In This Week’s JMRD Market Observer Market
- JMRD Strategy Comments
- The TRUMPQUAKE
- Trump’s First 100 Days
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
JMRD Strategy Comments
We don’t need to tell you that it’s been quite the week! The shock of Donald Trump taking the White House is still being digested by investors and media personnel alike. With markets looking to open much lower on Wednesday morning, there seemed to be an about-face after his acceptance speech and once the opening bell sounded the global markets went higher. This continued into Thursday on the US markets as investors seem to be giving the next President the benefit of the doubt with respect to how he will lead the US. Canada’s market reaction to Trump’s election victory was more muted, as were other global markets’. Trump has been open about his protectionist stance on trade and this may have been the reason for the less positive reaction around the globe.
Despite the media focusing on Trump’s perceived shortcomings as a Head of State, investors took his victory as a positive for economic growth. Trump’s economic platform is pro-US, pro-business and pro-growth and this rhetoric translated to higher US stock prices. A pro-growth agenda can also be inflationary and inflation usually leads to higher interest rates. The market is forward looking and long term interest rates jumped considerably this week. The US 10-year bond yield spiked from about 1.75% to over 2.1%, at the time of writing. The Canadian 10-year yield went from 1.20% to its current 1.42%. When long term interest rates move with such magnitude, not only do bond prices fall, but also stocks with higher dividends and more stable businesses i.e. telecoms, utilities (especially power generating utilities). The pullback in these sectors has been swift, which is one reason the TSX has lagged its US counterpart this week. Falling gold prices, in reaction to a higher USD, also weighed on the TSX this week. On the flipside, companies that have benefitted from the Trump win are industrial stocks, financials (especially insurers whose businesses benefit from higher rates) and mining stocks. Is this the start of a rotation out of defensive names into more economically sensitive growth stocks? Time will tell but we are assessing the situation and will be taking the appropriate actions if needed.
Please do not hesitate to contact us if you have any questions. In the meantime, we have provided more election commentary below.
- The Republican Party is in a good position to advance its agenda after winning the White House, the Senate and the House of Representatives for the first time since 2005. A combination of tax cuts and spending increases should lift U.S. GDP growth.
- A larger budget deficit and potentially higher inflation pressures could not only move the U.S. yield curve up but steepen it.
- Given Trump’s campaign rhetoric against free trade, there are concerns about a ramp-up of protectionist measures. But considering the likely fallout, it’s unclear to what extent the Trump administration will move in that direction.
- Canada, like many exporting nations, stands to lose if trade barriers are erected. It could be challenging to find other takers for our exports. Policymakers will need to find ways to make Canada more competitive and ensure that we do not lose access to global markets.
- Risky assets have reacted positively to Episode 1 of the new Trump reality show. We like the fiscal stimulus story. But there are many more episodes to come, with plots that will surely keep investors on the edge of their seats. At this juncture, until we get to know the actors a little better, we prefer to keep our asset mix unchanged with an above-average weighting in cash.
See attached report.
Trump’s First 100 Days
This is commentary from our US Research Affiliate Credit Suisse.
Despite that no pollster, media outlet or political insider predicted it, the U.S. “Trumpxit” is now in the history books. Donald Trump will be the 45th President of the United States of America. He will be the first President in history to take the oval office without prior government or military experience.
- While pundits missed it, Trump called it all along. He did have the silent majority, and they showed up in large numbers to vote for him.
- Pre-election polls missed higher voter intensity in key Republican constituencies which had a particularly significant impact in key battleground states won by Trump such as Florida, North Carolina, Pennsylvania and Wisconsin.
- Pre-election polls also missed significantly lower turnout in key Democratic groups, particularly African Americans and youth voters. Historical numbers of Latinos turned out to vote, but it did not make up the deficit left by other demographics.
- In a major surprise, college educated voters (including women) appear to have voted in much higher numbers for Trump than any polls had estimated.
- Trump’s victory should be viewed as part of a broader macro trend in which voters globally are questioning and rejecting the last several years of policy pertaining to immigration, trade and globalization. We believe this trend is likely to influence many of Trump’s policies as Commander in Chief.
- As President, Trump will enjoy a Republican led House and Senate to work with. Despite earlier tensions between Trump and various members of the GOP congressional caucus, including Speaker Ryan, we believe that differences have largely been ironed out and that commitments to work together have already been made.
- We believe the stage is set for Republicans to aggressively pursue big policy ideas, many of which Trump already discussed on the campaign trail, this likely includes: At least one Supreme Court nomination, immigration reform, corporate and international tax reform, infrastructure spending and healthcare reforms, among others.
- In addition to working with Congress, we also anticipate that as soon as he is sworn in, Trump will take use executive authority to undo some of Obama’s executive orders, like those on healthcare, the environment, energy and immigration. He is also likely to put in place an across-the-board halt on all pending regulatory actions. This would allow Trump time to get his regulatory teams in place and make decisions about their regulatory priorities. He may also consider taking unilateral action on certain trade policies.
