In This Week’s JMRD Market Observer Market
- JMRD speaking with another Bank CEO at the NBF Economic & Financial Outlook dinner…now have 4 out of the big 6 in last 2 weeks.
- NBF Asset Allocation Strategy: Vote of non-confidence
- NBFM Monthly Fixed Income Monitor
- NBFM Forex
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
JMRD Team members, Reg, Zach and Steve, attended a dinner presentation this week with the CEO of National Bank, Louis Vachon and NBF Economist & Strategist, Stefane Marion. It was an entertaining and insightful evening. Louis Vachon discussed three key issues and they are 1) climate change and the impact which we are adapting to in ‘real time’; 2) Technology changes causing major societal shift and changes in employment; and 3) A long period of low economic growth with business models being questioned. He mentioned that preparing society through the educational system is very important and thinks Canada is doing a very good job in this respect. Regarding bank branches and the concerns about fewer banks, Mr. Vachon said this is not the case, however bank branches will be ~30% smaller going forward with a big focus on investing in Technology
Stefane, after reviewing last year’s forecasts, predicts global growth of 3.3% in 2017, with Geopolitical risks to remain a key issue, which was also the biggest risk this year. European elections in France, the Netherlands and Germany will be very important to his forecast with the vote in France the biggest issue to watch in Europe. He believes there is a 30% chance of a rate cut in Canada and there will be no rate hike before Q1 2018, at the earliest. Oil prices will be in the mid $50’s over an 18-month period with renewed U.S. dollar strength that will result in a range of $1.25-1.35 for the Canadian dollar, with a possibility of $1.40 being hit.
If you’re interested in a copy of Stefane’s presentation, let us know. There are a lot of charts and information packed into the presentation.
NBF Asset Allocation Strategy: Vote of non-confidence
As you can see in Table 1, there have been a lot of changes in our asset allocation in October, particularly the underweight in equities which may appear to some as a major asset-mix call. However, most of these shifts are tactical, and do not represent a long-term view on our part. We took this position to protect the capital in light of some risks (explained in this letter), and are ready to get back to neutral weightings, or even overweight, when the situation is constructive for returns.
- For the US elections, the big picture is that Clinton would be the status-quo candidate while Trump would represent a clear break with the traditional approach to government. As the polls are predicting a Clinton victory, we think the outcome is priced-in for the stock market.
- In gold, we think the underlying fundamental demand, or technical levels, will trump further speculative selling going forward.
- BoC Governor Poloz struck a very dovish tone by mentioning that adding more monetary stimulus to speed up the economic recovery was actively discussed. This monetary policy divergence with the Fed, added to the potential of lower energy prices, makes the case for a weaker loonie and we suggest gradually removing the currency hedge to gain exposure to U.S. dollar strength.
- In equities, increasing yields and U.S. dollar doesn’t bode well for return prospects. We are in the midst of earnings season and it’s projected that the quarter will show negative or very little growth on a year-over-year basis for the 6th consecutive period. Added to expensive valuations, the U.S. election will also be a source of volatility and have potential pitfalls. Consequently we suggest an underweight in U.S. equities for the time being, but if they were to experience a selloff, we will quickly bring our position back to neutral.
NBFM Monthly Fixed Income Monitor – November 2016
- Market perceptions of the U.S. economic and inflation outlook have changed since midsummer. Expectations of a bit more inflation with a little bit more Fed tightening have helped drive the 10-year Treasury yield from 1.36% in early July to 1.85% currently. We see softer economic conditions in Q1 pushing the 10-year yield slightly lower in early 2017, but that will be a temporary pause. We expect 2-year Treasuries to be trading around 1.22% and 10-years around 2.02% by the end of Q3.
- We continue to see the Canadian economy picking up some steam next year, to growth of 1.8%, but with the Bank of Canada now on the sidelines until 2018. We still think the economic outlook will support a move of the 10-year Canada yield back toward a 1.40%–1.55% trading range by the middle of next year.
NBFM Forex November 2016 – Loonie’s Wings Clipped by Bank of Canada
- After its repeated warnings about an interest rate hike this year, the Federal Reserve now finds itself with one last chance to save face. If, as we expect, the Fed hikes in December, the U.S. dollar should strengthen because an increase in the fed funds rate is not fully priced in by markets. One thing that could force the Fed to remain in pause mode, however, is an unexpected shock that creates financial market stress. The upcoming elections provide potential for such an event unfolding. If the days following Brexit are any guide, the U.S. dollar could do well even under such a scenario, supported by safe haven flows.
- The European Central Bank and Bank of Japan both seem unable to stimulate their respective stagnant economies. Absent further debasement policies, the euro and yen may not depreciate all that much from here.
