February 2019 SWM Letter

Temperatures have shifted 30 degrees (upward in Ontario, downward in Alberta). Some things in life can move that fast. Same with the growth of investment accounts since January 1st, many up 4% to 5%. The worst December in 88 years has been followed with the best January in 30 years, already recovering most of the 2018 downswing. Canada rocketing market since Christmas is among the best.

Furthermore the U.S. federal reserve dramatically altered its position on interest rates with a bias to potentially no-change in 2019. This supports markets everywhere, in Canada and internationally. Our own central bank, while cautious on interest rates, forecasts our economy rebounding after the 2018 detour. No recession this year: Carolyn Wilkins of the Bank of Canada says “We expect the economic expansion to pick up again after (2018’s) detour.”

We hosted two client dinners recently and very well attended, with presentations from economic teams of TD Bank and RBC Global Asset Management. (If you missed, and would like invitation to a future dinner, please let me know.) Here today are some of the insights we shared over dinner along with an active and engaging Q&A discussion. To begin with, if you were wondering how account values fared in 2018 compared to wider indices, see the following picture here of the strongest major market, U.S.A.: that’s a tough battle compared to the easy cruising of 2017. As the global roller coaster held sway, the U.S. ended down 6%, Canada down 11%, Europe/International markets down 20%.

We see 2019 providing healthy growth even though some factors seem less than robust. Part of 2019 growth comes as a response and recovery from 2018. Yet we also keep in mind: (a) global manufacturing is slowing somewhat, (b) U.S. tax-cuts were all for 2018 and dampen the outlook for 2020-2022, (c) Trump’s tariffs are increasing costs of goods, yes even in the U.S. increasing corporate costs, pushing headwinds against multinational trade. Ultimately though, tariffs will ease because everyone in the end wants to sell goods and services, support jobs, trade successfully with world neighbours. With specific reference to China and the US: the U.S. wants increased access to China’s consumers, while China also wants greater exposure to North American consumers and less-volatile investments. China also continues to hold the purse-strings on > $1Trillion of U.S. government debt. U.S. and China are joined at the hip, the shoulders, the knees: their tariff tiffs will eventually settle into an acceptable win for both sides.

Ignoring what media say of the business cycle – it’s more complex and nuanced than a news blurb. While the cycle continual changes shape, nothing here is pointing now to recession. The extended ten-year recovery from 2008’s meltdown (worst since 1820) has been lethargic at times, punctuated by gasps of caution in 2011, 2015, 2018. Some regions and sectors are early-to-mid cycle, and others later in the game. If the FED hadn’t paused on interest rates in December it could have pushed the U.S. into a slight recession this year; since then 10-year U.S. bonds have fallen from 3.25% to 2.75% … giving corporations space to continue preparing and planning for growth.

RBC’s fair valuation model for the Canadian market reveals the least risk (or the most opportunity) since 2011 and 2002. See where the blue line is hugging the bottom of this historic stock channel. What we see going forward is not a timetable but clearly speaks of growth over the coming years. It’s very similar in Europe and Emerging markets with similar pictures. Again remember this shows opportunity but not timing. The U.S. S&P500 blue line is mid-way in the channel which suggests eventual headwinds against growth there. Globally, investment markets are 20% discounted from fair value, fueling the view of rising values through the seasons in front of us.

Analogy of the Ryder Cup.  Our RBC presenter drew an analogy to the Ryder Cup. When only Britain and the U.S. were in this golf tournament, Americans won 15 tournaments against the UK’s 3. When Britain included Ireland on their side it offered little difference – in fact the U.S. won all. Then as the Euro zone, contributing their population alongside Britain, the results changed completely. The Euro/UK won 10 tournaments against the US’ 8. This analogy as it is based on the strength of greater population numbers, confirms the wisdom to invest beyond our own country (which is 3% of the world economy) and even beyond N.Am. (at 28% of the world economy).

Life Income Mandates, especially our global exposure in dividends, real estate, infrastructure, and fixed income, have greatly reduced risks, increased potential growth while stabilizing results over time. Where Europe grew faster in the early 90s, U.S. grew faster in the late 90s, Canada grew faster to 2008, U.S. grew faster to 2018, our global mandates smooth the journey, allowing a stable yield for life income. Combine this with strict choice of funds, some with only 30 to 70 holdings so we’re not owning the whole roller coaster but a more narrow slice of the economy with strong and repeatable earnings at below-market risk. This is especially vital as the business cycle continues to mature.

That’s a brief glimpse:  the strongest January in 30 years proved highly profitable for us all. We wish you today a happy and prosperous Chinese New Year.  Any questions, or anyone who can benefit in speaking with us … we are always here for you.

Yours in Financial Security for LIFE!

Brian