**January 30th Issue of The JMRD Market Observer**
In This Week’s Market Observer
- JMRD Strategy Note
- National Bank’s 2015 Dividend All-Stars
- NBF Monthly Economic, Equity & Fixed Income Monitors
- Webcast: NBF 5-minute Market Review
- JMRD Basket Corner
- 2015 Tax Reminders
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Strategy Note
With the first month of the new year almost complete, North American Equity Markets have seen an increase in volatility. As of this writing, the TSX index has eked out a small gain and the S&P 500 is down 2% for the month – after three consecutive years of 13% or better returns. The end of Quantitative Easing in the US (Federal Reserve buying bonds in the market with printed money to keep rates low in an attempt to stimulate the economy) is cited as one reason – volatility increased following the last two times QE ended. In addition, there have been large swings in the currency markets, where investors often use leverage to increase returns on typically smaller currency moves. The added leverage can lead to increased volatility. The Canadian dollar has moved lower by 7% versus its US counterpart and the Euro has continued its selloff with Europe’s confirmation of an open-ended bond buying program, which is an attempt to try to kick-start their economy. Volatility is not necessarily a bad thing. It can also indicate indecision in the markets, but investors have seen a period of generally lower volatility over the last couple of years. While the media will look to ascribe reasons for day-to-day movements, we would avoid linking any short-term event to a reason for a specific day’s or week’s move. Volatility in markets should be expected (both upside and downside) and not a reason to make dramatic changes to a portfolio. One should be comfortable with their Asset Allocation.
The movements behind oil and the Canadian Dollar have been persistent and these new levels could be sticking around for a while, and may perhaps continue going lower. Nobody knows for sure. That said, lower oil prices and a lower dollar will create new opportunities for investing in Canada. The first area is manufacturing. Lower energy costs mean higher margins while the lower dollar makes exports to the US much more attractive. Foreign investment into Canada could also pick up. The idea of ‘cheaper’ Canadian goods from the viewpoint of a steadily improving American economy, an economy likely ready to invest in growth and capital, could lead to US companies taking a closer look at opportunities and goods in Canada.
We would also like to point out that interest rates (bond yields) in both Canada and the US continue to move lower. The 10 year yield in the US is currently at 1.75%. An interesting stat to note is that 23 of the 30 Dow Jones components have a higher yield than a US 10 year bond at the moment, if bought today. The Canadian ten year bond yield is even lower at 1.35% and the bond market is pricing in another 0.25% cut in the overnight interest rate sometime this summer. In this low interest rate environment, the appetite for quality dividend-paying stocks may increase, which could bode well for equities in 2015.
National Bank’s 2015 Dividend All-Stars
National Bank analysts collectively cover over 350 TSX-listed equities, of which roughly half offer investors income in the form of dividends or distributions. To help navigate this universe we assemble a portfolio that contains 26 of NBF’s favourite yield ideas, the basket spanning a variety of industries, sizes and liquidity, but sharing three investment criteria:
1. Dividend/distribution yield 4% or greater;
2. Extremely low risk of the current payout proving unsustainable; and
3. Positive analyst bias regarding the prospects for share/unit price
The primary objective of the NBF Dividend All-Star portfolio is to provide elevated income to investors through high quality, diversified companies that our analysts view favourably. The 2015 portfolio’s average 5.7% yield is relatively high and compelling in the context of investment alternatives, but more importantly it is underpinned by stable and growing cash flows, healthy balance sheets and encouraging operating outlooks that provide confidence that the respective management teams will be increasing payout to investors over time…not decreasing. (See attached for the full report)
• NBF’s 2014 Dividend All-Stars portfolio introduced January 26, 2014 returned income of 5.8% and realized an average price return of -1.3% over the last twelve months, this 4.5% total return underperformed the S&P/TSX Composite’s 10.6% for the same period (2.7% income + 7.9% price return for the index).
• This is the first year of underperformance since NBF’s Dividend All-Stars portfolio was introduced 2012, as H2/14’s -780 bps total return vs. the composite more than offset the +270 bps outperformance in H1. A disproportionate amount of 2014’s basket was tied to energy (~40% of equities included), a weighting reduced to ~30% this iteration to create a more balanced portfolio and due to ongoing oil and gas volatility.