- The Canadian dollar lost ground against the USD for a fourth consecutive month, despite higher oil prices in October. Already under pressure from a surging greenback ─ courtesy of rising odds of Fed rate hikes before year-end ─, the Canadian currency also has to contend with the Bank of Canada’s increasingly dovish rhetoric. Those headwinds should keep the loonie grounded over the near to medium term. We continue to expect USDCAD to trade in the 1.30-1.40 range over the next 12 months.
JMRD Basket Corner
Hydro One (H) – One year after its IPO, the honeymoon may be over for Hydro One (Canadian Business)
Canadian Natural Resources (CNQ) – Canadian Natural boosts dividend, revives expansion in Alberta (Globe and Mail)
Thomson Reuters (TRI) – Thomson Reuters to cut 2,000 jobs; profit tops estimates (Financial Post)
TransCanada (TRP) – TransCanada to sell $3.5-billion of shares, U.S. power business (Globe and Mail)
Whitecap (WCP) – Investment Case: Broadly speaking, we believe production growth is a prudent strategy so long as the asset base can drive returns through the corporate cost structure and back to shareholders. Whitecap, in our view, has a portfolio which should attract increased capital under a rising commodity price environment, providing growth and increasing returns to shareholders. Under current commodity pricing (call it US$50/bbl and Cdn$2.50/mcf), the return profile across Whitecap’s assets should drive attractive full-cycle returns and provide organic cash flow to fund production growth. Additionally, as the free cash flow profile improves, we expect dividend growth could become part of the capital allocation discussion once again. We are transferring coverage of Whitecap to Travis Wood from Brian Milne with an Outperform rating and$15.00/share target price.
All-Cap Growth Basket
Shopify (SHOP) – Shopify execs ‘thrilled’ as firm beats revenue forecasts, earnings on track – Shares of Shopify traded up by 6% on Wednesday to a new 52-week high following Q3 results
Savaria (SIS) – SIS delivers another quarter of strong, profitable growth Revenue of $32.4 million came in slightly above our $31.5 million forecast and was up 35.2% y/y thanks to impressive organic growth of 16% (in line) and a slightly higher than forecasted contribution from SHHC. Adj. EBITDA rose 47.8% y/y to $5.6 million (NBF and Street estimates both at $5.1 mln) and margin increased 140 bps y/y to 17.3%. EPS of $0.09 was in line with expectations due to a higher tax rate.
U.S. Growth Basket
Broadcom (AVGO) – Chip Maker Broadcom to Buy Brocade for $5.5 Billion
- Retirement Decumulation (Investment Executive)
Reads of the Week
- The 10 things we fear in markets – They all have one thing in common — they are beyond our control.
- Capital Economics: Capital Daily (3rd November 2016) – How would a Trump victory affect US equities? The consensus is that a victory for Donald Trump in next week’s presidential election would deal a lasting blow to the US stock market. Our sense, though, is that the performance of the S&P 500 would be a bit like that of the FTSE 100 in the wake of the vote for Brexit – after a lurch to the downside, a weaker currency and a lack of radical policy changes in practice would fuel a recovery. Admittedly, the S&P 500 has come under some pressure since it was revealed on Friday that the FBI is investigating more emails as part of its probe into Hillary Clinton’s use of a private server, which has boosted her rival’s standing in the polls. (At around 2,100, it is now at its lowest since early July.) And we think the index would take a much bigger knock if Trump actually won the race to the White House, which now seems quite possible. But there are two key reasons to think that the sell-off would not last long and that it could ultimately be more than reversed. Full Report Attached
- An Austrian startup’s sensors are in the stomachs of 15,000 cows in Britain to help farmers better monitor their herds (Bloomberg)
Monday November 7th – None
Tuesday November 8th – Canada Housing Starts; US Election,
Wednesday November 9th – None
Thursday November 10th – Canada New Home Price Index; US Initial Jobless Claims
Friday November 11th – REMEMBRANCE DAY; US Consumer Sentiment
Monday November 7th – Air Canada, Concordia, Emera, Franco Nevada,
Tuesday November 8th – Bird Construction, Cineplex, Freehold Royalties, Keyera Corp, Morneau Shepell, Painted Pony, Tamarack Valley, Torc Oil and Gas, WSP Global
Wednesday November 9th – Bellatrix Exploration, Boralex, Chorus Aviation, Delphi Energy, Exchange Income Corp., Intrexon, Northland Power, Peyto, Ritchie Brothers, Sun Life, Trican
Thursday November 10th – Ag Growth, Canadian Energy, Crescent Point, Enercare, Equitable, Extendicare, Fiera Capital, Gluskin Sheff, Medical Facilities, New Flyer, Pine Cliff Energy
Friday November 11th – REMEMBRANCE DAY – CDN and US Equity Markets Open; Cipher Pharmaceuticals, Hydro One, Power Corp, Power Financial
Have a good weekend.