**December 6th Issue of The Market Observer**
In This Week’s Market Observer…
- · NBF Monthly Equity Monitor
- · NBF Asset Allocation Strategy – December 2013
- · NBFM Forex – Sentiment turns against the Loonie
- · JMRD All-Cap Basket Company Update
- · 2013 Tax Reminders
- · Retirement Corner
- · Week at a Glance
- · Reads of the week
- · Economic Calendar
- · Earnings Reports
NBF Monthly Equity Monitor – December 2013
The last few weeks have been action-packed as financial markets continue to adjust to potential shifts of monetary policy in the advanced economies and to structural reforms in China. At this writing the MSCI All Country index is up 1.1% in November to date and 20.1% year to date. The index is now within 5% of its all-time high of 2007. However, emerging markets in all regions have retreated over the month to date. – This outcome probably reflects uncertainty arising from China’s slowing exports and structural reform. Developments in November suggest that things are not so bad. All told, the Chinese economy seems ready to grow at an annual rate of about 7.5%. The medium-term outlook remains encouraging in the wake of Beijing’s unveiling of its most comprehensive reforms since the 1990s. – After two sluggish years, the bottom-up consensus sees for next year an across-the-board improvement in profitability for S&P/TSX corporations. Even if its growth estimate were cut in half, to 6.4% from 12.8%, the S&P/TSX would still be trading near its historical average of about 15 times forward earnings. Equity markets are not cheap right now, but P/Es have upside remaining if the economy improves against a backdrop of tame inflation and low interest rates. By another valuation yardstick, dividend yield, today’s market looks more affordable. – We are modifying our asset allocation this month to reflect the resilience of the U.S. economy and a downward revision to our inflation forecast. We are paring back our cash position from 10% to 5% and adding to equities which are moved to overweight from underweight (to 57% from 52%). Even if tapering remains the most likely scenario early in 2014 given the resilience of job creation, communication on interest rate guidance will be much more sophisticated this time around as to better anchor the future path of interest rates. The very tame inflation backdrop provides credence to the monetary authority. Financial markets should be better prepared to deal with tapering this time around, even more so if the European Central Bank turns more aggressive with respect to an expansion of its balance sheet. Our sector rotation is also modified to reflect our change in asset mix.
NBF Asset Allocation Strategy – December 2013
Asset allocation strategy
1 ‐ Negative bond returns… again: Maintain a short duration, with government bond exposure at a minimum and a corresponding overweight position in riskier issuers.
2 ‐ Search for yield: Continue to underweight REITS, favouring the U.S. over Canada. Keep a preference for high‐yielding dividend stocks and ETFs or issuers increasing payouts.
3 ‐ Stocks in a secular uptrend: Keep an overweight position in equities at the expense of fixed income securities, and favour developed markets over emerging markets. We believe that U.S. and EAFE markets should continue to outperform markets linked to commodity prices, and our preference goes to U.S. small capitalization stocks as opposed to large caps.
4 ‐ U.S. dollar strength: Investors should benefit from being positioned in assets denominated in currencies other than the Canadian dollar. This argues in favor of U.S. markets and undervalued European markets, which still afford great opportunity and should be bought on euro weakness.
5 ‐ Commodity prices range‐bound: Until there is clear evidence of a pick up in inflation, maintain a neutral allocation to commodity‐linked assets and favour oil relative to precious metals.
NBFM Forex (December 2013) – Sentiment turns against the loonie
All of a sudden, Canada can’t do anything right. At least that’s what some investors seem to believe given the speed at which sentiment has turned against the loonie. The deal struck by the international community with Iran, which allows for a gradual relaxation of sanctions under some conditions, will eventually add Iranian oil to the global supply pool. That announcement helped trim risk premiums, putting a dent in oil prices and hence the Canadian currency. Further pressure was applied on the C$ by bearish analyst reports. The loonie’s downtrend seems to have momentum, fueled by self-fulfilling negative investor sentiment and partly by a deterioration in the terms of trade. We are adjusting our forecasts accordingly by raising our end of- Q1 USDCAD target to 1.10, although we expect the currency to stabilize afterwards as economic fundamentals improve.