• Despite H2/14’s weakness the average annual total return of NBF’s Dividend All-Stars over its three year history is 11.9%, consistent with the return profile we expect from this product. 16 of the 42 names highlighted as 2014 All-Stars (38%) outpaced the market, compared to 71% in 2013 (27/38 equities) and 80% in 2012 (28/33).
• Eight All-Stars increased dividends in 2014, representing 18% of the basket (Baytex, Canadian Energy Services, EnerCare, First National, Keyera, Pembina, Superior Plus and Whitecap Resources). 12 All-Stars increased distributions/dividends in 2013 (32% of the portfolio) and 15 in 2012 (45% of the portfolio). Since its inception there have been 35 increases (57% of total equities included) versus only two cuts (3%).
• The average yield of an All-Star is elevated at 5.7%, but payout is easily funded for each, with most equities having the capacity to grow dividends/distributions over time.
• For investors seeking stable, predictable, elevated income and exposure to high quality companies, the following basket reflects NBF’s favourite ideas for 2015.
NBF Monthly Economic, Equity and Fixed Income Monitors
The global economy is in better shape than what’s depicted by slumping commodity prices. In the advanced world, the U.S. is now growing at the fastest pace in years and largely offsetting continued weakness in the Eurozone. Emerging economies are benefiting from improving U.S. demand, more competitive currencies against the U.S. dollar, and lower oil prices. Cheaper energy will help keep inflation low, allowing central banks in most major economies to assist growth by keeping monetary policy highly accommodative. We remain comfortable with our forecast for global GDP growth to increase to 3.5% this year.
The U.S. economy is on track to grow in 2015 at the fastest pace in a decade. The net stimulus provided by lower oil prices should give a further boost to a private sector that is already benefitting from low interest rates and high confidence. Adding to the good news, low inflation will cap the Fed’s ability to significantly tighten monetary policy. We have, accordingly, raised our forecast for 2015 U.S. GDP growth to 3.3%.
The oil price slump has proven to be larger and more persistent than we had anticipated, prompting us to lower our forecast for WTI oil to an average of $55/barrel this year (from $70 in our previous forecast) and just $65 in 2016. As a result, we have significantly downgraded our forecasts for Canadian real GDP growth, employment growth and inflation. The GDP deflator may even contract this year, causing nominal GDP growth to be the weakest on records outside of a recession. Under such a scenario, further interest rate cuts by the Bank of Canada cannot be ruled out.
(See attached for full reports)
NBF Webcast: 5-minute market review
The link to this week’s 5-minute market review discussing recent changes in bond yields, currencies and equity market valuations:
JMRD Basket Corner
Open Text (OTC) – Open Text Q2 license revenue missed on weakness in developing regions and FX headwind. License revenue of $76 mln fell 7% y/y and was below consensus of ~$84 mln. Recall last quarter license missed due to macro concerns; these seemed to persist into the quarter, and were reflected in cautionary commentary on the conference call. FX trimmed $3.5M from license. Cloud revenue of $151M was up $1M q/q. Combined license & cloud revenue declined on a LTM basis. We trimmed Open Text in the DIG Basket as the position was nearing a 10% weight in the portfolio. Still hold a core position in the company which has shown good relative strength recently.
All Cap Growth Basket
Alimentation Couche-Tard (ATD.b) – Alimentation was up 4% on Thursday as Imperial Oil announced they are considering the sale of its remaining company-owned Esso-branded gas stations to independent third-party operators and is looking at options for its On the Run convenience-store brand in Canada. Couche-Tard bought 450 On the Run stores in the U.S. in 2009 and some analysts expect the company to be interested in all or some of the Canadian sites.
Sun Life Financial (SLF) – “Sun Life to Buy Ryan Labs, Adding $5.1 Billion Under Management”http://business.financialpost.com/2015/01/28/sun-life-financial-inc-buys-u-s-asset-manager-ryan-labs-in-stateside-growth-push/
Facebook (FB) – Facebook said earnings in the December quarter jumped 34% as the social network continues to get more money from mobile ads. The shares had a volatile day following the report but closed up 2.3% on Thursday.
