Rate Rise May Surprise

Transcription

1 Rate Rise May Surprise Since the great recession, we have experienced a bottoming of interest rates and have moved into a structural rising interest rate environment as noted in our March Hinesight. The markets have been looking at Trump s policies as fuel to the increasing rate environment and pricing in multiple rate hikes in 2017 and Although we do see these policies as putting short-term pressure to rising rates, we believe the emergence of technology will provide downward pressure on inflation and slow down the pace of interest rate increases in the long-term. Inflation is measured by the Consumer Price Index (CPI), defined as a measure of the average change over time in the prices paid by customers for a market basket of consumer goods and services. This basket of goods and services can be broken down into eight major categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. All central banks use the CPI as a measure of whether to adjust interest rates and as CPI rises, interest rates rise. Inflation has averaged 1.38% per year from (Federal Reserve Bank of Minneapolis). As such, we have seen only three interest rate hikes by the Federal Reserve since the Great Recession. Technology has always been a disruptor as it is introduced to various industries and services, allowing things to be made quicker and cheaper. With technology advancing at an exponential rate, we are seeing changes across a broad range of industries and services at a quicker pace than we have ever seen before. When new technology is introduced to an industry, this usually brings new efficiencies and cost reduction to the industry. At Hines Investment Management, we have been paying attention to these changes and what technologies are emerging that could put further downward pressure on goods and services. We have seen the price of computers, televisions, audio equipment decrease over time (US Bureau of Labor Statistics ). However, Amazon is arguably one of the biggest disruptors in the market for goods. Allowing clients to shop the marketplace and putting downward pressure on all sorts of products. For example, on May 7 th, Amazon was selling 12 rolls of Bounty paper towels with free shipping for $14.77 CDN, while a competing grocer was selling the same paper towels for $22.48!

2 In the U.S., we have already seen 3,296 store closings in 2017, twice the same period last year, (Louise Yamada Technical Research Advisors, LLC) as more and more consumers shop online for a wider selection and cheaper goods. Many stores are either closing or moving their business online. These closings are already putting pressure on real estate firms to reduce rent and/or upgrade their buildings to attract renters. REITs are feeling pressure from rising interest rates and lower margins as the online shift occurs. In the education sector, we have seen a rise in online course offerings over the past decade. As technologies emerge to allow easy communication between student and professors and secure ways of administering tests online. Students see advantages as being able to upgrade their skills at their own pace, and professors are able to teach larger class sizes to students across the globe. As universities and colleges no longer have to pay for the costs associated with physical buildings, we see those costs get passed down to students in lower tuition costs for online courses. When we look to the future, we see many technological advancements that have the potential to significantly reduce costs. There has been a lot of talk recently about self-driving cars and trucks. The impact of which would incredibly reduce shipping costs and thus create downward pressure on prices. A bigger change may be the evolution of the 3D printer. GE recently announced they will be using a 3D printer to print metal components to use in their new turbine jet engines. Imagine a world where automobile parts could be printed in one factory and assembled at an adjacent factory, thereby eliminating shipping costs and greatly reducing labour costs. Memphis Meats is in its infancy stage of developing a method to grow meat from self-reproducing cells in bio-reacting tanks called clean meat. So, no cattle, no grain, no water, and no pollution from the animals. This has the potential to completely change the U.S. meat industry! We believe that coming technological advances will continue to put downward pressure in the coming decade to keep inflation low. Clients in fixed income portfolios will suffer from not only rising rates, as we discussed in our last publication, but will also not be able to obtain the higher rates they require to maintain sufficient cash flow on fixed income portfolios. At Hines Investment Management, we have solutions to generate the income that you require to maintain your standard of living now and in the future. We are here to help you live a financially stress free life!

3 Are we Forecasting too Optimistically, Ignoring the Facts? Over the past few months, there has been a lot of talk surrounding the economy, especially with the Bank of Canada hinting at a rate increase and the Fed increasing their rate in June. Here at Hines Investment Management, we are looking at the economic trends and are not agreeing with the rosy picture painted by the central banks. In March, we predicted the markets were due for a rest and since then, we have been keeping an eye on slowing economic conditions. As the U.S. tends to lead the Canadian economy by about six months, we focus on the U.S. economic numbers for guidance. U.S. unemployment remains very low at 4.3%, but this has not lead to an increase in inflation. In fact, inflation remains below the target rate of 2% and the past three months is the worst run since the Great Recession. Core inflation is at an annualized rate of 1.7%, down from 2.2% in Q1 (Econoday, June 16, 2017). Consumer spending makes up 69% of US GDP. Consumer spending has been decreasing steadily since December from 0.8% MoM in December to -0.03% MoM in May, far below average. Housing starts have decreased 9.2% from an annualized rate of 1.238M in Q1 to 1.124M in Q2 (Econoday, June 16, 2017). Inventories are down across the board as well. These are not falling because of demand, but more likely due to falling sales expectations. Inventory draws are negatives in the GDP calculation (Econoday, June 16, 2017). Taking all of this underlying data into consideration, we believe we are due for a slowdown, but do not believe this will lead to a recession. We believe this will present us with opportunities in various sectors, but take caution and wait for the data to lead us. If you have any questions or wish to discuss these recent trends further, please feel free to reach out!

