**September 5th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- NBF Asset Allocation Strategy: Yellen vs Draghi: Bullish either way!
- NBF 5-minute market review
- NBF Monthly Equity Monitor
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
NBF Asset Allocation Strategy: Yellen vs Draghi: Bullish either way!
It only took a matter of days in August before what initially seemed like a pullback ended up propelling equity market to new record highs. With its closer links to the Ukraine/Russia conflict, Europe was the only market that exhibited correction-type behavior, but expectations of further easing from the European Central bank (ECB) and the fall in the euro were enough for the German equity market to rebound from strong technical support levels (chart of the month). Meanwhile, the S&P 500 breached an important psychological level by closing above 2000 points for the first time of its history. For fixed income, yields on 10-year German bunds fell below 0.9%, dragging U.S. yields to a year-to-date low of 2.34%.
Asset allocation strategy
- Equities: Over the shorter-term, we recommend maintaining a prudent approach. The possibility of another pullback cannot be excluded as seasonality becomes unfavourable to equities in September. Over the longer term, however, stocks continue to offer the best expected returns. We are maintaining our asset allocation weightings over the 12 to 18-month horizon. Europe is lagging and should benefit from a weaker euro and the probability of more easing on the part of the ECB.
- Fixed income: With the Fed acknowledging that inflation is closer to its target and the job market continuing to improve, current nominal yields are not appealing for long-term investors. However, downward pressure on yields could prevail until the ECB initiates a bonds purchases program.
- Currencies: Due to diverging monetary policies in the Eurozone and the United States, the euro should continue to weaken against the greenback. Oil prices have probably troughed and should help the loonie stabilize around current levels.
NBF Webcast: 5-minute market review
A timely review on the ECB easing measures announced this week and U.S. economic data.
NBFM Monthly Equity Monitor – September 2014
NBF’s Economics and Strategy team published its Monthly Equity Monitor. Key highlights are below. Note in particular the increase in the year end targets for both the S&P500 and S&P/TSX Composite, the changes to global equity allocation (increase US, decrease Canada), and the changes to sector allocation, which is highlighted in blue text.
- Two-thirds of the way through Q3, global equities are on track for a ninth straight quarter of gains, the longest such run since 1995-96. The MSCI All Country World index has been posting record highs. Emerging markets, cause for concern early in the year, have been doing especially well since midyear.
- With the S&P 500 at an all-time high, a growing number of investors are concerned about index fatigue. We find it difficult to buy into this argument that a correction is coming. The rise of the S&P 500 has certainly been impressive in recent quarters, but so has the performance of the economy. Moreover, strong growth in leading indicators is very good news because it implies that monetary policy is finally gaining traction in the real economy. This development is confirmed by increased lending at U.S. commercial banks, where loans and leases have grown notably in recent months.
- An improving North American economic backdrop can go only so far to support equity markets if the rest of the world deteriorates. In the euro area, the good news is that the central bank has pledged to use unconventional monetary policy to fight deflationary forces. Though the direct effect of new liquidity injections on the real economy may not be immediate, the central bank is moving in the right direction. In the emerging world, we take comfort from China’s low CPI which should allow policymakers to ease the grip of their monetary and fiscal tightening.
- At this juncture we remain comfortable with our recommendation to overweight equities relative to our benchmark while maintaining a slight underweight for fixed income products. Our year-end targets are raised to 16,200 for the S&P/TSX (from 15,700) and to 2,085 for the S&P 500 (from 2,010).
- We are altering our global equity allocation this month. We are increasing our S&P 500 exposure at the expense of the S&P/TSX, which is reduced from overweight to market weight. We are also making changes to our sector allocation this month. Energy is downgraded to market weight while Financials are moved from market weight to overweight. We are also downgrading gold stocks back to market weight.
JMRD Basket Corner
Manulife (MFC): Manulife, a recent purchase in the DIG Basket, announced the acquisition of Standard Life’s Canada operations for $4 billion. Strategically the acquisition builds further scale in Group Retirement, Mutual Funds and Group Benefits and expands MFC’s presence in Quebec
Pembina (PPL) – Pembina announced at $650M ethane pipeline acquisition that will provide PPL with strategic access to the liquids-rich North Dakota Bakken Play. The shares traded to a new high of $53.04 before pulling back a bit. Pembina Pipeline Corp. plans Pacific push with propane
Alimentation Couche-Tard: Alimenation announced Q1/F2015 results this week that beat expectations due to better than expected gas margins. The company also announced a 12.5% dividend increase. The shares traded higher by 9% over 2 days following the results. Alimentation Couche-Tard gets sales boost from grab-and-go food, coffee
Inter Pipeline (IPL) – For Canadian oil-sands pipeline companies, operating under the radar pays. Inter Pipeline Thrives Out of Keystone Spotlight
Stantec (STN) – Stantec announced they will split the shares two-for-one and the split will take place in early November subject to final regulatory approval
Walgreen (WAG) – Walgreen Co. announced on Thursday that same-store sales rose 3.7% in August, lead by growth in the pharmacy section, but fell shy of analysts’ expectations. Analysts polled by Thomson Reuters expected same-store sales growth of 3.8% for the month. Nonetheless, shares advanced 3% on each of the last 2 days on speculation that Carl Ichan has bought a stake in the company.
Week at a Glance
Reads of the Week
- “This Pope Means Business” (Fortune Magazine) http://fortune.com/2014/08/14/this-pope-means-business/
- “Why TransCanada can survive-even thrive-without Keystone XL” (Yahoo Finance Canada)
- “Top 10 Buys and Sells by the Ultimate Stock-Pickers” (Morningstar)
- “What Does The Bursting of a Bond “Bubble” Look Like? (A Wealth of Common Sense)
- “Things Got Better, Slowly” (The Motley Fool)
- “Asking the Wrong Question” (A Wealth of Common Sense) There’s no point in instituting a plan if you’re not going to follow it. With a consistent process, the portfolio moves that feel the worst are likely the best ones for you over the long run.