January 2018 SWM Letter

January is among the busiest months (followed by February, March …).  Last month we offered insights into 2018 and beyond so if you missed, freely review that again.  Today we can pass by the 2017 frenzy for crypto-currencies and marijuana.  We’ll touch on 2017 investment results.  Then being Canadian, we have the looming questions and noise about NAFTA and the risks or losses that could arise if that agreement terminates.  Stay with me here for this year’s opening letter  …and here’s to a successful 2018!

Successful 2017.

Having reviewed clients’ accounts this month we can see that 2017 created strong growth.  Statements have already been arriving so you’ll have all the details in the next few days.  A key theme that arises is the value of diversified international investing.  Canadian equity was mighty in 2016 and modest in 2017.  International equity was modest in 2016 and mighty in 2017.  Combining these two together – domestic and international – has reduced risk and raised returns, to benefit all of us.

If it hadn’t been for Canada’s double-digit growth in 2016 we’d be wondering why our economy shone brightest in 2017 yet gave the weakest returns.  Financial and Energy sectors (combining as half of Canada’s equity market) are largely responsible.  Financials that grew 20% the year earlier became jittery with interest rates and threats to NAFTA.  Oil producers fret over lack of pipelines to reach global markets.  Two of 2017’s strongest sectors – info tech and health care – are a mere 4% of the our economy compared to 38% in the U.S.  But those U.S. markets are now looking expensive while Canadian equities have room to grow.

Charts and discussion of 2017 and insights for 2018 are here from GLC Asset Management (combined entity of Great West, London Life, Canada Life).

Death of Long Term Care Insurance.

As promised last month ....  You can choose a longer article or just a summary on the coming disappearance of Long Term Care Insurance.  If someone wanted “disability coverage for seniors” …or if you seek a distinctly new source of income for future healthcare, this is for you.   LTCI is so much bigger in the U.S. but we have friends and family in Canada too who deserve a choice – for themselves or their parents.  Full discussion is here, or a brief intro here.  (And rest assured if you already have coverage in place insurers won’t cancel contracts already in effect.)

 NAFTA – missed in all the chatter.

Getting directly to the point here I’ve found two pieces with perhaps the most practical insight on NAFTA.  Anything further could be just noise.

RBC GLOBAL PERSPECTIVES:

RBC gives 60% chance that little or no change will hit NAFTA during Trump’s current term of office.  The White House is more focused on tax reform – a quicker and easier “win” than NAFTA.  Congress is deeply divided on trade, with a majority seeming to favour little or no change to Canada/U.S. trade.

Canada has not contributed to U.S. trade deficits, and while 75% of our exports go to the U.S., much of this is below the costs of US-homegrown materials.  Ending NAFTA, then, would hurt U.S. production, raise new home costs, hurt U.S. employment, and generally drag the U.S. economy.  Some disputed areas could be updated with respect to intellectual property and to address industries that didn’t exist 25 years ago.  With little or no substantial changes, the expected result ranges from modestly negative to positive.  No fears!

Terminating NAFTA is given a 35% chance.  But this would raise production costs and threaten labour-permits and supply-chains for both Canada and the U.S.  Without NAFTA, we have the earlier FTA unless it too were scrapped.  Behind that we have the WTO (World Trade Organization) where Canada is pressing nearly 200 complaints against the U.S. for questionable or illegal trade practices.  The U.S. has a big stick but it also wants the carrot:  while they’re waving the stick, they get more of the carrot only if they can share with us as trade partners.  Our balance of trade favours the U.S. already, and the stick risks pushing us further into alliances with Asia and Europe.  Ultimately Congress should favour Canada as a friendly and well integrated neighbour and trade partner.

RBC puts 5% chance of damaging changes.  This refers to eliminating trade dispute panels, protecting US-based procurement policies, requiring higher US-content in auto manufacturing, and setting 5-year windows at which the agreement would be reviewed or torched.  Especially this last factor could present the greatest risk, leaving Canadians powerless and without a structure for legal complaint.

