What's going on and what do we do now?

Feb 19, 2016 | Dian Chaaban


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This was the million dollar question we answered for our clients last night at the Four Seasons.
Special guest speaker, Mark Allen (our VP of Canadian Equities) educated the packed room as he covered key details and trends regarding Canada’s economy, the price of oil, currency, US monetary policy, US recession risks, concerns over China’s growth/policy and where we believe tomorrow’s most compelling global investment opportunities are.

 

For those of you who couldn’t join us but would like a summary along with a copy of Mark’s slide deck, send me an email or give me a call and I will be happy to send it your way but if you’re only interested in the high level summary, here is goes:

 

  • China is a slowing economy, but still a growing economy and while some of the key risks are warranted, the longer term trends point towards good news fueled by a two speed economy
  • The US is showing positive signs where it matters: a strong labor market (i.e. job growth and consumer spending). Furthermore, while the US economy’s growth is (and will continue to be) choppy, average growth is still modest
  • European and Global bank jitters are a real risk but mostly concentrated in Italy & Spain. That said, Global GDP growth consensus is still forecasted at ~3.5%
  • Negative interest rates were summed up nicely by quoting Alex Weber (Chairman of UBS) “The side-effects of the medicine are getting stronger and stronger, the curative effects are getting weaker and weaker”.
  • The epicenter of the ‘08/’09 crisis was balance sheet oriented (i.e. a bank solvency crisis) while in the current major concern with banks is income statement oriented (i.e. how will banks make money in a negative interest rate environment). The interconnected nature of how banks obtain funding (banks borrow from other banks) meant solvency concerns in 08/09 brought the economy to its knees as banks stopped lending to one another after some went bankrupt (Lehman) and others needed a bailout to avoid it (a host of European institutions).There is no evidence of a similar crisis taking place at the current time and global banks now have far more (and better quality) capital than was the case in 08/09.
  • Mark is generally optimistic about oil prices recovering quickly (politically influenced by OPEC cooperation) or within the next ~1-2 years purely based historical oil price troughs and the slow grind path to rebalancing between supply, production efficiency and demand growth.
  • Canadian banks are on super sale (down 22% from 2014 peak to recent low and down 16% from 2014 peak at present). A great time to consider buying into a sector that has provided an average earnings growth of 11% over a 20 year period. Sure there are headwinds still ahead (low interest rates, slowing mortgage growth, tighter capital rules and credit risks) but being paid for your patience with dividends is a good deal.

Speaking of dividends – they are awesome. If you invested $100,000 40 years ago and turned the DRIP (dividend reinvestment plan) on you would now have ~$4.5 million.