Economic releases in Canada have been robust in the first month of January. GDP rose 0.4% in November 2017 putting the annual GDP growth on track to projected 2.9% for 2017. Robust employment data spurred Bank of Canada to raise the key lending rate by a quarter point to 1.25%.  Headline inflation pressure eased to 1.9% which put it in line with Bank of Canada’s 2% inflation target.

 

Despite the positive economic data, Canadian equities underperformed in January compared to the U.S. and other Developed Economies. The primary reason is we see some of the boosters to the economy in 2017 to taper off in 2018 and equities markets are always forward looking.

 

In contrast to Canada, we have a more bullish outlook on the U.S. equities. Admittedly U.S. equities are in the later stages of a bull market, but we see no eminent signs of a recession or crisis. RBC Capital Markets’ price target for S&P 500 is 3000, an implied 13% upside from the index level at the beginning of January. We estimate about half of the lower tax benefits were priced in to the S&P500 in 2017 and believe there is room for the beneficiaries of the lower corporate tax rate to continue to outperform.

 

Growth oriented companies outperformed in 2017, for 2018, we expect value companies to outperform. Even though on a relative basis many of the tech companies have room to grow, the tech sector has become a crowded trade. In terms of sectors, we favor Financials and Industrials.

 

Revenue and Tax Reform Are Driving Our 2018 EPS Growth Forecast

 

Positioning Your Fixed Income Portfolio in a Rising Rate Environment

 

When investing in fixed income, choosing where to invest on the yield curve is an important decision and to make that decision, investors should consider both the absolute and relative levels of Government of Canada yields. Since December 2016, the yield curve has flattened materially.

 

For the past year, we have positioned our clients’ fixed income portfolio to the shorter end of the yield curve. Given the yield curve have flattened further, investors are not getting compensation to take on the longer duration risk.

 

The GoC yield curve have flattened materially

Preferred Shares as a Component to Fixed Income Allocation

 

Preferred shares were an important component to our fixed income/hybrid allocation. Preferred share market offered higher income generation and produced double digit returns in 2017.  An additional benefit is as an asset class, preferreds have historically low correlations with the equities market. For 2018, we continue to see the preferred share market to be attractive as a yield instrument, however, the potential for upside have become much more subdued comparing to past years’ performance.

 

 

 

 

 

Rita Li works with high net worth individuals and families to provide a high touch service in holistic wealth management planning. Together with her team of experts with in-depth taxation and legal background, they strive to deliver a high standard of service to their clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with in-depth expertise in asset management. Contact Rita for a complimentary consultation to determine whether the services she provides can be the right fit for you and your family.