A third quarter high in excitement

Cathy Duval |


After a difficult last year, 2016 didn’t start much better and was marked by the free fall of the oil price. Since then, the Canadian market has had some better moments in the last three months. However, in economic terms, Canada just had its worst quarter since the 2009 recession. GDP is showing a lower production caused by the diminished international trade. Of course, the Fort McMurray forest fires are partly responsible for this. On the other hand, the relatively weak dollar has not been enough to sustain a strong demand from foreign countries. Going forward, many scenarios are to be considered, the most optimistic one being a stabilization in the oil supply which would increase the price of crude barrels and lift up the earnings for the majority of Canadian companies. This would also benefit the labor market and households with better income. Their spending would then go in the same direction.

Following the contraction of the last quarter, the United-States manufacturing sector is in the process of increasing in the next months which would lend a helping hand to Canadian exports. The low value of the loonie has also forced some families to spend their vacation time in the country which has helped tourism.

The improved federal government child benefit program that began in July should eventually pay off and may boost the total spending.



Economic indicators seem to point to an end of the current economic cycle. The job sector is doing really well, households are starting to see their income rise thanks to a gradual increase in salaries. The discretionary spending power being greater, consumers spending is being bolstered.

Company earnings have not been decent since the beginning of the year (in large part due to the failing energy sector) but the trend seem to be reversing. Investor confidence has been put to the test all through this very volatile period and we are now forced to admit that stock prices point to a strong confidence toward better future earnings.



The source of numerous worries in 2015, China continues to stabilize helped by accommodating monetary policies. Slowing growth has not been well received by investors who would like to see returns like in the early 2000s (above 10%). Despite all that, credit has increased following the central bank’s comments and the situation has since stabilized. Many thanks to regulators who have intensified their infrastructure projects so that the industrial and real estate sectors can recover. In the long term, structural reforms will need to be more consistent.



For years, an aging population and an economy dependent on international trade have been characteristics of the weak economic growth in Japan. It must then be understood that the performance of their economic partners is a key factor in evaluating their situation. A lot has also been written about the "helicopter money" policy. Essentially, it is an alternative to the quantitative easing program when interest rates are nearing absolute zero and other sources of economic stimulus are not enough to jump start an economy. The term used is not far from reality as the money would be distributed directly to individuals and private enterprises much like one would throw money down to the people from atop of a helicopter. This way differs from the traditional method of going through indirect investments. It is a desperate measure but the government is out of solutions as the interest rates are negative, the price deflation is omnipresent and growth is nowhere to be found.



At the source of numerous headaches, the European situation looks like a minefield. The people of United Kingdom have voted to leave the Euro zone in June and we thought we would see the European economy take a steep dive. That is not quite what happened and the markets are currently ignoring Brexit associated risks. Recession risks are increasing and political instability will be a key factor. It is mostly on the German side that confidence is eroding as the government made it clear that it would not intervene to help the banking sector (i.e. Deutsche Bank), if it is needed. The message being that government support cannot be relied on to recapitalize banks unlike what the United States have done in the past.  Liquidity problems, for the Italian and German banks, amongst others, could have a spreading effect should the situation deteriorate. Let’s hope that local economy will take the lead and accelerate spending.



As you know, past performance is no guarantee of future results. The calculation hypothesis that we have used in the past decades are now becoming obsolete. The central banks are using negative interest rates, monetary policies are not impacting inflation as much as they should and the aging population does not have the same life and consumption habits. All these elements (which are just the point of the iceberg) have an impact on the way we must evaluate the expected performance of positions. Certain sectors have reached historically high valuations (bonds, utilities) but the trend may or may not reverse soon.

We must keep in mind that our long term objective is to have a portfolio that performs well despite all the ambient noise and trust a smart asset allocation. The positive momentum that is taking place in the market suggest that North-American stocks still have their place in the portfolio and that is why we continue to be well exposed to these markets. Even if a tightening of the American monetary policy is coming soon, it is not the same story in Canada. However, we are keeping a conservative approach in having a relatively short duration and also by overweighting corporate bonds over government bonds. We expect that the central bank will soon act in the United States, the early cycle sectors (such as financial) would be well positioned to take advantage of it. Otherwise, as market ratios are not very attractive, we are overweighting defensive positions.


Do not hesitate to contact us if you would like to obtain more information on our strategy or if you would like to obtain a revision of your investment portfolio.



Disclaimer: The opinions expressed herein do not necessarily reflect those of National Bank Financial. . The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX).