Nothing in the world can take the place of persistence

Transcription

1 Nothing in the world can take the place of persistence High U.S. Dollar: Not an End to Growth Low Euro: Opportunity Solution: Get Invested Globally The U.S. economy is the healthiest of the major economies. The U.S. Dollar rise has been modest compared to some of the past swings, notably 1985 s 50% run. Corporate profits are off the boil, but there s more to the story there than dollar strength. While the rising dollar has bruised some bottom lines, our analysis of recent U.S. corporate results suggests a weak relationship between international sales exposure and performance at the broader level. In the early years of the recovery, a downsized greenback aided the competitiveness of U.S. manufacturing, resulting in export gains and the reshoring of some operations that had previously been moved abroad. The U.S. economy s share of global exports, relative to other advanced economies, was on the rise. A V shaped rebound means that U.S. manufacturing production has surpassed its pre recession peak, unlike most other developed countries. However, we do not believe manufacturing can do the heavy lifting from here that it did in the early recovery. The decline in machinery orders during the final quarter of the year suggests that the slowdown in business outlays seen in Q4, 2014 will spill over into the first half of 2015 as well. We have seen evidence of hiring, including the best three month spree since Consumer spending has offset the recent underperformance of exports. Corporate earnings will be affected by the U.S. dollar strength, but another factor such as weak energy sector has accounted for a reduction in earnings consensus. We continue to believe that the Feds will raise rates in June. Heartier economic readings will be the medicine to allow the Fed to end its near zero rate policy. The Eurodollar weakness is also fueling the trade weighted U.S. Dollar. The euro is the largest component of the trade weighted Dollar index. Europe has its problem list: Greece, Ukraine, quantitative easing and low to negative bond yields to name a few. However, we believe the time to invest is when the herd is running scared. Greece and other small debtor nations may end up leaving the Eurocurrency. This is actually a positive as once this is complete, you are left with a stronger nucleus of countries. This over time would propel the Euro to strengthen. Ukraine is not an economic engine. If Russia continues its invasion, the economic cost from sanctions could turn the political will of its citizens. Longer term a new Russia could become a centre of growth. Historically, once quantitative easing begins, this new liquidity injection is fuel to a fire for equities. We prefer to stay invested and ride the wave.

2 Disciplined Strategy is the Key to Success Our Portfolio strategy continues to have our macro view flow through to our sector asset allocation, which flows to stock selection. Below we have outlined our current thoughts: Interest Rates: Have bottomed and will trend higher over the next three years, U.S., then CAD Currency: Low rates in Canada will be a headwind for the CAD. Target $0.74, then $0.68 U.S. Dollar, higher U.S. interest rates will support the Dollar, potentially higher Euro has no support, look for a target of $0.95 vs USD. Oil: The bottom is in, slow growth to $60 $70 area in time Metals: Lower. China slowing still, thus demand for base metals weak Equity Allocation: Canada 35% + USA 40% + Europe 25% Canada: Stay invested in the Banks. Continue to be the core of the portfolio = quality + yield. Every other sector with high grade companies can be found outside Canada with safe dividends and currency tailwind. U.S.: Stay invested in the blue chip with strong dividend yield, cash flow and earnings growth. This defensive investment posture will weather any corrections and provide low volatility. Sectors: Pharmaceutical, industrial, consumer discretionary and financials. Europe: Increased exposure in conservative, dividend leaders. Sectors: Oil titans, pharmaceutical, leisure and industrial. Bond Portfolio: Duration (the average weighted maturity of the bond holdings) should be under 4 years. As rates rise, risk is in the longer maturities losing current price. Money market funds take the place of government bonds yielding less than 1.40% to maturity. The no risk yield of 1.20% in the money market offsets future price risk. Look for strong corporate bonds in the 4 6 year maturity, yields above 2.30%. Equity cash holdings should be largely in U.S. dollars. Sacrifice money market yield for the strong currency benefit.

3 Will & Estate Planning: Questions to Answer Many fail to plan the future of their hard earned assets after they have passed on. The process of planning seems morbid and sad. However, it is vital to the mental health of your loved ones. Avoiding conflict and stress after you have left this world, for your family is a must. Don t plan to fail, take action. Our knowledge, combined with our specialists at CIBC Trust can assist you every step of the way. Below are some questions to get you thinking: 1) Who would you like to appoint as your Executor(s)? Can they work with family members and make decisions based on your instructions, independent of family wishes? 2) Do they have the expertise and time to carry out your wishes to the best interests of your Family? 3) How would you like to have your personal effects, household items, vehicles divided? 4) Would you like to leave a memorandum that deals with leaving specific items to different family members? 5) Who will share in the residue of your estate? Consider discussing with the inheritors. 6) If trusts are to be created, will the Trustee be the same as those appointed as Executors? (The trustees can be different for each of the trusts). 7) What amount, and at what intervals, should money be paid from the trusts? 8) Should any of the estate proceeds be donated to charity. If so, stipulate a dollar amount, not a percentage of the estate. Stating a percentage could lead to valuation disputes. 9) In the event your children predecease, what is our wish for their portion? 10) Is there a limit on the amount you would like to leave your children? Thus, a large inheritance may or may not change their lifestyle and values.

