In This Week’s JMRD Market Observer Market
- JMRD and the Private Wealth Canada Forum
- Imminent Pullback for Vancouver and Toronto Home Prices
- BoC Policy Monitor – Dovish BoC actively discussed cutting rates
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
JMRD and the Private Wealth Canada Forum
On Tuesday of this week, JMRD members attended the ‘Private Wealth Canada Forum’ in Toronto at the St. Andrew’s Club. The meeting is a gathering of wealth managers, private banks and family offices to discuss everything from how technology is changing the financial industry to surviving market volatility.
JMRD feels it is prudent and important to attend these types of functions to make sure the Team is up to date on current trends and to ultimately stay ahead of the curve. Our objective in attending this particular function was twofold: to see what family offices are doing and identify new products and services to add to the JMRD offering AND to discuss with peers what is currently occurring in financial markets.
Of course, as the day goes by, one is bombarded with contrasting views of what the future holds and the end result is by no means a clear picture of what is to come but rather a number of different opinions. As they say, there is no free lunch.
Just naming a few of the sessions will indicate the thoroughness and timeliness of an event of this nature:
- Advanced Asset Allocation
- Opportunities For Yield
- Investing In The Global Equity Market
- Investing In Real Estate And Other Real Assets
- Opportunistic Alternative Investing (BIG FOCUS)
- Family Governance And Dynamics
- And the mandatory cocktail reception to make sure nothing was missed!
So, as you see from the list there was a bit of everything at this conference and in the coming weeks and months you will see some new things being rolled out by the Team.
Let’s move on and spend some time on what was actually discussed.
Obviously, the elephant in the room continues to be what the risks to the global financial markets are moving forward. There is nothing surprising in the following list as the risks are well known but the outcomes are not known:
- What will be the outcome of the US Election?
- When will the Federal Reserve in the US raise interest rates and by how much?
- What is the next $5 dollar move in oil? What is OPEC really saying? Will countries comply?
- What will the eventual Brexit fallout be?
- When will corporate earnings growth pick-up?
All of the above are important but long term investing success will not be influenced by these short term events. These types of events may create buying opportunities but other factors are more important at the individual level. Your long term portfolio success is one that allows you to meet and exceed your financial goals. The list of things that you should be spending more time considering include:
- What are your short and long term goals?
- What is important to you and your family?
- What are your future income requirements?
- Are you on track to meet your goals? (Goals based planning)
- Are you taking too much risk in your portfolio?
- Are you taking enough risk in your portfolio?
- Does your portfolio match your profile?
JMRD has opinions on all of these ‘market’ unknowns and will be writing about them in up-coming Market Observers. The Team will continue to use our risk management tools and strategies to reduce portfolio fluctuations as we continue to focus on our main objectives:
- Focus on preservation of capital
- Provide an above market rate of return
- Focus on after-tax returns
To wrap up, much time was spent on portfolio construction. We found this very interesting because this is one of our main focuses going into 2017 as we continue to rollout JMRD’s Model Portfolios.
We have been working on our improved MODEL program for much of 2016 and will soon be able to roll them out in a more widespread way for current clients. The models are offered on a discretionary basis which means that the day to day decisions are made solely by the Team for one all-inclusive monthly cost. The asset allocation and performance are discussed with clients quarterly and adjusted as needed. There is a model available for each risk profile i.e. Conservative, Balanced, Growth and Maximum Growth. Within the models we are using our own Baskets, standalone exchange traded funds (ETFs) and investments offered by external managers. We feel that using external managers to complement JMRD’s own ideas will add further diversification, risk reduction and enhanced performance over time. If you would like more information on The JMRD Models, please do not hesitate to contact Jaden.
We are always looking for client feedback, please let us know your thoughts on this note and how we can assist with anything at all, including any of the following:
- What is my current asset allocation?
- Does it match my profile or do I need to update it?
- Has my financial situation changed?
- When was the last time I updated my financial plan?
Imminent Pullback for Vancouver and Toronto Home Prices
- For various reasons, home sales began declining in Vancouver well before the introduction of a 15% tax on purchases by non-residents and the latest measures announced by the federal government. The latter factors will only accentuate an existing trend.
- The Teranet–National Bank House Price Index shows Vancouver home prices essentially flat from August to September after an accelerated rise over the previous seven months. The reason the sharp drop in sales has yet to translate into a price decline is that the resale market remained tight despite the drop in sales.
- We think Vancouver home prices will soon start correcting. We expect a decline over 12 months of 10% overall and 20% for detached homes.
- In Toronto, home sales have been setting records month after month while listings have shrunk sharply. The result has been a spectacular acceleration of prices. Sales will eventually cool in response to this rise, as well as to federal government measures and a rise in mortgage rates. But since supply is unusually tight, prices are likely to drop less than in Vancouver. We expect a 3% decline in 2017.
