January 2014 Sovereign Wealth Letter

Dear friends,  as we begin a new year we offer a “new look”.  Please tell me which you prefer!   You can see today’s letter in the email format as usual, or in a blog format here....  Please tell me which you find clearer, easier, better for you?   In addition now, enter your email to subscribe for future discussions on retirement lifestyles, family wealth, life-long income, estate planning, etc.

2013 – now in the history books

It was a year of many challenges.  Floods shut down Alberta.  Megantic’s rail disaster shut down much of Quebec.  Rob Ford nearly shut down Toronto.  Duffy and friends nearly shut the Senate (what’s that mean exactly?).  Fiscal discussions shut down Washington.  “Run to the hills” was the general theme of many voices in 2013.

One could call it a “year of living dangerously.

News media were shouting about risks on every side.  Risk of emerging markets growing at 5% instead of 12%.  Risk of faltering recovery in US and Europe.  Risk of too few jobs.  Risk of too few skills.  Risk of corporations still hoarding their cash reserves.  Risks of rising interest rates, falling house prices, and the tapering of qualitative easing (economic stimulus).

year of ear-bending news reports.

2013 can be divided into three periods.  Canadian equities (TSX) rose 2% in the first quarter, dropped 5% in the 2nd quarter, and rose 12% to complete the year.  Our market rose near 8%.   OK in hindsight all this sounds rather placid, no?

U.S. and Europe.

American and European markets offered stellar headlines with their continued recovery from 2008/2009 losses.  That’s what makes the US pat themselves on the back for a 24% leap in market values.  Fact is they were finally recovering from the worst failure since 1929 or 1820.   Happily as our funds were increasing allocation to US & European equities, we benefited nicely in diversifying beyond Canada.

Bonds remained a hazard.

Bonds paid little or nothing in 2013 unless people took on junk-level risk.  When interest rates rise or threaten to do so, bonds trend downward.  When 2013 results are all published I believe results for short-term bonds will be near 0.5% for the year,  and for long-term bonds near (a loss of) -6 to -7%.  As we’ve discussed before, this environment for bonds has been rare since 1982 but casts a long dark shadow over bond investing in the decades ahead.

Emerging and Frontier markets.

Emerging investment markets paused for 2013 because American and global investors sold foreign holdings to repatriate into the U.S. stock market.  (If you had Frontier Markets though you'd be happy with >20% gain there.)  2014 will be altogether different because stock values in the US are now very highly valued and will certainly recede at times during this year.  Emerging Market equities meanwhile built stronger earnings which haven’t moved the stock market.

In 2014 I’m confident emerging and frontier markets will both rise strongly with:  (i) growth rates 2-times to 4-times higher than the developed world, (ii) lower debt levels,  (iii) improving political environments.  These dynamics are broadly positive for emerging and frontier markets …and also for Canadian companies with interests in such far-flung parts of the world.

People are asking about China.  

I’m best to borrow from Mark Mobius’ that China’s ten year plan from Nov. 2013 touches some 60 proposals which will dramatically affect health care, social security, justice and rule of law, intellectual & property rights, banking and monetary policy, and environmental protection.  Measures to reform state-owned enterprises, encourage innovation, and reduce unfair competition, will continue to re-balance and improve the economy.  Such will fuel progress in 2014 and beyond.  Other Asian economies and Canada too will benefit significantly.  (Ref Mobius, http://ow.ly/soNYy )

View into 2014:

I haven’t found a certified crystal ball and I hope Apple or Blackberry may release one this year.  To the best of our view the following dynamics may appear on our pathway during 2014.

(i)  Interests rates may rise slightly, impacting 5-year mortgage rates a little but scant change for interest rates on lines of credit.

(ii) Washington will probably avoid a shut-down in 2013 because both parties in the US want to look clean for November’s mid-term election.

(iii) US government will continue tapering their economic stimulus due to increasing health in the wider economy.   This however offers the leverage to delay increasing interest rates.

(iv) World markets should mostly rise this year, supported by strong corporate earnings, remaining stimulus, lower consumer debt, modestly higher consumer spending, and progressive trade developments.

(v) Fixed income investments will likely earn between -4% to +5% with an average near 2% while equity markets may rise between 5% to 9%.

(vi) For retirees or people within 5-10 years of retiring “life income mandates” create life-income and continued growth to reduce two brutal risks:  losing money, and outliving or running out of money.  That’s why I design “life income mandates” as a fundamental and secure focus of your portfolio.  (See Life Income Mandates)

Wishing you the best for 2014 and always . . . 

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I am grateful always, serving your Financial Security for LIFE!

Brian Weatherdon,  MA, CFP, CLU, CPCA, MDRT. 
SOVEREIGN WEALTH MANAGEMENT INC.   (905) 637-3500  x 223 
627 Guelph Line, Burlington, Ontario.  L7R 3M7    1-877-9337-3500 x 223
Life and Health Insurances.  Business Successions.  Wealth, Income, & Estate Planning.
Author: A Lifetime of Wealth – and how not to lose it.  Visit www.ALifetimeOfWealth.info
Founder of web-learning resources:  www.GuaranteedIncome4Life.ca
** 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 are not a valid guide to future performance.  For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media.  Research is sourced from leading sources including GLC, RBC, Franklin Templeton, Mackenzie, and a wide range of other well-reputed firms.  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 serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals.  We are grateful always to receive your comments and questions.


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