4 Principal Protected Notes The Myth Investors are being sold on the concept invest in the markets, but don t worry, the principal is guaranteed. What few investors really do not understand is the high cost of that guarantee. A principal protected note (PPN, GIC linked to the market) or principal at risk note is a debt like instrument. On its maturity date, the issuer agrees, at a minimum, to repay investors the amount originally lent. The interest portion is tied to the performance of an underlying asset (such as the TSX index, mutual fund or common stocks). Although they are generally issued by banks they are not covered by Canada Deposit Insurance Corporation. The main risks with PPNs are liquidity and performance risk. Liquidity is through the trading desk, which must have a wide bid ask to offset the unwinding of the basket it is linked to and the fees associated with the note. Fees include commissions, management fees, guarantee fees and structuring fees. Performance risk is often misunderstood. Generally the underlying index that the PPN is associated with pays a regular dividend. Thus, if you held only the underlying asset you would receive this payment. Not so in a PPN. That is because the PPN is structured using derivatives. By using derivatives, the dealer hedges off their risk of the underlying index. By way of example, I will highlight a PPN. One of the most advertised PPNs are those linked to the TSX 60 index (top 60 companies on the TSX). In this example, the client s principal is guaranteed for the next 5 years. Their return is based on the difference in the level of the TSX 60 index at a maturity date, 5 years from now, let s use March 30, 2020 and today. Between today and maturity, the client receives no income stream. At worst they will receive their principal at maturity. Let s analyze the possible outcomes. Remember the client does not receive the 2.5% annual dividend yield that the underlying index pays. Over five years this amounts to a total of 13%. The one scenario where the client is better off in the PPN vs owning the index is if at the maturity date (one specific day), the index is 13% lower in value than at the start date. If you are investing to predict that the top 60 companies in Canada will be 13% lower one day, five years from now, then the PPN might fit. Otherwise you are always better off owning the actual underlying asset. At Hines Investment Management, we will not utilize these PPNs. Our philosophy is, if the client requires a guarantee to invest in high quality equity, then what is appropriate is a no frills GIC, as risk is not in their investment spectrum. A PPN only serves to erode their time value of money.

5 Patience is a Virtue Canadian Banks Banks have been the bellwether for the Canadian equity market since its creation, and likely always will be. Canada runs a very concentrated banking system, and that has carried the country in good stead for several decades. Furthermore, Bank shares have formed the foundation of most successful investment portfolios over time. Many seasoned bank investors were schooled on the mantra of buy banks when they yield 55% of long bonds, sell them when they yield 45% of long bonds. As with all yield vehicles, banks no longer trade on these old yardsticks. One would have assumed that, like other yield vehicles, the minimum equity yield argument would have simply resulted in Banks underperforming when rates rise, but staying flat when rates fall. However, something strange has occurred over the past five years: banks have entered bizarro world. They now trade in a completely opposite manner to that of the past. Since the recession, the trading relationship with the long bond yield has broken. Bank yields are now in excess of the long bond yield. Fundamentally, the major concern and opportunity for banks is spread. We believe credit risk, related to the decline in oil prices, is manageable. Banks also price loans and deposits with a reasonable spread so that movements in rates can be managed. As rates decline, loans are pressured to re price lower and spreads will compress. Our view that rates will rise over the next 18 months, spreads can widen and Banks will do extremely well. No discussion of yield would be complete without looking at Return on Equity (ROE) and dividend payout ratio. The banks performance on the ROE front has been very strong. Despite the fact that the 30 year time frame ( ) included a commercial real estate fiasco, the dot com era and the worst liquidity crisis for over 75 years, Bank ROE s have averaged in the teens. Payout ratios have also remained stable over time. With current payout ratios at an average of 45%, it is very manageable in a highly profitable industry. Given the strength of the Tier 1 ratios, we expect share buy backs to ramp up over time. Although Q1 of 2015 has not been favorable to the bank shares, patient investors will be well rewarded over the next months in this predictable sector.

6 Not Retiring: Right Choice for Some Some people nearing retirement don t want to leave their jobs. But defying expectations can be difficult at home and the office. Everyone expects you to retire. But what if you don t want to? Contrary to popular belief, you love your career. Staying at work requires a deep inward look. You must be willing to retool yourself to stay equipped with the skill set to perform in today s competitive environment. As we age, time is the economic variable that gets scarce. One needs to think about how they want to spend that time and whether they want to work as hard. Be self aware and tuned in to where you are now, versus five or ten years ago. Another gauge of whether sticking around is a good idea is your willingness to take on new projects and stay current, including technology. Once you make the decision to keep working, compare notes with your spouse. The job may make all the sense in the world to you. But it s important to sort out tough topics including money, age differences, job satisfaction. Really listen and appreciate what the other would like to do. It is more important to have quality time versus sitting around looking at each other. At work, communicate your decision to your colleagues and clients. It s important to position yourself so that no one will look for you to bow out soon. Older professionals have amassed so much skill and experience. The accumulated know how can be essential to the success of an organization. It is important to always maintain a passion for your craft. I, personally love my craft. I continue to learn through schooling, new client challenges and market twists. For me, my brain stays engaged, perhaps 24/7 in this craft. My work is my hobby. When I stop developing the skills for my craft, then it is time to venture on.