See attached report for full details.
BoC Policy Monitor – Dovish BoC actively discussed cutting rates
As widely expected, the Bank of Canada left the overnight rate unchanged at 0.50% today. However, the message was very dovish. While the central bank expects Canadian growth to be above potential in the second half of the year thanks in part to the federal fiscal stimulus, it still lowered its growth forecasts for both this year and next, meaning that the profile for growth is now lower than projected last July. The BoC says this is due to slower near-term housing resale activity and a lower trajectory for exports. It added that the new measures to promote stability in the housing market “are likely to restrain residential investment while dampening household vulnerabilities”. The central bank was also less optimistic about trade due to “lower estimates of global demand, a composition of U.S. growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms”. While it thought the global economy would regain momentum in the second half of the year, driven in part by the U.S., the central bank was still cautious as evidenced by a downgrade to its world growth forecasts to just 2.8% this year and 3.2% in 2017.
The BoC lowered its Canadian real GDP growth forecast for 2016 to 1.1% (from 1.3%), and for 2017 to 2.0% (from 2.2%). Growth for 2018 was left unchanged at 2.1%. The quarterly growth profile shows a slower second half of 2016 than previously thought with Q3 lowered to 3.2% and Q4 cut to 1.5%. The downgrade for next year was largely due to housing whose contribution was lowered from 0.1% to -0.2% (i.e. now a drag on the economy). Trade was also lowered a bit. Those more than offset upgrades to government (from 0.6% to 0.7%) and consumption (from 1.1% to 1.2%). Gross domestic income is expected to rise just 0.3% this year (versus 0.6% in July’s estimate), and by 2.1% in 2017 (versus 2.9% in July’s estimate).
Canada’s potential GDP growth was left unchanged at 1.2-1.8% for this year and 1-2% next year. The BoC estimates slack at the end of Q3 was between 1 and 2%. It now expects slack to be eliminated by mid-2018 contrasting with last July’s MPR which had the economy returning to full capacity by end-2017. Inflation forecasts were lowered but the BoC expects inflation to be close to 2% from early 2017 onward “when temporary factors will have dissipated and as economic slack is absorbed”.
In his opening statement, Governor Poloz recognized that, despite recent improvements, the level of exports remains below what was projected in the last MPR. The shortfall is explained in part by weak U.S. growth but also appears to be due to more structural factors. The Governor also talked about the new measures implemented by the federal government to address concerns about household indebtedness (e.g. mortgages) which would, however, have a negative impact on growth over the near to medium term. Those factors explain the downgrade to the BoC’s Canadian growth forecasts. In that context, the Governing Council “actively discussed” the possibility of adding monetary stimulus. However, it decided to stand pat, preferring to wait for more data. The Governor welcomed the new macro-prudential measures, saying that they ease constraints on the Bank of Canada in deciding on monetary policy. For instance, although lower rates would likely lead to more debt, the quality of the loans would be better, thereby mitigating risks to financial stability.
Bottom line: The Bank of Canada’s statement was rather dovish despite the no change decision on rates. The central bank lowered its Canadian growth forecasts for both this year and next, leaving the output gap open until mid-2018. While that’s just two quarters later than the previous forecast, the central bank qualified the change as “material”. The BoC is clearly communicating that rate hikes are not on the horizon. What about rate cuts? That’s a possibility, more so considering it was “actively discussed” at today’s meeting. But Governor Poloz did not sound overly confident about the BoC’s forecasts during the press conference, recognizing there may be upside risks particularly with regards to housing. Note that the federal government will soon release its 2017 immigration target which is expected to be increased significantly from its current level of 300,000/year. If that pans out, housing demand in Canada’s largest metropolitan areas will get a boost. We still believe the next move by the BoC will be a rate increase albeit delayed to 2018 given the central bank’s view about the output gap.
See attached report for full details.