- Day one of Trump’s Administration we expect to see a package that will repeal key Obama executive orders, call for the immediate resignation of many agency appointees, insert a large number of vetted people into non-confirmable positions and publish multiple advance notice of proposed rulemakings (ANPR) around key agency rules.
In this edition of Washington Notes, we highlight Public Policy’s initial sentiments as to priorities and what can be achieved during President-Elect Donald Trump’s first 100 days in office and beyond. We will provide additional updates as we move closer to inauguration and more details emerge on the specifics of Trump’s plans.
See attached report.
JMRD Basket Corner
Hydro One (H) – Q3 2016 results slightly ahead of expectations – Hydro One Ltd. reported Q3 Adj. EBITDA of $572 mln versus our $531 mln estimate (consensus: $525 mln) largely reflecting warmer than usual summer weather patterns boosting Transmission peak demand. Meanwhile, adj. Q3 Adj. EPS (FD) came in at $0.39 versus our estimate and consensus of $0.31. See attached report. Hydro One
Keyera Corp (KEY) – Q3 2016 results in line + AEF back online- KEY reported Q3 adj. EBITDA of $148 mln, in line with our $150 mln estimate (Street: $154 mln) with higher G&P margins offset by higher G&A expense. Of note, the planned six-week turnaround at Alberta EnviroFuels Facility (AEF) commencing early September was extended two weeks for additional maintenance, but has now resumed production. Reiterate $48 target and Outperform rating with our longer-term estimates largely unchanged, we maintain our $48 target. Inside, we highlight KEY trading at a 2017e P/AFFO multiple of 12.2x – below peers at 12.5x despite a payout ratio of 51% and D/EBITDA of 2.5x versus peers at 82% and 3.9x. Combined with a 12-month total return opportunity of 25.1% versus the group at 17.8%, we reiterate our Outperform rating and continue to recommend KEY as a core holding. See attached report. Keyera Corp.
WSP Global (WSP) – Q3/16 first look – no (negative) surprises; America’s margin impresses – WSP reported Q3/16 results Nov. 8th – strong performance / in-line guide adjustment. Net revenue for the quarter was $1.2 bln (in line with consensus and our forecast of $1.2 bln), while adjusted EBITDA stood at $147.2 mln (again in line with consensus and our forecast of $147.9 mln and $147.3 mln, respectively). Diluted EPS of $0.77 (adjusted for amortization of intangibles) was slightly above Street’s estimate of $0.76 (we were at $0.78). Note that the market focused on EBITDA. Backlog of $5.4 bln is down 5.2% q/q (up 9.8% y/y) and represents 10.3 months’ worth of work (vs. 10.6 months the quarter prior). Organic backlog growth on constant-currency basis was negative 4.9% q/q but flat y/y (we’ll be looking on the call if that’s a beginning of a new trend or is simply driven by lumpiness). Organic growth was 1.7% y/y (in line with what was previously telegraphed by the company) vs. flat in Q2/16. Canada was down 11.3% this quarter (vs. -9.0% in Q2/16; primarily on slowdown in transportation / infra market and Western Canada-related weakness). Americas / EMEIA posted organic advances of 8.5% (U.S. is showing good momentum)/ 2.3%, while APAC posted another quarter of organic momentum of +2.1% (driven by Australia). EBITDA margin of 12.4% was above our 12.1% forecast.
All-Cap Growth Basket
Sun Life (SLF) – Reported better than expected results due to its US operations. The company also raised its dividend 4%. Sun Life’s stock rose over 10% post-earnings. See attached report for more details. Sun Life
New Flyer Industries (NFI) – New Flyer Industries Inc. (NFI-T) reported third-quarter revenue of $511.5-million (U.S.), up 40.3 per cent compared to $364.7-million a year ago. Net earnings were $26-million or 43 cents per share compared to $16.6-million or 30 cents a year ago. Analysts were expecting revenue of $503-million and earnings of 45 cents per share. The stock was up 3% on the news.
- Retirement Tax Tips (MoneySense)
Reads of the Week
- Bonds plunge by $1-trillion this week on prospective Trump policies (Globe and Mail)
- Canadian insurers surge as Trump win raises rate hopes (Globe and Mail)
- Tesla’s Future in Trump’s World (Bloomberg)
- Trump’s Win Yields Investing Wisdom (Bloomberg)
Monday November 14th – None
Tuesday November 15th – Canada Teranet/National Bank Home Price Index; US Empire State Index, US Retail Sales
Wednesday November 16th – Canada Manufacturing Sales; US Industrial Production Index, US NAHB Housing Market Index
Thursday November 17th – US Inflation Index, US Initial Jobless Claims, US Philadelphia Fed Index
Friday November 18th – Canada Inflation Index, US Manufacturing PMI, US Leading Index
Monday November 14th – Amaya, Intertain Group,
Tuesday November 15th – None
Wednesday November 16th – Cisco Systems, Loblaws, Metro, Target Corp., Lowe’s Companies, Grenville Royalty
Thursday November 17th – Best Buy, Gap, Walmart
Friday November 18th – Aurora Spine
Have a good weekend.