**June 30th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- Brexit – The Week After
- NBFM Economics and Strategy – Morning Comment
- NBFM Economics and Strategy – Monthly Equity Monitor July/August
- Asset Allocation Strategy
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the Week
- Economic Calendar
- Earnings Reports
Brexit – The Week After
The Brexit aftermath is still being discussed among various pundits and media outlets ad nauseam and there still isn’t any more clarity this week than there was last Friday. As you recall in last week’s Market Observer (MO), after many phone calls and emails to and from clients, which continued this week as well, and after two team meetings discussing the next steps in terms of tweaking portfolios and Baskets, it was our recommendation to “do nothing”. We thought that staying the course until the dust settled made sense at the time. We also discussed taking the market weakness as an opportunity to add to positions in portfolios where appropriate.
Looking at the landscape a week later, most financial markets have stabilized and in fact have had a positive bounce to the upside. Looking at the Dow Jones Industrial Average, it was trading at a level of 18,011 before the Brexit vote. Friday was a rough day as it was down 600 points and Monday was another day of ‘digesting’ the news with another 260 point decline. As we write this week’s MO, the Dow is back to 17,929 or just 82 points lower than the closing level last Thursday. On this side of the border, the TSX entered the Brexit referendum at 14,131, dipped as low as 13,609 on Monday and as it currently at 14,064. In percentage terms the Dow is down 0.45% and the TSX is down 0.47%. The European Markets are also off their lows, but there is greater uncertainty with respect to the effects of Brexit in this region, obviously, and it may take more time for their markets to recover. As you can see, standing pat was the right course of action.
We will continue to monitor the situation closely but again, as always, please do not hesitate to call or email if you need anything.
NBFM Economics and Strategy – Morning Comment
Markets shrug off Brexit
Global equities continue to rally, getting support from the news that Boris Johnson will not be running for the Prime Minister position after Michael Gove’s surprise announcement that he would run for the position. Let’s see how Mr. Gove does in the coming weeks and whether he has the charisma to get the Brexit forces organized. In the meantime, GBP is a bit stronger and stock market volatility (as measured by the CBOE VIX) is way down from its recent high of 27. (See attachment for more details.)
NBFM Economics and Strategy – Monthly Equity Monitor July/August
- With Britain voting to exit the European Union, downside risks have increased for the global economy. Related uncertainties alone will brake economies worldwide and force the major central banks to maintain accommodative monetary policies. Consequently the threat of a Federal Reserve tightening in 2016 has disappeared. But the U.S. dollar should be supported by its safe-haven properties.
- We see a stronger greenback as bad news for global equities as we anticipate a tightening of financial conditions. Emerging countries are especially vulnerable because of their sizeable USD-denominated debt. Also, we now see downside for commodity prices in the coming weeks (WTI down to $40).
- We do not anticipate a global recession as we expect central banks to gain some traction in their efforts to support investor confidence in the coming weeks. Still, we think the current environment is prone to heightened volatility and justifies a reduction of risk in the portfolio.
- In our June 24 Strategy Update, we shifted our asset allocation to a more defensive stance, raising cash from 5% to 10% at the expense of equities. Geographically, we are trimming our exposure to emerging markets, EAFE and Canada to partially reflect our view on currencies. Our targets for the S&P/TSX and the S&P 500 are scaled back to 14,500 and 2,100 respectively.
- In our Canadian sector allocation, our exposure to Energy was reduced in favour of Golds, Utilities and Telcos. (See attachment for the full report.)
Asset Allocation Strategy
- The financial market’s reaction to the Brexit surprise win was brutal. That being said, in the aftermath of the vote the greatest uncertainty is more political than financial. Even though European banks have felt the brunt of the selling pressure, this is still not a financial crisis in the making. The sector is much better capitalized than in 2007, and liquidity should not be an issue as the BOE, Fed and ECB have pledged they would provide as much as needed.
- In light of recent risks emerging from the Brexit vote, the prudent approach taken by the Fed in June certainly paid off. The next hike seems to be constantly pushed further away, to the dismay of policy hawks who believe that monetary tightening is already behind schedule. Surely, financial and international developments have elbowed their way into the discussion, but we think the FOMC still has enough time to pick and choose the right moment for a rate increase by the end of the year.
- For fixed income markets, especially U.S. treasuries, the majority of the move is probably already behind us. We believe the situation will stabilize faster than what is anticipated right now, and once the dust settles, any positive economic numbers will revive hike talks
- For equities, the story hasn’t changed much from last month. Except for the two-day fall tied to the Brexit outcome, the price moves have been fairly contained and nothing has changed valuation-wise. The 2100 resistance level is still there, and before the next leg up, companies will have to show some form of earnings growth (which has proven difficult to achieve in recent months).
- Currency-wise, the loonie is stuck in a range and we do not foresee any major changes in the near future unless crude oil makes a material move tied to an extreme event. Therefore, we suggest taking a neutral approach regarding currency hedges until we get a clearer picture about the next trend. (See attachment for full report.)
JMRD Basket Corner
- “TransCanada Pipeline (TRP) – TransCanada Announces Closing Conditions Satisfied for Acquisition of Columbia Pipeline Group” – (Reuters)
- “Emera Inc. (EMA) – Emera Acquisition of TECO Energy Approved by New Mexico Public Regulation Commission” – (Reuters)
All Cap Basket
- Savaria Corp. (SIS) – This is a new addition to the All Cap Basket. One of its competitors, Prism Medical, was acquired this week and NBF Analyst Leon Aghazarian, breaks down how it relates to Savaria in the attached report.
- “Everybody Dies. It’s Time to Have the Talk.” – (Bloomberg)
Week at a Glance
See attached report.
Reads of the Week
- “What first time home buyers need to know about insurance” – (Globe and Mail)
- “Peter Tertzakian: Why Brexit is actually bullish for oil” – (Financial Post)
- “Eight Things to Know About the U.K. Vote” – (Bloomberg)
- Canada Watch -Data published this morning by Statistics Canada sheds new light on the surprising resilience of the Canadian economy. Business formation rose by the most in nine years in Q1 2016. As today’s Hot Charts show, added businesses reached 2% growth year/year, a pace which has not been observed since 2008. That growth is all the more impressive when considering the massive drop of 7% in mining & energy. As shown, it is reassuring to see widespread gains in other industries. This should dispel fears that the Canadian economy is a one-trick pony. (See attachment for accompanying chart)
Monday July 4th – US Market Closed for Independence Day
Tuesday July 5th – US Durable Goods Orders
Wednesday July 6th – US ADP National Employment, US ISM Service Sector Index
Thursday July 7th – Canada Building permits
Friday July 8th – Canada Employment Change and Unemployment Rate; US Non-Farm Payrolls and Unemployment Rate
Monday July 4th – US Market Closed for Independence Day
Tuesday July 5th – Jean Coutu
Wednesday July 6th – Cogeco Cable, Walgreens Boots Alliance
Thursday July 7th – Pepsico
Friday July 8th – None
Happy Canada Day! Have a good long weekend!