JMRD Basket Corner
All-Cap Growth Basket
Sun-Life (SLF) – On Oct. 20, 2016, Sun Life Financial hosted an investor day with a focus on Sun Life Investment Management (SLIM). SLIM encompasses SLF’s liability-driven (LDI), alternative, and fixed income investment capabilities developed and acquired by SLF over the past two years. We expressed a positive bias toward these acquisitions, which now form the foundation of SLIM, because we considered them well measured uses of surplus capital that extended the breadth of SLF’s offerings in a market segment (LDI) in which the company already competes. This investor day provided clarity about how SLF intends to pursue the aforementioned market opportunity and the potential. (Full note attached)
U.S. Growth Basket
Altria (MO) – Wells Fargo’s Bonnie Herzog argues that the combination of British American Tobacco (BTI) and Reynolds American (RAI) makes a merger of Philip Morris International (PM) and Altria (MO) more likely:
British American Proposes To Acquire Remaining 57.8% Stake in Reynolds American That It Doesn’t Already Own – Offer Is Cash & Stock Valued At $56.50 Per Share or $47B – Reynolds American confirmed this morning that it had received a non-binding proposal last night from British American Tobacco (BAT) to purchase the approximately 57.8% of Reynolds American common stock that British American does not currently own. The offer represents an approximately 20% premium to Reynolds American’s last closing price and roughly 15.4x Reynolds American’s FY16E EBITDA, 43% of which would be in cash ($24.13/ share) and 57% stock (0.5502 BAT shares) which values Reynolds American at roughly $81B. The deal is subject to the endorsement of RAI’s independent “Other Directors” (i.e., not designated by BAT), due diligence, regulatory and shareholder approvals. Bottom Line-We reiterate our Outperform rating on RAI.
Will Reynolds American Accept? While we have long discussed the possibility of such a transaction, we question whether $56.40/share is enough of a premium. We think Reynolds American’s standalone business is worth $55 today. Include synergies (British American estimates a modest $400M of synergies, subject to due diligence), and we argue Reynolds American’s value is arguably higher. Therefore, we believe Reynolds American may seek to negotiate a higher price…
The Deal Increases The Probability of Philip Morris/Altria Combining, In Our Opinion – A British American/Reynolds American combination would catapult BAT to become the largest listed global tobacco company in terms of sales and operating profit, give British American full access to the lucrative U.S. market, and create the largest reduced risk tobacco products company. As such, we don’t believe Philip Morris would idly sit by and believe this increases the probability that Philip Morris could acquire Altria as has been discussed in the media (Reuters and Bloomberg) but unconfirmed by the companies.
Shares of Philip Morris International have risen 0.8% to $96.29 at 12:45 p.m. today, while Altria has gained 2.9% to $63.63, Reynolds American has jumped 13% to $53.41, and British American Tobacco ADRs have tumbled 6.4% to $110.60.
UnitedHealth (UNH) – UnitedHealth shares moved higher, the most in more than six years–and lifted competitors like Humana ( HUM), Cigna ( CI), Aetna ( AET), and Anthem ( ANTM) as well as the company reported a solid 3Q setting off the Managed Care earnings season on a high note. The company posted a healthy 9 c EPS beat at $2.17 and modest revenue beat while raising FY16 EPS guidance by 13 c to $8.00. The beat was driven by an 80 bps beat on Consolidated Medical Loss Ratio and a lower effective tax rate offset by 50 bps worse SGA ratio as the company invests for future growth. Consolidated MLR of 80.3% was better than consensus by 80 bps. Importantly, the quality of the quarter as measured by reserve strength and cash flows was excellent with an improvement in DCP of 52 Days by 2 days YoY and QoQ by 1 day, while Adj. CFO of $3.2 B offered CFO to NI ratio of 1.7x. Optum shone in all three segments of Optum Rx, Optum Health & Optum Insight with top line growth of 9% and margin expansion to 6.9% in 3Q. Balance Sheet deleveraging continues with a reduction in Debt to Cap by 2% to 46.9%. Shareholder dividends have grown by 25% YoY with continued share repurchase despite the deleveraging efforts post CTRX.
Visa (V) – Visa Chief Executive Officer Charles Scharf is resigning his post after advising the board that he can no longer spend enough time in San Francisco “to do the job effectively.” The San Francisco-based payments network said Mr. Scharf will be replaced by Alfred Kelly, 58, a member of Visa’s board and a former president at American Express Co. In an interview, Mr. Scharf said his departure is connected to a need to be closer to his family in New York.
Reads of the Week
Monday October 24th – US Chicago FED Activity Index, US Manufacturing PMI
Tuesday October 25th – US S&P/Case-Shiller Home Price Index, US Consumer Confidence Index
Wednesday October 26th – US New Home Sales
Thursday October 27th – US Durable Goods Orders, US Initial Jobless Claims, US Pending Home Sales
Friday October 28th – US GDP
Monday October 24th – Capital Power Corp., Visa, West Fraser Timber,
Tuesday October 25th – 3M, Apple, AT&T, Baker Hughes, Caterpillar, DH Corp., Du Pont, Eli Lilly, Lockheed Martin, PrairieSky Royalty, Proctor and Gamble
Wednesday October 26th – Boeing, Boston Scientific, Coca Cola, FirstService Corp., Goldcorp, Suncor, Tesla, Uni Select,
Thursday October 27th – Altria Group, Deutsche Bank, Ford, MGM Resorts, MSCI Inc., Superior Plus Corp.,
Friday October 28th – Imperial Oil, Exxon Mobil Corp.
Have a good weekend.