4 Successful Cottage Succession Planning Summer is in full force and you may be looking forward to retreating to a family cottage to enjoy some relaxation. If you are one of the many people who wish to pass along your family cottage to the next generation, we highly suggest considering a cottage succession plan if you have not already done so. Without proper planning, family vacation homes can become the central point of family disputes. To get started on your plan, you should consider the following: 1) Personal & Family Situations Reflect on the emotional and financial desire for some family members to keep the cottage. These are important conversations to have with the beneficiaries. 2) Tax Law Consider capital gain burden and how this will be paid from the estate. If U.S. vacation property is owned, individual advice is required to determine US estate tax exposure. 3) Family Law Depending on timing of gift and use of the property, there could be implications in the event of a marriage breakdown of a beneficiary. Several options are available for individuals looking to create a successful succession plan for their vacation property. Owning a vacation property can be satisfying and important to your family. At Hines Investment Management we are here to educate you and guide you based on your unique family situation. Feel free to reach out if you would like our full article on Cottage Succession Planning or have further questions relating to your situation.

5 The Fiduciary Standard Over the past few months there has been a lot of articles and discussion surrounding the best interest standard, or more accurately, a fiduciary standard of care. In Canada, there are two standards of care that financial advisors adhere to, depending on their licensing and experience. They could follow the Suitability Standard and/or Fiduciary Standard. At Hines Investment Management we are fiduciaries and operate under this legal standard. Currently in Canada, all financial advisors have the duty of care to act fairly, honestly and in good faith. This includes knowing the clients financial circumstances, risk tolerances, and financial objectives. It requires advisors understand the products they offer so they can recommend a suitable solution to the client. This is the basic standard of care termed the Suitability Standard. The products or investments that are recommended would be based on the outcome of a standard questionnaire. At this point, the investor will make the decision to proceed with the purchase or sale of that product or investment. Investopedia defines fiduciary as the highest legal duty of one party to another, it also involves being bound ethically to act in the others best interests. The responsibilities and duties of a fiduciary are legally binding. In Canada, advisors who operate as discretionary Investment Advisors are fiduciaries and Advisors who have completed their Chartered Financial Analyst certification are bound by fiduciary duty as per the guidelines and principals of the CFA designation. As a discretionary advisory group, we are making the day-to-day decisions as to what companies to invest in on behalf of our clients. We cannot purchase a new issue for a portfolio or a mutual fund as that would be a conflict of interest due to the fact we would get paid on top of the flat fee we charge our clients. Here is an excerpt from CIBC s standard for Senior Portfolio Managers: A Senior Portfolio Manager must act with integrity, competence, diligence, respect and in an ethical manner. The Senior Portfolio Manager must place the clients best interest ahead of his/her s at all times. Senior Portfolio Managers must also use reasonable care, exercise independent and prudent judgment and observe all applicable laws when conducting investment analysis and taking investment actions to ensure the clients financial objectives and risk profile are met. At Hines Investment Management, we believe in providing the best possible advice to our clients and removing all barriers to creating an exceptional client experience.

6 Money as a Tool In life, there are two things money cannot buy health and happiness. Retirement is not only a time to sustain your lifestyle, you may also wish to take up new activities or hobbies. Perhaps it is time to take that trip you have been dreaming of or making the renovation to your home that you have been thinking of. Why not bring along family or loved ones while you re at it? Perhaps you have been dreaming of giving back to the community around you who was with you during your journey. Why not create a charitable giving strategy? What would your children do if they received an early inheritance? Money is a tool. Everyone has a different lifestyle and requires different amounts of money to maintain this lifestyle. The money you have earned and saved throughout your lifetime will help you to maintain your lifestyle throughout retirement. The only thing you cannot buy is your health or happiness. Often times we get concerned about not having enough money or wanting to have more when we pass away. Hines Investment Management is here to ensure you are financially stress-free so you can focus on the things money cannot buy. Why not have Hines Investment Management draw up a financial plan? Let us show you what you can do with your money. If you have any questions or want to learn more about any of the content in this newsletter, please contact our office at CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc Gerald Hines is an Investment Advisor with CIBC Wood Gundy in London and Sarnia. He and his clients may own securities mentioned in this column. The views of Gerald Hines do not necessarily reflect those of CIBC World Markets Inc. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. Gerry Hines, Joanne Hines and Sheldon Hines are Investment Advisors with CIBC Wood Gundy.