THE ECONOMY AND CAPITAL MARKETS Clément Gignac Sr VP & Chief economist ia Financial Group September 2017
Disclaimer Opinions expressed in this presentation are based on actual market conditions and may change without prior warning. The aim is in no way to make investment recommendations. The forecasts given in this presentation do not guarantee returns and imply risks, uncertainty and assumptions. Although we are comfortable with these assumptions, there is no guarantee that they will be confirmed. Industrial Alliance Insurance and Financial Services Inc.
Before sharing my views on the economy and capital markets, some words on our mandates as portfolio managers within the ia family
Funds under management - Clément Gignac (Associate/Senior Economist: Sébastien Mc Mahon) 4 Source: IAIM & ia Economics, September 11 2017.
Our management process for the ia Diversified funds Economic analysis Capital markets analysis Asset classes allocation* Decision on the best investment vehicle Internal and external research: 1) Economic growth 2) Monetary policies 3) Commodities and currencies 4) Geopolitical factors Internal and external research: 1) Asset class valuation 2) Market sentiment 3) Capital flows 4) Market momentum 5) Sector rotation Following the committee meetings, a final decision is taken by Clément Gignac and his team on the relative weights allocated to each asset class A choice is made between our internal portfolio managers, ETFs or derivatives Source: iaim
6 Our 4 pillars of active management Active asset allocation Our team s structure is flexible and allows us to quickly adjust our investment strategies when opportunities arise. Active currency management Currency management allows us to reduce fund volatility and to add value. Active monitoring of underlying funds Our daily reports allow us to follow the underlying funds performance, and our close relationships with managers give us a good understanding of their strategies. Active rebalancing We periodically rebalance our portfolios in order to avoid large deviations from our targets.
7 World economy: All the engines at work! For the first time since 2007, all OCDE countries recorded accelerating growth in the last quarter.
China: A transition of the economic model that pays off, but careful about debt! China: Total debt in % of GDP 270 250 230 210 190 170 8 Source: JP Morgan 150 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IA Economics, data from Bloomberg
Europe: In much better shape PMI indices Quarterly average USD/EUR exchange rate 1.22 1.20 1.18 1.16 1.14 1.12 1.10 1.08 Euro appreciation Macron election on May 7 1.06 1.04 Euro depreciation 1.02 08/16 10/16 12/16 02/17 04/17 06/17 08/17 9 Source: IA Economics, data from Bloomberg
U.S. : «Welcome to the Goldilocks economy» 10 U.S.: Unemployment rate (%) 12 11 10 9 8 7 6 5 4 3 2 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 U.S.: Low inflation pressure in sight Core inflation, % 16 14 12 10 8 6 4 2 0 1970 1980 1990 2000 2010
U.S. : A slower economic recovery than in cycles past 11
A frequently asked question: Where are we in the business cycle and when will be the next recession?
U.S.: The last recession is certainly far behind us but the present expansion is relatively young 11 % Taux de chômage 10 9 8 On average, the expansion lasts for another 36 months when the observed unemployment rate falls below the level considered as full employment (NAIRU) 7 6 21 5 70 22 32 47 24 NAIRU 4 6 13 3 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 NBF Economics and Strategy (Datastream)
14 Should we fear a recession in 2018? Unlikely to see a recession in 2018!!
U.S.: Expectations toward Trump s administration are at the lowest Positive surprise in sight on the fiscal front? 15
Canadian economy: Showing a lot of resiliency and bolstered by immigrant inflows
Canada: Economy has been doing well in recent quarters 17 Nominal GDP growth 8 % (y/y) 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 -8 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 NBF Economics and Strategy (data via Statcan and Datastream)
Canada: Suddenly leading the pack in 2017!! 18 Source: IA Economics, data from Bloomberg
World: Composition of population growth Contributions of components to annual percentage growth, 2016 (major advanced countries) 1.4% 1.2% 1.0% Natural Migration Total 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% 19-0.4% JAP DEU GRC PRT DEN ITA FIN NLD FRA AUT GBR BEL NZL SWE USA ESP AUS NOR IRE CAN NBF Economics and Strategy (data via Statistics Canada and US Census)
Canada: Within the OECD, Canada attracts the most educated migrants 20 Canada: Newcomers are highly educated Share of immigrant population with a university degree Canada Australia United Kingdom New Zealand Poland Norway United States Mexico Switzerland OECD total (33) Denmark Sweden Japan Iceland Belgium Finland France Chile Korea EU total (28) Netherlands Portugal Czech Republic Spain Turkey Germany Austria Greece Italy 0 10 20 30 40 50 60 NBF Economics and Strategy (OECD data via http://www.oecd.org/els/mig/indicators-of-immigrant-integration-2015.pdf) %
Immigration: Positive impact on Canadian real estate!!! OECD: Homeownership rate of immigrant population % 21 NBF Economics and Strategy (OECD data via http://www.oecd.org/els/mig/indicators-of-immigrant-integration-2015.pdf)
Booming real estate in Canada: Necessary to compare with other big cities around the globe Price per square feet in USD for downtown living (For a 645 sq.ft. apartment) 22 Source : NBF Economics and Strategy
Time for monetary policy normalization? What does that mean?
