Janurary in review

 

The U.S. S&P500 returned 1.79% while the Canadian SP/TSX composite returned 0.64%.  The strong performance in the U.S. is propelled by companies reporting earnings beating expectations.  Oil is flat in the month stabilizing around $50USD/bbl.  Copper advanced 7% in the month.  Overall the market sentiment is positive, companies reported have beat expectations and risk return dynamics remain favorable. 

 

For Canada, there are two major tailwinds:

• A weaker Canadian dollar to stimulate export demand
• The price recovery and market stabilization in the Energy sector

For the U.S., there are three key tailwinds:

• Proposed tax cuts to fuel corporate profit
• Proposed $1trillion in fiscal stimulus for infrastructure spending
• Proposed repeal of Dodd Frank and other Obama administration policies and replacing with more business friendly policies

Anticipate heightened volatility as a result of policy implementation uncertainties

 

The U.S. stock markets have largely priced in much of the proposed policy gains and valuations are closer to the high end of their historical range.  Since the markets have pre-emptively priced in the benefits of the Trump administration’s policies, any delay in implementation will likely cause heightened volatility. 

 

The current market conditions require advisors to be more vigilant in identifying investment opportunities that are still trading at attractive levels.  For the first half of the year, more weighting should be placed in sectors that benefit from a steepening yield curve such as the financials as well as cyclical sectors, such as Industrial, Materials and Energy.

 

Currency Outlook- Continued dollar strength and a weaker CAD

 

Canadian dollar relative to Purchasing Power Parity is still considered overvalued and may see further pressure in the year.  U.S. dollar will likely maintain its strength because of relative economic strength and a more hawkish outlook from the U.S. Fed.

 

It is worth noting that the Chinese government spent $500billion over the past 18 month to prop up its currency and the RMB in is overvalued against the dollar despite the U.S. rhetoric for currency manipulation. A trend in depreciation of RMB will exacerbate capital outflow from the country.

 

Canadian Housing markets

I want to quickly touch on the Canadian real estate sector because there have been many questions asked by clients:

• The Vancouver housing market has cooled down and prices were flat in recent month. Toronto is now the only housing market in Canada that has continued to rise in price
• Canadian consumer credit is now at 1x GDP which is roughly $1.8trillion in dollar amount.At the height of financial crisis, the US consumer credit was at a lower level than where we are today
• Canadian government has now accelerated counter-measures to reign in the housing market.Under the recent CMHC changes, 30% of the high loan-to-income mortgages issued in the past year would not have qualified.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So, in conclusion?  I believe the housing market will experience a soft landing as long as there is a shortage of supply in single detached houses in Toronto and interest rates remain low.  However, the price appreciation observed in the past year cannot be sustainable and there should be a cool down in the single detached housing market as buyers opt for cheaper alternatives such as condos.

 

Reference

Teranet House Price Index

Statistics Canada, U.S. Bureau of Economic Analysis, U.S. Federal Reserve

Department of Finance Canada and Bank of Canada calculations