HCA Holdings (HCA) – Last Friday, after the close, it was annoucned that HCA will replace Safeway in the S&P 500 Index. HCA traded higher by 5% on the week, as of Thursday’s close
Hanesbrands (HBI) – Hanesbrands announced on Wednesday that they would increase their dividend by 33% and plan to split the shares 4-for-1 on March 3
Illumina (ILMN) – Illumina’s fourth-quarter profit nearly doubled, as the gene-sequencing company reported a 32% increase in sales. The shares traded to a new high on Wednesday before pulling back to $200. Nonethless, ILMN was the best performer in the Basket in January, up 8%.
2015 Tax Reminders
- 2015 TFSA contributions – contribution limit $5,500.00 can be made in cash or securities.
- 2015 RESP contributions – contribution limit is $2,500.00
- 2014 RSP contribution deadline – Monday March 2, 2015. The 2014 maximum RRSP contribution limit is 18% of “earned income” in 2013, to an annual maximum $24,270. The 2015 contribution limit is a maximum of $24,930.
1) “RRSP dilemma: Pay down debt or squirrel your money away for retirement?” (Financial Post)/
2) “Renting during retirement? 10 cases where it might be right for you” (Financial Post)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- NBF Economics & Strategy Fixed Income Update: Data revisions argue for March rate cut In the January MPR the Bank was already looking for soft growth in the first half of 2015 to result in a material setback to its projected return, by late 2016, to full employment and sustainable 2 per cent inflation. With Statistics Canada revisions showing a material loss of momentum in the labor market in late 2014, we believe the Bank has to be more aggressive in its support to non-energy exports, higher investment and a stronger labor market. In that context, we believe the Bank of Canada will cut its policy rate by 25 bps on March 4, 2015. (see attached for full note)
- Invest Like a Legend (Globe and Mail Series) – http://www.theglobeandmail.com/report-on-business/rob-magazine/5th-annual-invest-like-a-legend/article22678491/
- “CPPIB’s Wiseman Carrying a Big Wallet to the Oil Patch” (Bloomberg) http://www.bloomberg.com/news/articles/2015-01-28/cppib-s-wiseman-carrying-a-big-wallet-to-the-oil-patch?hootPostID=2d21cefb5a9a12315d7d5ddae0aa7b9d
- “Would Keynes Have Been Fired as a Money Manager Today?” (A Wealth of Commen Sense) – Very likely is the answer, despite great long-term returns, investors would not have remained patient in today’s day and age http://awealthofcommonsense.com/keynes-fired-money-manager-today/
- Find Today’s Stock-Market Surprise (Bloomberg) – A lot of energy is spent trying to explain random day-to-day market noisehttp://www.bloombergview.com/articles/2015-01-27/stocks-plunge-on-earnings-disappointments-oil-random-noise
- NBF Hot Charts – Canada: Interest rate relief instead of payment shock According to a recent consumer survey released by the Canadian Association of Accredited Mortgage Professionals (CAAMP), just over 2 million of Canada’s 5.6 million mortgages outstanding will be renewed during the next two years. Among these mortgages, the current interest rate averages 3.2%. For households who purchased their home in the past five years and whose interest charges are higher, the current average mortgage rate is actually a little higher at 3.5%. Just a few months ago, Canadian authorities were concerned about a potential payment shock for some households at renewal time. How fast things can change. Canada’s chartered banks just announced that the popular five-year fixed rate mortgage was to be reduced to 2.84%. Many homeowners are thus set to enjoy interest relief in 2015. For illustrative purposes, the windfall could be as much as $2,300 annually in lower interest charges for those that bought a home in 2010 and who are set to renew this year with a balance of $300,000 on their mortgage. Of course, labour markets must not deteriorate markedly in 2015 to enable homeowners to take full advantage of lower interest rates.(See attached full note) Hot Charts (2)
Monday February 2nd – Canada RBC Manufacturing Index; US ISM Manufacturing Index, US Personal Income and Spending
Tuesday February 3rd – None
Wednesday February 4th – US ADP Employment Change, US ISM Non-Manufacturing Index
Thursday February 5th – US Initial Jobless Claims
Friday February 6th – Canada Unemployment Rate, Canada Building Permits; US Non-Farm Payroll and Unemployment Report
Monday February 2nd – Imperial Oil, Exxon Mobil
Tuesday February 3rd – Westjet, TMX Group, Disney
Wednesday February 4th – Suncor, Intact Financial. Merck, GM
Thursday February 5th – BCE, Philip Morris
Friday February 6th – Cameco, Emera
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