**July 29th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- JMRD Market Commentary
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
Fed Policy Monitor – Fed says near-term risks have diminished
As expected, the Fed left monetary policy unchanged at its July meeting. But unlike in the last statement, the FOMC said that “Near-term risks to the economic outlook have diminished”. The Fed acknowledged strengthening labour market and household spending. However, it pointed out weakness in business investment, below-target inflation, and the fact that market-based measures of inflation expectations remain low. The FOMC continues to expect inflation to rise to its 2% target “over the medium term”. Esther George was the lone dissenter to the decision, preferring to raise the fed funds rate by a quarter percentage point.
The FOMC’s statement was less dovish than in June. The Fed didn’t even mention the UK referendum results and instead clearly stated that it thought near-term risks to the economic outlook have diminished (perhaps in light of improvements in financial conditions courtesy of plunging bond yields). That opens the door a bit wider to tighter monetary policy over the coming months. The voices of hawks seem to be growing louder as evidenced by a dissent from Esther George. A data-dependent Fed will be looking for confirmation of labour market improvements (i.e. for evidence that the April-May slowdown was an anomaly) and that’s why next week’s nonfarm payrolls will be crucial in determining the course of monetary policy. The Fed’s next meeting will be in September, when it presents updated economic forecasts. But Fed Chair Janet Yellen will have an opportunity to communicate to markets before that with an important speech at the Federal Reserve Bank of Kansas City’s annual Economic Symposium at Jackson Hole (August 25-27). While July’s statement leaves the Fed room to tighten policy over the coming months ─ and markets seem to be expecting at least one rate hike before yearend ─ we remain of the view that the FOMC should remain in pause mode until at least inflation and inflation expectations bounce back from very low levels. (Full note attached)
Banks and Mortgage Companies (Thematic Research) – B.C. Government Announces 15% Tax on Foreign Buyers of Residential Property in Vancouver
On July 25, 2016, the British Columbia Ministry of Finance announced an additional property transfer tax on residential property transfers to foreign entities in the Greater Vancouver regional district. The additional tax applies to all transfers registered with the Land Title Office on or after Aug. 2, 2016 “regardless of when the contract of purchase and sale was entered into”.
The additional tax is calculated as 15% of the fair market value of the foreign entity’s proportionate share of the residential property, and applies even when the transaction may be exempt (e.g., transfer between related individuals). The additional tax does not apply to non-residential property, mutual fund trusts or real estate investment trusts. The definition of foreign entities includes:
- Foreign nationals: persons who are not Canadian citizens or permanent residents
- Foreign corporations: corporations not incorporated in Canada, or controlled by foreign national or corporation (unless listed on a Canadian stock exchange)
- Taxable trustees: beneficiary of a trust that is a foreign national or foreign corporation
We note that penalties for tax avoidance will include a) the unpaid tax plus interest, b) a fine ($100,000 for individuals, $200,000 for corporations), and/or c) up to two years in prison. In addition, the British Columbia government amended the Vancouver Charter to allow the city to implement a tax on vacant homes. The City of Vancouver will control the design and timing of such a tax.
How much of the Vancouver housing market is affected?
On July 7, 2016, the British Columbia government released initial measures of the share of foreign purchasers of residential real estate in the province. In Metro Vancouver, foreign nationals accounted for 5.1% of unit sales and 6.5% of the dollar value of sales. The data, drawn from property transfer tax filings between June 10 and June 29, 2016, suggests a somewhat muted impact. In fact, these results are significantly lower than the 33% foreign buyer share of purchase volume in 2015 that we hypothesized, earlier this year.
The B.C. government’s narrow definition of foreign entities (above) is partly to blame for the difference. We formed our hypothesis using a broader measure of foreign entities as defined by the U.S. National Association of Realtors (NAR). NAR defines an international buyer as either (1) a non-resident foreigner, or (2) a resident foreigner – i.e., recent immigrants (in the country for less than two years) or temporary visa holders (residing in the country for at least six months). Given this distinction, the additional property transfer tax does not fully address foreign capital inflows, which could act to mute the impact of the new tax law.
