Your market review

The year 2016 has not been a boring one. Let’s take the time to review the events that have marked the history and the world’s international stock markets.

 

STOCK MARKET

The first quarter of the year was a difficult time for several investors as we experienced a rapid drop of the indexes. The main cause was the price of the oil barrel as well as concerns about the slowdown in global economic growth. As the year progressed, we realized that these concerns did not materialized and that economic data have suggested a more optimistic future than anticipated. Investors’ confidence has gone up since the elections and has propelled the price of basic materials and oil upward, bringing with it the indexes to historical highs.

ECONOMY

Global

Central banks have been very accommodative in recent years, and usually that should create an upward pressure on inflation. That is not what happened and for many reasons, it did the complete opposite. Now that certain actions have been taken, including the rate hike by the Federal Reserve, consumers and businesses shall be encouraged to spend more. However, political instability and the nationalist movements on a global scale could hinder global growth and curb investor confidence. Here is a summary of what lies ahead in the coming months!

 

Canada

Some key elements will be essential to a good Canadian stock market performance for 2017. These elements include higher commodity prices, a positive impact of the infrastructure investment program, and more exports to the United States.

We see commodity prices continuing to climb in the coming months as a result of higher inflation and significant US and Canadian infrastructure spending. The Canadian labor market is expected to grow as a significant number of jobs are linked to the energy sector.

Concerning the interest rate policy, the Bank of Canada is expected to remain on the sidelines, and surf the wave coming from the south. Since movements in the US yield curve are usually reflected in the Canadian curve, no action is required to see an increase take place following the Fed's decisions.

Economists have been sounding the alarm for many years now, and still the household’s debt to income ratio is very high. The situation has not changed and we don’t see anything that could affect the trend in the near future. With interest rates rising in the next few years, we recommend to stay cautious and avoid excessive indebtedness.

 

United States

The stock market has already reacted strongly following the election of the next US president Donald Trump. The prices reflect the electoral promises that were made during the presidential race and the ratios are at high levels. Several sectors have soared in the hope of possible deregulations, notably in the banking and insurance sectors. We can also expect a tax cut for the wealthiest and corporations.

The job market has improved a lot since the Great Recession, and now, there is not much improvement that can be made aside from an increase in the participation rate of the 94 million people who are currently out of the labor force. Going forward, we should see an increase in wages that would then be reflected in consumer spending.

Last December when the Fed announced it would lift the federal funds rate at 0.75%, it was also mentioned that three rate hikes were planned for 2017 and three more for 2018. By analyzing the yield curve, the market rather anticipates two hikes of 0.25% each. The collateral effects have already begun to be felt here in Canada, while mortgage rates have been increased by most financial institutions.

Recall that the weighted US dollar is very close to its peak in 2002. This slows US exports but also limits the price of imported goods.

 

Eurozone and Asia

Worldwide, the economic outlook is improving, taking advantage of the important stimulus measures put in place by governments. In Europe and the United Kingdom, the economic figures have been exceeding expectations, explaining the high expectations for the coming months. Despite favorable policies to help Greece and Italy recover, uncertainties about the future of the referendum in the UK have generated a very tumultuous year. The pound has tumbled despite those economic data.

At the same time, the growth of the Chinese economy is coming back and seems to be in favor of those who advocated a stabilization of their activities. Consumption is gaining speed and indexes are pointing upward.

The Japanese government has more difficulty stimulating its economy, slowed down by the low value of its currency and by the weak internal demand of its households. Because of the aging population, their saving rate is too high. On top of that, investments coming from other countries is not enough to offset all their problems.

Emerging markets, on the other hand, benefited from increasing prices in the commodities sector and less interest rate hikes by the Fed. The US currency has declined since its peak in January 2016, which has given a boost to countries like Brazil and Mexico and ones with USD denominated debt.

My asset allocation

Fixed Income

Fixed income investments seem to be returning to their primary role of protecting capital rather than generating large revenues in a traditional asset allocation. Since we anticipate rate hikes in the coming years, we suggest keeping a shorter duration than the index. Moreover, we advocate securities with good credit quality, even though we are aware that this reduces the interest income generated by the bond portfolio. We currently recommend a duration between 4.5 and 5.5 years with a balance between corporate and government bonds.

Stocks

Stock levels are high and the expectations of good corporate earnings are already priced in. In the near future, one can expect a temporary pullback if investor optimism weakens. This will depend on the speed at which Trump's promises will be implemented. Asset allocation is the foundation of the portfolio, and we advocate good global diversification.

All eyes are on the United States and expectations are now very high. The table is set for a volatile year, and we advise to stay patient and ready to act fast, because there will be good opportunities that might emerge when investors will become more nervous.

Patience, timeliness and diversification (geography, credit and style) will be the factors that will separate the outperformers, especially considering the rise in global protectionism.

As I am writing these lines, we maintain a neutral position in the stock market since we believe the balance is fragile. We have a slight tilt towards the US stock market, bearing in mind that the TSX will benefit from higher commodity prices. We maintain exposure to European and Asian markets, and we keep an active currency management as a core performance generator in order to take advantage of the differences between central bank policies.

 

I hope you enjoyed reading our views on the market, and please if you have any questions or comments I would love to discuss them with you. Give us a call or send us an email and we can find a good time to meet!

cathy.duval@bnc.ca

514-871-3450

Thank you for your confidence!

 

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).