**February 5th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- NBFM Forex: The impossible Trinity
- NBFM Asset Allocation: January Blues
- National Bank Financial’s 2016 Dividend All-Stars
- Oil & Gas: 2016 Survival Guide
- JMRD Insurance Corner
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance\
- Reads of the week
- Economic Calendar
- Earnings Reports
NBFM Forex (February 2016) – The impossible trinity
It has been a volatile start to the year for all currencies starting with the Canadian dollar which sold off 5.5% during the first 3 weeks of the month before a 7.5% recovery into January.
- China is learning, the hard way, about the impossible trinity. You just cannot have free capital flows, a fixed exchange rate and independent monetary policy all at same time. The People’s Bank of China can either continue to run down its currency reserves or allow the yuan to float freely which would give back control of monetary policy to the central bank. A more yuan-friendly option perhaps is to temporarily impose capital controls, at least until investor confidence returns.
- With its inflation forecasts slated to be revised down yet again, the European Central Bank is poised to add stimulus at its March meeting, something that could weigh on the euro over the near term. The Bank of Japan, also struggling to hit its inflation target, took a page from the ECB’s book in January by pushing the deposit rate on excess cash balances held by financial institutions at the central bank into negative territory.
- Given the above, the USD is in a strong position to add to last year’s gains. But we remain hopeful the Fed will be as concerned as we are about the situation. Not only is a strengthening greenback hurting growth and keeping inflation low in the US, but it’s also raising risks of disorderly deleveraging in emerging markets considering the massive amount for USD-denominated debt in those economies. The threat of a global financial crisis and recession may be enough to convince the Fed to back down and tone down its tightening bias, something that could help take some steam out of the USD.
- We have lowered our forecasts for oil prices this year, expecting WTI to hit $40 by year-end ($50 previous forecast) and have accordingly downgraded our Canadian GDP growth forecast and C$ targets. Our call for USDCAD to hit 1.36 by year-end hinges not only on rising oil prices but also on a large enough fiscal stimulus from the federal government which would negate the need for the Bank of Canada to cut interest rates.
A recap of the important takeaways in this month’s FOREX report with the full report attached.
NBF Asset Allocation: January Blues
The year started with a bang, but it wasn’t in the direction anyone wished as China fears, added to the downturn in crude prices (-9.4%) created a general malaise that set up a major bout of risk-asset sales across the globe. A last minute rally wasn’t enough to offset the worst January performance since 2009 for the S&P 500 (-5.0%). Its Canadian counterpart didn’t fare any better, recording its third negative month in a row which is a consequence of crude oil troubles and mounting economic challenges in the country.
On the bond and currency side, the diminishing probabilities the Fed will hike rates in March and beyond impacted U.S. 10-year treasury yields as they lost 35 bps to close the month out at 1.93%. As for the US dollar, the risk-off mindset triggered a flight to quality asset movement that helped the currency appreciate 1.0%. The loonie dropped to 0.68 US$ before rebounding at the end of the month.
Asset allocation strategy
- We think markets are currently over-emphasizing bearish indicators and short-term news while ignoring the rest of the global environment. As such, there now seems to be a growing disconnect between dramatic financial market moves and the underlying economic situation.
- The current energy levels are the result of an overall oil glut, not decreasing consumption.
- While we believe defaults in the oil sector will ramp up in the coming months, this has been largely discounted in the markets via increasing spreads.
- Unless the situation improves materially in the near future, March is now out of the question for a hike and markets are now pricing fewer than two hikes in 2016.
National Bank’s 2016 Dividend All-Stars
Recently, NBF published its 2016 Dividend All Stars List. The list is a good starting point for companies that cover their dividends and equities having the capacity to grow dividends/distributions over time.
National Bank analysts collectively cover 350+ TSX-listed equities, of which roughly half offer investor’s income in the form of dividends or distributions. To help navigate this universe we assemble a portfolio that contains 33 of NBF’s favorite yield ideas, the basket spanning a variety of industries, sizes and liquidity.
The 2015 All-Stars outperformed the S&P/TSX composite over the last twelve months (-11.7% total return vs. -15% for the benchmark), with dividend/distribution increases from ten equities versus two cuts (there have been 55 increases versus four cuts from this portfolio since its 2012 inception). The average total return is 6% for the All-Stars versus 2% for the TSX in its four year history, and for investors seeking stable, predictable, elevated income and exposure to high quality companies we recommend the enclosed equities.