Remember too if you hear Trump triggering withdrawal, this doesn’t kill NAFTA but only starts a six month “cooling off period.”   Then the U.S. may choose to exit or use the event to negotiate adjustments.  Trump would need Congress’ support at a time when mid-term elections will steal the steam from trade negotiations.

Despite the president’s threat and bluster, his mind is in flux seeking a great political “win”.  NAFTA is not such a quick win, even for Mr. Trump.

BLOOMBERG:

Bloomberg is an interesting source of insights if we avoid the videos and paid-advertising which are of questionable value.  On January 11th Andrew Mayeda pointed out that even if President Trump gives notice of a pull-out, NAFTA could survive.  Trump will likely start the clock, threatening to end the agreement.  What happens next, however, is what we don’t know.  This echoes RBC’s comments above.

ZOMBIE:  NAFTA could continue as Congress, having power to “regulate commerce with foreign nations” rebukes Trump’s wishes.  “NAFTA could stagger on well after Trump signals a pullout” with higher odds of a withdrawal notice than actually raising tariffs.

END:   NAFTA could reach a complete end.  Mayeda outlines how this would raise costs, reduce company profits, hurt growth and jobs in all three nations, and spur unwanted inflation.  While recession is unlikely, U.S. Trade Representative Carla Hills says that NAFTA is “a big agreement and we would all lose, all three of us would lose if we were to pull out.”

START:   Alternatively Trump’s notice could simply open a new phase of negotiations.  People would pause, and come back someday with cooler minds to negotiate over a few years or more.  (More at Bloomberg.)

PRUDENCE now and in 2018.

With NAFTA in the winds I herald the continued advantage of international diversification.   Europe looks very appealing.  Emerging Markets also look strong.

With expanding earnings this year we should find strength in equities over fixed-income.  Yet compare the price of earnings among world markets.  The GLC report shows price-earnings ratios for the US are getting high at 18.6,  still comfortable in Canada at 16.4, and indeed sunny in both Europe and Emerging markets (14.5 and 12.7 respectively).  Within suitable risk tolerances we could find the greatest opportunities in the EAFE or European zones and Emerging economies.  This can also reduce NAFTA risks (though trade policies, currency fluctuations, tax laws, corporate earnings, etc., apply wherever one invests.)

A final tidbit comes from CIBC Renaissance and Riverfront who show the US market now 16% above trend, meaning in 2018 it could fall, rise, or end flat.  Emerging markets are 4% below trend suggesting more potential.  Europe is about 30% below trend and building momentum.  If a crystal ball were in hand, one might expect Europe to host strong growth in 2018.  Canada too is below-trend with room to grow right here at home.

We’ve covered many areas in this letter.  Next, we meet personally and discuss how these apply to your own investments and financial planning.  Reach me at your convenience.  Any questions – any way we can help – let us know.  And indeed you’ll find friends or family also have questions, needs, or anxiety over financial needs:  we are open to help when you introduce them to us.

Now wishing you the best health, the best weather, the best trips, memories, and family times  … and the very best all year long!

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500

Brian@SovereignWealth.ca

Author:  (2013) A Lifetime Of Wealth — And How Not To Lose It(2013) Protecting Life, Loved Ones, and Future Dreams.  (2015) Your Business, Your Retirement: Halton Retirement Study.

** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton.  Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.

2 comments

  1. Senators from U.S. mid-west states are urging to keep NAFTA and also resume TPP negotiations. Key points from Senator Grassley of IOWA:

    “Pulling out of NAFTA would be catastrophic for farmers, based on the fact that Mexico is our number one export market for corn,” Grassley said in an interview in his Capitol Hill office Wednesday. “That could signal a real agricultural, at least Midwestern agricultural depression.”

    “A disruption in trade flows with Canada and Mexico would be a financial hit in farming communities already struggling with low prices for corn, wheat, soybeans and other commodities that the Agriculture Department said may push U.S. farmer profits this year to their lowest since 2006.”

    https://www.bloomberg.com/news/articles/2018-02-16/ending-nafta-could-cause-rural-depression-gop-senator-says

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