GP&A May 2021 Market Portfolio Update
Monthly Update Video - June 2021
Speaker1: [00:00:09] Welcome, everyone, to this month's Markets and Portfolio Update, as always, my name is Dan Girard, managing partner with Girard Pilkey and Associates Wealth Management, which is part of CIBC Wood Gundy. I hope this this video finds you doing well and enjoying the summer so far. Hopefully it continues to be good weather and we have a nice, warm summer from an investment standpoint. Markets continue to do well, but with a lot of volatility and a lot of rotation under the surface in May, the month that just past as I'm recording this in early June and starting the first part of June as well, investors continue to be fairly optimistic as we move closer to a pandemic economic world. But with
Speaker2: [00:00:59] That
Speaker1: [00:01:01] Moving to a more open global economy due to the vaccine rollout and dropping virus case counts around the world, we also run the risk of inflation. There's been so much stimulus put into the economic system that there's serious concerns that inflation could end up being persistent and much higher than
Speaker2: [00:01:23] Anyone really
Speaker1: [00:01:24] Wants. The numbers suggest strong inflation at the moment,
Speaker2: [00:01:28] But the
Speaker1: [00:01:30] Consensus currently is that that inflation is going to be transitory and
Speaker2: [00:01:33] Not persistent.
Speaker1: [00:01:35] But risks are certainly
Speaker2: [00:01:36] Out there and the markets have been
Speaker1: [00:01:39] Rotating almost on a daily
Speaker2: [00:01:41] Basis based on that risk. And if
Speaker1: [00:01:45] Inflation does take hold in, central banks around the world have to reduce their stimulus,
Speaker2: [00:01:52] Then a lot of asset prices would have to revalue lower because of that. And this is what the markets are reacting to in almost a daily basis, daily basis. I'll talk a little more about that going forward.
Speaker1: [00:02:05] But as always, we'll look at some current topics or some common topics that we look at each month.
Speaker2: [00:02:12] And those are as follows.
Speaker1: [00:02:16] We'll look at how the markets performed in May and also year to date from a global perspective. We'll also look at how the model portfolio has done year to date and last month as well. We'll discuss our current investment strategy
Speaker2: [00:02:32] And outlook going forward over, you know, roughly the next six to 18 months.
Speaker1: [00:02:38] And then we'll end today's discussion with a bit of a hot topic
Speaker2: [00:02:44] In
Speaker1: [00:02:44] The investment world these days, which is cryptocurrency and bitcoin, which is also been
Speaker2: [00:02:48] Seeing far
Speaker1: [00:02:50] More than its fair share of volatility recently. So let's get straight into it. Last month, so May was was an interesting month, especially because there was a tremendous amount of rotation under the surface, indexes continued to rise globally for the most part, but there was a rotation between value and growth and between inflation on or inflation
Speaker2: [00:03:21] Off type of investments
Speaker1: [00:03:23] And the way that resulted from an index standpoint. And let me just get my pointer going here. You can see that the global equity index, what's called the MSCI World Equity Index, which is a stock index representing all the developed markets around the world weighted by the size of their market.
Speaker2: [00:03:44] So the U.S. is the largest and Europe and
Speaker1: [00:03:46] Japan and so on and so forth. It was actually down zero point zero five in May, not because stock prices fell, but because the Canadian dollar was quite strong. You can see down here the Canadian dollar was up almost two percent for the month. And this is mainly priced in foreign currencies, primarily U.S. So as the Canadian dollar went up, it lost the returns from the investments due to the currency. So the global stock index as a Canadian was negative point zero five in May, up four point six percent still year to date. It up twenty one point one over the last 12 months. Canada had a very strong month and that was based on commodities doing
Speaker2: [00:04:29] Quite well and the value trade doing well. So the Canadian market is
Speaker1: [00:04:35] Very weighted towards commodities and more value
Speaker2: [00:04:38] Style investments
Speaker1: [00:04:40] That has caused us to underperform the
Speaker2: [00:04:43] U.s. market for the last decade or so.
Speaker1: [00:04:46] But in environments where there's a strong economic recovery and commodity prices are moving higher and potentially rates may rise and inflation may be around the corner, the assets we have in
Speaker2: [00:04:58] Our Canadian index tend to do better. And that's what we've been seeing some months this year.