However, even prior to the policy change, looking at micro data on the Vancouver housing market, we do find some early evidence of cooling off in those areas in which we have anecdotal (and occasionally more scientific) evidence of high foreign buyer activity, e.g., Richmond, Vancouver West, West Vancouver (Figure 1). (Note attached)
JMRD Basket Corner
Open Text (OTC) – “Open Text scours bargain bin for deals and world-beating returns” (Globe and Mail)
All Cap Basket
Uni-Select (UNS) – Solid profitability and CF offset tepid organic growth: Q2 was relatively in line. Sales of $323.8 million benefitted from M&A ($46 million) and modest 0.1% organic growth. EBITDA of $29.7 million was exactly in line with consensus (NBF: $31.0 mln) and margin improved 160 bps y/y to 9.2% as we forecasted. EPS was $0.40 vs. $0.39 consensus and NBF at $0.42. Free cash flow was strong at $30 million. (Full report attached)
CGI Group (GIB.a) – “Why CGI Group soared over 7% on Wednesday” (The Motley Fool)
U.S. Growth Basket
Boston Scientific (BSX) – “Boston Scientific posts 27 percent net income jump in second quarter” (Star Tribune)
Facebook (FB) – “What Facebook is doing right” (Financial Post)
Nasdaq Inc. (NDAQ) – Nasdaq Inc. said Wednesday that its second-quarter profit fell but revenue increased across all of its segments as the company continues to integrate a number of acquisitions. Nasdaq has transformed from a U.S.-focused exchange operator to a global business-services company that includes markets in the U.S., Canada and the Nordic region, as well as investor, public relations, technology and data services. In the quarter, it completed a $1.1 billion deal for options-exchange operator International Securities Exchange, a move that gives it control of nearly 40% of the U.S. options market. It also completed its $200 million acquisition of portal systems provider Boardvantage, an online platform for company directors. For the quarter, Nasdaq reported a profit of $70 million, or 42 cents a share, down from $133 million, or 77 cents a share, a year prior. The second quarter was hit by restructuring and merger-related charges. Excluding these charges and other items, per-share earnings were 91 cents. The shares traded to a new year-high of $71.00 on Thursday.
- “Discrimination is allowed when it comes to your will” (Globe and Mail)
Reads of the Week
- “What’s the Right Asset Allocation For Young Investors?” (A Wealth of Common Sense)
- “Behold the Gigafactory” (Bloomberg)
- “Mark Carney has seeded a revolution by embracing finech” (Globe and Mail)
- “In hot real estate markets, realtors are going to make you an offer – whether you want it or not” (Financial Post)
- “The Cheapest Generation” (The Atlantic) Why Millennial’s aren’t buying cars or houses, and what that means for the economy
- “Create a windfall of tax savings by making interest deductible” (Globe and Mail)
- “The cost of cash isn’t stopping people from using it” (Globe and Mail)
- Economic News (National Bank Financial)
Monday August 1st – Civic Holiday
Tuesday August 2nd – Manufacturing PMI
Wednesday August 3rd –
Thursday August 4th –
Friday August 5th – Employment change, Unemployment Rate
Monday August 1st – Pen West Petroleum (PWT)
Tuesday August 2nd – Canaccord Genuity (CF), Gibson Energy (GEI)
Wednesday August 3rd – Agrium (AGU), Brookfield Infrastructure Partner (BIP.UN), Great West Lifeco (GWO)
Thursday August 4th – Artis REIT (AX.UN), BCE Inc. (BCE), Canadian Tire Corporation (CTC’A), Cara Operations Ltd (CAO), Inter Pipeline (IPL), Manulife (MFC), Whitecap Resources (WCP)
Friday August 5th – Bombardier (BBD’A), Telus (T)
Have a good long weekend!