Portfolio Management Commentary

Transcription

1 Portfolio Management Commentary Quarter Ending September 30, 2016 First things first, let s dissect the current market environment to see where the bias exists for investors. As usual, we begin with the fundamentals to see how expensive the markets are from a comparative perspective. The forecasted P/E ratio for the S&P TSX Composite is approximately 17.09Xs earnings and the forecasted P/E ratio for the S&P 500 stands at 19.01Xs. While not cheap, these numbers are still under the excesses of previous market corrections in the mid- 20s. They should be reviewed, however, to determine any signs of change. In terms of growth, the S&P TSX Composite is forecasted to grow earnings at 5.88% and the S&P 500 at 6.40% 1. Clearly earnings growth needs to accelerate or prices will retreat from higher levels. So the message here is that the markets are moderately priced. Patrick A. Choquette, CFP, CIM, FCSI Portfolio Manager Tel: patrick.choquette@raymondjames.ca Raymond James Ltd. Suite nd Ave Langley, BC V2Y 1R7 Inside This Issue Commentary...1 Your Portfolio... 4 Final Thoughts... 5 The relationship between the US and Canadian dollar is important to our economy and investment allocation. The FX cross rate is the same as the last review, but the $CRB (commodities) has moved up 5%. Why? Oil broke out above $50 a barrel and oil represents 23% of the $CRB index. An interesting point to note here is the stability of the $USD even though commodities are going higher. Remember commodities, which are priced in $USDs, usually have an inverse price relationship with the dollar. The $USD should be going down in this scenario relative to the $CAD and the $CRB. An answer may lie in the anticipation of a higher Fed rate in December. Higher interest rates generally lead to a higher dollar and therefore the increase in price of oil may have been offset. The technical picture for the major North American indices is still positive. In the last couple of weeks, we have seen some short-term weakness in the S&P 500, but I believe that this pattern is consistent with season trends and not the harbinger of a major decline. The price is still above the 40 week moving average and the slope is up. 1 Data is provided by Ycharts and is based on the aggregate components of the SPY and XIC.TO.

2 Portfolio Management Commentary Page 2 Clearly, the support zone needs to hold or declines could breech the 2000 level. The S&P TSX Composite is also showing a similar pattern, but with a more pronounced V bottom back in January. Once again, the chart tells a similar story. I believe that this period of consolidation is constructive for us to selectively add to our positions. Perhaps, the move in the $CRB, noted earlier, will lead the index to take out the 2014 highs. Let s see where the strength in the Canadian market lies for the last quarter.

3 Portfolio Management Commentary Page 3 There has been a dramatic reversal in the leading sector of last quarter, the light blue bar (S&P TSX materials), is now the worst performing sub-group of the market. Gold stocks, which represent the lion s share of the materials sector sold off sharply since their yearly highs in mid- August. Health care has continued its decline, and most recently, utilities has rolled over as investors are concerned with overstretched valuations and interest rate sensitivity. Understandably, financials have ticked up as higher interest rate anticipation leads to better profitability metrics for financial service companies. Info tech was the clear winner for the quarter as money flowed back into that sector in sympathy to its cousin down south. In reference to the portfolios, we trimmed our positions in gold equity and bullion in advance of the seasonal declines and look to re-establish a position at lower support levels. Here is another update since the last quarter, the battle for North American market dominance. As you can see we are basically at the same level as last time, but there seems to be a descending triangle forming.

4 Portfolio Management Commentary Page 4 Usually this type of pattern occurs in a downtrend, so we have a mixed signal right now. It seems to me that, like the $USDCAD rate, the markets are in a place of indecision and are awaiting further information to reconcile themselves. The last item for review is the state of the US yield curve. The curve is still in normal territory, but talk of Fed tightening has raised the front end of the curve slightly. Once again, a flattening curve is normal when rates are set to rise. We need to be conscious of a change to an inverted one. Your Portfolio To say that 2016 has been a difficult year for actively managed portfolios is an understatement. The V shaped start to 2016 has penalized those of us who are more defensively minded and with an eye towards protecting capital during market declines. October should provide us with some opportunities, however, as this month typically coincides with the yearly lows and sets the stage for strongest seasonal period of the year. We are running our cash levels high right now to capitalize on selective purchases. On another note, it should be mentioned that October also tends to be one of the most volatile months of the year. Given the US presidential race, I would assume that this should persist until after the end of We made a few additions this quarter in order to further diversify the portfolios. For starters, we added some international exposure through the purchase of XMI.TO, XMM.TO, XEF.TO. These positions provide access to non-north American equities which have more compelling valuation characteristics. In our $USD portfolios we exchanged SBUX (Starbucks) for T (AT&T), in order to upgrade the dividend yield and reduce exposure to cyclicals. In our $CAD portfolios, we exited half of our bullion positions and sold ABX (Barrick) as stops were tripped by downward price performance. Given the rambunctious moves in gold lately, it was prudent to take some profit and wait for a new entry point. I believe that this may occur during months of October to November. We also reduced our exposure to the low volatility strategies in Canada and the US (ZLB.TO, and ZLU.TO) as the risk/reward of this trade was starting to weaken.

5 Portfolio Management Commentary Page 5 Final Thoughts The final quarter to 2016 should be an exciting one as the Democrats and Republicans battle over the state of the Union. People love drama and the US has this in spades! Add to this mix the real possibility of a Fed rate hike in December, more Brexit commentary, oil pushing through 50 $USD, and the potential for a Canadian housing bubble. Irrespective of the headlines, the market seems to be in a consolidation pattern where the gains of one day are erased by the losses of another. I believe that this form of market indecision is constructive for the next advance forward. And while correction will come, the following picture speaks about the potential of the future: Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus carefully before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This Quarterly Market Comment has been prepared by Patrick Choquette and expresses the opinions of the author and not necessarily those of Raymond James Ltd., (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. The performance outlined in the report is net of fees. The client account performance may vary from the model portfolio due to several factors, including the timing of contributions and dates invested in model. The performance reported is that of the account that represents the model, not a composite. Performance calculation for the models may be different than the index used as a reference point. The index performance reported reflects price gains returns only (not total returns) and in their local currency. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This Quarterly Market Comment is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund.