September 2017 SWM Letter

Hurricanes and other events blow in and away this time of year.  It can be addicting to watch, especially as stitched together by endless videos in news media.  Ultimately, the immense damages caused by Harvey and Irma were less than feared, took fewer lives than in years past, and will goose productivity in seasons ahead due to rebuilding.  Millions in the Caribbean and southern U.S. have a long struggle ahead, yet will choose to keep living in the path of future storms.  History repeats, people rebuild, life goes on.

A US-based firm opened its monthly letter with the plea:  “Wake me up when September ends.”  In Canada though it seems investment markets have been treading water for months – still negative year-to-date.  If we were not diversifying globally our accounts would be in the red this year (8 months).  But there are strong positives, and these will soon bear fruit in Canadian markets and investment funds.

Positive Momentum

Canada is leading G7 nations in economic growth yet trailing in last place among G7 stock markets.  Eric Lascelles as chief economist at RBC Global Asset Management calls this bizarre, a rare or unprecedented “disconnect between stocks and the economy.”  Our unemployment rate is lower than any time since 2008.  Wages are up 1.8%.  Canada has created 374,000 new jobs in the past year (two-thirds being full-time positions).  Industrial production at 85% of capacity is the best since 2007.  With this strength, the Bank of Canada has confidently raised overnight interest-rates twice and may add another 0.25% to reduce stimulus before this year ends.

So why is Canada’s stock market in bed with the flu?

First, Canada is rich in what has not been working.  One-fifth of Canada’s stock market is in energy.  Energy is down 20% this year, and has fallen by half since its 2014 peak.  Oil and gas may fuel the future for many years but there’s too much in storage and it is still being over-produced.  Few O&G companies are profitable at these levels.  All have cut costs.  Canada needs a way to boost exports (or refine these products closer to home) so when oil again rises over $60/barrel the next boom will bring rewards.  Watch further for 2018-2019.  (FYI: another fifth of Canada’s economy is metals/materials and has also been flat in 2017 with little clue of how or when a next leg-up may occur.)

Second, Canada is lacking what boomed this year especially south of the border.  Have you heard of FAANGS?  Facebook, Apple, Amazon, Netflix, Google.  These American firms have gained near 50% in 2017.  Canada has far less "technology" as compared to the U.S. market.  Even the U.S. market (up 10%) would be a flat pancake without those five stratospheric stocks.

Third, 34% of Canada’s stock market is financials.  It is truly bizarre that bank stocks have gone nowhere this year despite earning historic billions.  “What gives?”  A range of factors fit here, but especially a belief in the U.S. that Canada was due for a fall, that our housing market would collapse and thus derail our banking system, and rising interest rates would poison our economy and threaten havoc among mortgaged homeowners.  False assumptions.  I personally believe our Canadian banking is gaining strength for many reasons, and the year ahead will prove highly rewarding.

  • Dave MacKay of Royal Bank rebuked the pessimism by evaluating risks in RBC’s $260 Billion portfolio of home mortgages.  $100 Billion is insured and poses no risk.  $140 Billion is below 70% loan-to-value.  Other mortgages are safe among higher income borrowers paying less than 35% of income on debt servicing.  After all that there is $6 Billion of riskier borrowing with an estimated potential loss of $600 Million.  That’s less than ¼ of 1% on their mortgage portfolio -- seemingly not a major risk.
  • Americans also disparaged bank loans to oil and gas companies.  Our major banks though are ~ 2% leveraged to the energy industry.  Many have failed to grasp the safeguards of Canadian banking.  It’s built to last!  4% dividends and 15% return on equity.  Whether Canadian bank stocks rise or fall in a year –  or just pause for a season they have a strong keel to weather any storm, and unfatiguing engines to focus forward regardless what hurricanes may rage in financial markets.
  • Just yesterday, Citigroup in the U.S. refreshed its take on our banks:  “Canada has the best ‘boring’ banks in the world.”   (See link here)

I’ve said before, consider the pendulum.   In 2013 and 2014 Canada’s banking sector grew (in market values) 23% and 14%.  In 2015 it fell 2%.  2016 rose 24%.  2017 the sector has paused entirely.  Like last year we may see the whole year’s growth come in one quarter.  That wouldn’t be strange at all.  The pendulum will swing forward again, likely as banks start releasing their earnings expectations for 2018.