The euro rallied on news that the zone’s unemployment rate fell one tick to 12.1% and the annual inflation rate rose two ticks to 0.9%. Of course, the bid on the common currency is unwarranted because such awful economic data raises the odds that the European Central Bank will loosen monetary policy not tighten it. We continue to expect the ECB to engage into unconventional monetary policy, e.g. perhaps another LTRO or something a bit more potent early next year, which will incidentally coincide with tapering of the Fed’s asset purchase program, presenting a double whammy for the euro. We are maintaining our 1.28 end-of-2014Q1 target for EURUSD.
JMRD All-Cap Basket Company Update
Continuing with our introduction of the JMRD All-Cap Basket, this week we discuss Magna International (MG) and Methanex (MX), the most recent purchase in the basket. Magna, based in Aurora, ON is a huge auto parts company with 315 manufacturing plants and 87 product development centres in 29 countries, employing a total of 121,000 people. The company’s products including just about everything that can gino a car or small truck: seta, doors, mirrors, powertrains, roofs, bodies and chassis. In some cases, entire cars are assembled at Magna plants. The company has a solid position in the global automotive industry, steady growth, strong balance sheet and track record of dividend increases.
Methanex produces, supplies, and sells methanol to petrochemical producers and distributors. The company also purchases and re-sells methanol produced by others. Its methanol is a clear liquid commodity chemical that is used to produce traditional chemical derivatives, including formaldehyde, acetic acid, and various other chemicals. The company’s methanol is used in energy-related applications; for blending into gasoline, as a feedstock in the production of dimethyl ether, which can be blended with liquefied petroleum gas for use in household cooking and heating, and in the production of biodiesel; and to produce methyl tertiary-butyl ether, a gasoline component, as well as used into olefins applications. In addition, it operates a fleet of methanol ocean tankers with a capacity ranging from 3,000 to 100,000 deadweight tons. The company has a network of production hubs and terminals in North and South America, New Zealand, Europe, the Middle East, and Asia, as well as distributed terminals and storage facilities located throughout in the U.S Gulf Coast, the Mediterranean, Northwest Europe, Korea, and South China. Methanex Corporation was founded in 1968 and is headquartered in Vancouver, Canada.
2013 Tax Reminders
- Last day for Tax Loss selling of Canadian Equities – Tuesday December 24, 2013
- Last day for Tax Loss selling of U.S. Equities – Thursday December 26, 2013 (Canadian Markets closed December 26)
Taking advantage of tax-loss selling http://www.marketwatch.com/story/how-to-cash-in-on-year-end-selling-2013-11-01
- 2013 TFSA contribution deadline – Monday December 31, 2013 – contribution limit $5,500.00
- Note, if you are planning a TFSA withdrawal in early 2014, consider withdrawing the funds by December 31, 2013. The advantage is that you will not have to wait until 2015 to re-contribute that amount. 2014 TFSA contribution limit is $5,500.00.
- 2013 RSP contribution deadline – Monday March 3, 2014. The 2013 maximum RRSP contribution limit is 18% of “earned income” in 2012, to an annual maximum $23,820.
How we’ll afford retirement
The below infographic compares the United States to Canada and 19 other industrialized countries in a variety of measures of retirement preparedness and quality of life. Canada scores well for its low levels of seniors living in poverty. Interestingly, at a time of debate about expanding the Canada Pension Plan, the data here shows Canadians pay a comparatively small percentage of their wages to mandatory social security programs.
Week at a Glance
Reads of the week
“Canada at Crossroads in Bid to Become Energy Superpower” (Bloomberg) Canada’s bid to become what Prime Minister Stephen Harper calls an energy “superpower” is at risk as approval delays for new pipelines threaten an industry already hurt by high costs and rival production.
Bull or Bubble?: Ritholtz Chart” (Bloomberg) Of the myriad reasons we could possibly see a correction beyond the pullback of the past five days, the markets’ year-to-date gains of double digits or even 20 percent are not one of them.
Monday December 9th – Canadian Housing Starts
Tuesday December 10th – None
Wednesday December 11th – U.S. Monthly Budget Statement
Thursday December 12th – Canadian Capacity Utilization, Canadian New Housing Price Index, U.S. Retail Sales, U.S. Initial Jobless Claims
Friday December 13th – U.S. PPI
Monday December 9th – None
Tuesday December 10th – None
Wednesday December 11th – Costco Wholesale, Laurentian Bank of Canada
Thursday December 12th – Empire Co
Friday December 13th – None