Changes to the list from Mid-Year 2015:
Added: Chorus Aviation, Cominar REIT, Enbridge Inc., Enbridge Income Fund, First Capital Realty, High Arctic Energy Services, Manitoba Telecom Services, MCAN Mortgage, Northland Power, Pembina Pipeline, Savaria Corp, Slate Retail, Student Transportation, Sun Life Financial, Toronto Dominion Bank, TransAlta Renewables, Transcontinental, WSP Global
Removed: AltaGas, ARC Resources, Cardinal Energy, CIBC, Canadian Energy Services, Crescent Point Energy, Dream Global REIT, Gibson Energy, KP Tissue, Mullen Group, National Bank, Premium Brands Holdings and Superior Plus
Oil & Gas: 2016 Oil & Gas Survival Guide
In a world of commodity over-supply to begin the year, and with re-balancing likely to begin on both crude and gas through the back half of the year, we remain cautious for first half of 2016, but are more constructive towards the prospects for a meaningful rally in the second half of the year.
Given pricing stress is expected to prevail through at least the medium term, and respective operating profiles are not generally sustained at current pricing (as discussed within this note), we continue to direct towards those producers with the most defensive characteristics (limited capital/dividend commitments, low costs & strong balance sheets). That said, we continue to note a group of operators whose business fundamentals remain reasonable and whose stock prices and valuations have underperformed, which could present attractive risk/reward exposure to a recovery. As such, we note defensive producer top picks as AAV, ARX, PEY, RRX, TOU, TVE, WCP and VET, relative to best positioned torquey top picks of BIR, BNE, CNQ, CPG, CJ and SPE.
- “How to avoid leaving RRSP tax headaches for your family” (Globe and Mail)
JMRD Basket Corner
BCE Inc (BCE) – BCE Inc. on Thursday raised its dividend and posted fourth-quarter results that largely met analyst expectations on stronger revenue from its wireless operations. BCE, whose Bell Canada unit is the country’s biggest telecommunications company, said performances across its business units were strong in the quarter, a period that covers the competitive holiday season. Still, the company’s latest quarterly results were hurt by higher costs related mainly to workforce restructuring moves, which led to an 8.5% decline in net income to 496 million Canadian dollars ($360 million). Excluding items, BCE’s adjusted earnings were unchanged at 72 Canadian cents a share, in line with the Thomson Reuters mean estimate. Revenue improved 1.4% to C$5.60 billion, also in line with the C$5.63 billion analysts were expecting.
All-Cap Growth Basket
Exco Technologies – Exco Technologies Limited announced a quarterly cash dividend of $0.07 which represents a 17% increase. Brian Robbins, CEO of Exco said, “Strong business fundamentals continue to support our financial performance. In light of this and after having reviewed Exco’s capital needs over the balance of the year together with its liquidity position, I am pleased to announce this dividend increase”. This is the seventh increase in six years over which time the dividend increased 250%.
U.S. Growth Basket
Limited Brands (LB) – L Brands Inc. on Thursday raised its profit outlook for the recently ended fourth quarter, though the parent of retailers such as Victoria’s Secret reported a surprise decline in a key sales metric in January. L Brands, which also owns mall stalwart Bath & Body Works, said it now expects earnings of $2.05 a share, above its earlier guidance for earnings of $1.85 to $1.95. That would also top the $2 a share analysts polled by Thomson Reuters are forecasting for the quarter
Week at a Glance
Full report attached.
Reads of the Week
- “How Canadian stocks fared during January’s market carnage” (Globe and Mail) For Canada’s biggest publicly traded companies, 2016 started on a sour note
- “Why Canadian equities are due for a comeback” (Canadian Business) Canadian stocks have underperformed their American counterparts for five years now. That imbalance is an opportunity
- “ROB Magazine: The Sixth Annual Invest Like a Legend issue” (Globe and Mail)
- “Why Bonds Are So Confusing” (A Wealth of Common Sense) A very good explanation of how bond math works.
- Money 101: Three things every teen should understand about money (Globe and Mail)
- “Super Bowl 50: 50 Greatest Facts” (Forbes)
Monday February 8th – Canadian Housing Starts, Canadian Building Permits
Tuesday February 9th – None
Wednesday February 10th – None
Thursday February 11th – Canadian New Housing Price Index, U.S. Initial Jobless Claims,
Friday February 12th – U.S. Retail Sales, U.S. Business Inventories, U. of Michigan Sentiment
Monday February 8th – None
Tuesday February 9th – Agrium, Canadian REIT, Cineplex, Open Text, CVS Healthcare
Wednesday February 10th – Agnico Eagle, FirstService, Intact Financial, Just Energy, Keyera, Sun Life, Smart REIT
Thursday February 11th – Canaccord Financial, Manulife, TELUS, Thomson Reuters, Uni-Select
Friday February 12th – Brookfield Asset Management, Emera
Have a good weekend!