WHAT IS ONE CLUE THAT ALWAYS WORKS?  

In one word it’s “diversification”.  Then add the word “global”.  To be clear we call this a global portfolio of “life income mandates” (LIM).  This is how we reduce market risk while safeguarding Life Income. 

Over the years our clients have had healthy returns.  LIM dampens the ever-present risk of stock markets.  While accounts vary personally we broadly see year-over-year gains:   2013 up 6%;  2014 up 6%;  2015 up 5%;  2016 up 9%.  And year-to-date 2017 is up 3% to 5% even though Canada’s market is down.

This is even more clear in stormy downturns.  Through the 2000-2002 tech meltdown LIM stayed safe.  As pictured in my 2013 book, A Lifetime Of Wealth, with a 65% global meltdown of 2008-2009 this portfolio dropped 15% (1/4)  and recovered four-times faster.

This approach has proven effective over 10, 30, 50, 200 years.

LONG AFTER I’M GONE . . .

These principles were true before we were born, and will remain so long after we’re gone.  I’ve shared before how I identified these as a platform to secure life income.  To feel safe in life’s storms you want a safe ship and a strong crew.  That’s what we have here.

With this theme I also want to congratulate Ben Takacs on our team as he passed his second-level of CFA (chartered financial analyst) this summer.  One more level to go in the toughest regimen of financial exams in the world.

PATIENCE IS SURELY REWARDED

In closing here’s a humorous take on how GOD might manage the earthly task of investing.  (See here ...or if you cannot load the page I've added a summary in the "comments" section below.)  Between the lines we learn that markets can pause before paying rich rewards, and require patience that may seem super-human.  Another insight is that God’s portfolio described in the article would often lose value, terribly in 1929-1932, and 40% in 2008-2009 …and such risk may optimize the eventual rewards.

We mortals don’t have God’s time horizon so we purposely design Life Income Mandates so we experience less risk.  Still, the article's insights can help any generation consider factors that will build wealth patiently while surviving any hurricanes that happen to cross our path.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA CFP CLU CPCA. 
Certified Financial Planner.  Certified Retirement Coach.
627 Guelph Line, Burlington, Ont. L7R 3M7. 905-637-3500 x 223
Email:  Brian@SovereignWealth.ca
 
Author of : 
> A Lifetime Of Wealth - And How Not To Lose It. (2013). 
> Protecting Life, Loved Ones, and Future Dreams (2013).
> Your Business - Your Retirement:  Halton Retirement Study (2015)

** This monthly letter touches on key strategies in Canadian and global investing and Ret.Coach SEALfinancial planning. This lette

1 comment

  1. If you had difficulty reaching the article mentioned in closing above, it is by Ian McGugan in the August 25th Globe And Mail, “EVEN GOD COULDN’T BUILD THE PERFECT PORTFOLIO.” As God would see the future with unfailing accuracy, McGugan shares a study by Wes Gray of Broomall, Pennsylvania, reviewing the last 90 years. God, it presumes, could infallibly choose the stocks that would give the greatest returns over successive five year timelines. Indeed the bottom-line results were “divine” but came with gut-wrenching downsides: losing 76% in 1929-1932, losing more than 40% in the 2008 global financial crisis. Ten times — more than once per decade — the all-knowing approach lost over 20%. Hence the catch: high returns are inseparable from turbulent and extended volatility, and even God would be fired by investors whose patience wore thin on the downturns. It’s a good article, worth a chuckle and some thoughtful pondering 🙂

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