gold prices to rally. However, in July, bond yields in the U.S. increased, while gold lost some of its allure. Yields in the U.S. increased as bets that the Federal Reserve will soon begin to increase interest rates were ratcheted up, while bonds in countries such as Spain and Portugal sold off in reaction to Argentina’s default. For its part, gold was pushed lower by a strengthening U.S. dollar, which rose to multi-months highs against the European common currency. The Euro continued to be bogged down by the prospects of deflation and the possibility that the European Central Bank (ECB) might increase the amount of stimulus that it is already injecting. Elsewhere, crude oil prices also declined in the face of a stronger dollar and increased production.
JMRD Basket Corner
Keyera (KEY) – KEY Q2 results handily beat expectations with adjusted EBITDA of $129M above the Street consensus of $109M. Importantly, over 50% of the beat resulted from fee-based segments (Gathering & Processing, NGL Infrastructure) and can be considered recurring. The shares traded higher by 6% and a new all-time high.
Manulife Financial (MFC) – A new addition to the DIG Basket this week, MFC announced a 19% dividend increase this week, its first dividend increase since the 2008-2009 Financial Crisis. This is seen as a ‘new era’ and the company indicated it will focus less on building a fortress balance sheet and more on creating shareholder value.
Whitecap Resources (WCP) – WCP reported Q2 results this week and remains a core energy-yield holding. Whitecap exceeded Cash Flow Per share forecast CFPS beat, compelling disposition and its production update implies second half volumes could come in higher than forecast. The stock is still trading at a discount to peers and offers 10-15% dividend growth over the next 6-months
CCL Industries (CCl.b) – CCL announced that it has signed a binding agreement to acquire Bandfix AG (“Bandfix”), located near Zurich, Switzerland. Bandfix is a privately owned label company increasingly focused on European Specialty customers with estimated sales for the calendar year of 2014 of $47.0 million and anticipated adjusted EBITDA of approximately $3.5 million. The agreed debt and cash free enterprise value is $18.0 million subject to customary closing adjustments. CCL traded at a year-high of $117.00 this week
Magna (MG) – Auto-parts maker Magna posted better-than-expected second-quarter results Friday and raised its sales guidance for the year following stronger vehicle production in North America and Europe. The shares traded up 4.5% following the news and a new all-time high
U.S. Growth Basket
1) “There is such a thing as too much saving” (Globe and Mail)
2) “Downsizing? A plan to invest the proceeds carefully” (Globe and Mail)
Week at a Glance
Reads of the Week
- “No matter what, the long term investor comes out ahead of the short-term trader” (Washington Post)
- “4 lessons from Warren Buffett’s biggest quarter ever”(Yahoo Finance)
- “Peter Lynch on Stock Market Losses” (A Wealth of Common Sense)
- “Buying time: Investors should take advantage of correction fears” (Globe and Mail)
- “Fired Managers Outperform Hired Managers” (Reformed Broker)
- “Essential reading for homebuyers”
- NBF Hot Charts – Canada: A dramatic shift in the sourcing of QC oil refineries. The U.S. is now the #1 supplier of crude to Quebec – not Canada because of a lack of pipelines to move oil from Western Canada Hot Charts
Monday August 11th – Canada Housing Starts
Tuesday August 12th – None
Wednesday August 13th – Canadian Teranet/National Bank Housing Index; US Retail Sales
Thursday August 14th – US Initial Jobless Claims
Friday August 15th – Canada Manufacturing Sales, Canada Existing Home Sales; US Empire Manufacturing Index, U of Michigan Consumer Confidence
Monday August 11th – Aecon, Legacy Oil + Gas,
Tuesday August 12th – Allied Properties,
Wednesday August 13th – Crescent Point Energy, Cisco, Deere
Thursday August 14th – Walmart
Friday August 15th – None
Have a good weekend!
The Market Observer returns in 2 weeks.