U.S. : The market is expecting a slowdown of the Fed's rate hike cycle 24
U.S.: The Fed is about to start reducing the size of its balance sheet 25
We are experiencing a bubble, not in stock prices but in bond prices. -- Alan Greenspan, July 31, 2017 26 Source: JP Morgan Source: JP Morgan
Interest rate in Canada: The entire yield curve has moved upward 27 Source: IA Economics, data from Bloomberg
Interest rate and canadian dollar: 1) Why this fast reversal since late May? 2) What is the fair value of the CAD?
Last March 29
Inflation: Cost-push in sight from the upcoming minimum wage increase in Ontario??? 56 54 52 Ratio of minimum wage to avg hourly earnings in the manufacturing sector Quebec s minimum wage breached a level deemed to be counterproductive in the 1970s ON 55% 50% Minimum wage as a % of average wage in major OECD countries in 2015* 50% 50% 50 48 46 44 will the outcome be different for Ontario? QC 45% 40% 44% 42% 43% 41% 41% 41% 40% 38% 37% 38% 42 40 38 35% 30% 35% 32% 31% 29% 36 34 30 32 25% 25%
Bank of Canada and the loonie Canada: Exchange rate and rate spread CAD/USD (lhs) & spread between 2 year-rates, Canada - U.S. (rhs) A major change of tone by the BoC last June pushed the loonie higher 1.10 $ 1.05 $ 1.00 $ 0.95 $ 0.90 $ 0.85 $ 0.80 $ 0.75 $ 0.70 $ 0.65 $ 2010 2012 2014 2016 1.50 1.00 0.50 0.00-0.50-1.00 31 Source: IA Économie, données via Bloomberg CAD/USD Spread (Can-US)
CAD: A long-term of about 83-85 cents using the PPP approach 32 Canada: Loonie and PPP 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: IA Economics, data via Bloomberg CAD/USD PPP
Financial markets: Will the 8 year Bull Market keep on charging ahead?
U.S : Perspective on the current Bull Market 34
S&P 500: Is the valuation level too high? 35
S&P 500: Stocks no longer reacting positively to good news 36
Equities: The U.S. stock market continues to move higher thanks to (or despite) the election of Donald Trump! 37
Equities: Is there still some room for expansion? Looking at history, there is a potential for more economic expansion and for the bull market to continue to run 38 Data as at April 30, 2017.
Equities: Current valuations suggesting lower expected returns 39
Portfolio strategy: Canadian stocks becoming more attractive?
Canada : Attractively valued, but foreign interest remains muted 41
Portfolio strategy: Overweight Europe and Asia (EAFE)
Equities: Attractive opportunities outside the US? 43 Price/Book ratio: Europe vs US
Asset allocation: Europe and Asia becoming more attractive? 44 Source: RBC Capital Markets, as at March 31, 2017.
Emerging markets as well for the long run!!! 45
Question : What is the most important long- term risk our clients are facing? Longevity risk!!
Today s early retirees face a bigger challenge than the previous generation Economic context: The world has changed! My client His father 2017 1987 Life expectancy at age 65 19 years 12 years Inflation rate 1.2% 4.6% Leading rate 1.0% 7.5% 10-year federal yield : Nominal 2.0% 9.4% Real 0.8% 4.8% Dividend yield : TSX 2.7% 2.5% S&P500 2.0% 2.9% The big question! 1987: To whom will I leave my money? 2017: Who will want to host me when all my retirement capital is eaten up? 47 Source: ia Economics; for illustrative purposes only.
Conclusion : Big picture and portfolio strategy 48 No recession until 2019-20. Monetary policy normalization should continue. The «Bull Market» should keep going, but we expect more volatility ahead. In term of asset allocation, we favour to be overweight equities and underweight bonds. Geographically, we favour overseas markets.
49 www.ia.ca/economy
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