Speaker1: [00:05:05] Canada's up fourteen point four year to date and up thirty three point eight over the last 12 months. The U.S. market took a bit of breather, a bit of a breather last month. And that's primarily because large growth
Speaker2: [00:05:17] Companies, the Facebook, Apple,
Speaker1: [00:05:20] Amazon, Google, these type of things, they backed off last month as the fear of inflation and rising
Speaker2: [00:05:25] Rates became more prominent in investors minds. So it
Speaker1: [00:05:31] Didn't do a whole lot since those stocks, those large tech
Speaker2: [00:05:34] Companies dominate the S&P 500 index,
Speaker1: [00:05:37] Still up twelve point six year to date as of the
Speaker2: [00:05:39] End of May and up forty
Speaker1: [00:05:42] Point three over the last 12 months.
Speaker2: [00:05:44] The iffy market, so
Speaker1: [00:05:47] Iffy or international
Speaker2: [00:05:48] Equities is
Speaker1: [00:05:51] Roughly 75 percent year up 25 percent. Japan, it was up three point four percent for the month, ten point four year
Speaker2: [00:05:58] To date and 39 percent over the last 12 months.
Speaker1: [00:06:02] And everything except for the world index. These are in domestic currencies. So we still have to adjust these foreign investments for Canadian dollars.
Speaker2: [00:06:13] And the Canadian dollar has been up a lot this year,
Speaker1: [00:06:16] Which means those foreign investments are lower. Because of that, emerging markets had a decent month, up two point three. It continues to struggle a bit this year. It's looking well valued, but it hasn't been able to get a lot of traction yet. It's up seven point four year
Speaker2: [00:06:31] To date in domestic currency,
Speaker1: [00:06:33] But fifty one point five as it recovered strongly off
Speaker2: [00:06:36] The big sell off in March last year, March and April.
Speaker1: [00:06:41] The bond market actually moved higher in May as well. Typically with rising interest rates, you'd assume bonds are moving lower and they have been
Speaker2: [00:06:48] Doing that most of the year. But they recovered a bit from, I think, what was an over crowded trade going against bonds. And I think there was a little bit of a realization that maybe they sold off a little too strong and they came back a little bit last month,
Speaker1: [00:07:05] Still down four point four percent for the year.
Speaker2: [00:07:08] Are sorry for. Yeah. Year and in one point seven percent negative over the last 12 months.
Speaker1: [00:07:14] Canadian dollar, as I said, had a strong rally again last month. It's been doing that all year, up one point nine percent against the U.S. dollar
Speaker2: [00:07:22] And then five point
Speaker1: [00:07:23] Six percent stronger year to date in fourteen point two percent over the last 12 months. So just to reiterate the importance of that on any foreign investments that aren't hedged and we have hedged a decent amount of them
Speaker2: [00:07:36] Protect to protect against this,
Speaker1: [00:07:39] That lowers the return on those foreign investments. And that's why
Speaker2: [00:07:42] That global index is showing
Speaker1: [00:07:45] Only a four point six percent gain
Speaker2: [00:07:47] When all the
Speaker1: [00:07:48] Indexes are higher
Speaker2: [00:07:49] Than that. That's because this is adjusted for the currency.
Speaker1: [00:07:53] And then lastly, oil was again strong last month, the oil. Trade for quite a while had been considered absolutely dead because of all this movement, environmental movement and progression from an investment standpoint into renewable energy and green energy sources, oil stocks
Speaker2: [00:08:13] Or energy stocks in general have just done nothing for multiple years now. And they came roaring back this year as demand as assumed is going to pick up as the world reopens.
Speaker1: [00:08:24] So four point three percent gain in
Speaker2: [00:08:26] May, up thirty six point seven percent year to date and up almost 87 percent over the last 12 months.
Speaker1: [00:08:33] Fortunately, we have a decent allocation to this through the Canadian index and a few
Speaker2: [00:08:37] Other investments we have. So we've been participating in that rebound fairly well in the portfolio.
Speaker1: [00:08:46] Let me move on here. So the GP&A model portfolio, we're doing well year to date and we're doing well over the last 12 months, you can see the year to date, four point six, seven percent net of costs
Speaker2: [00:09:01] And seventeen point nine over one year.
Speaker1: [00:09:03] But it struggled a little bit in May. And that's primarily because the
Speaker2: [00:09:08] The category that I
Speaker1: [00:09:10] Benchmark our portfolios
Speaker2: [00:09:12] Against is a Canadian centric category.
Speaker1: [00:09:17] To try to be fair to all investors, we benchmark against
Speaker2: [00:09:19] What a normal Canadian portfolio would look like if we weren't managing the money. And that tends to be overweighted in Canadian assets
Speaker1: [00:09:27] Since Canada has been doing so well
Speaker2: [00:09:29] This year. And that category has more Canadian equity in it than foreign, U.S. or international or emerging markets. It's been doing very well this year and in May, particularly
Speaker1: [00:09:42] With growthier investments selling
Speaker2: [00:09:44] Off last month
Speaker1: [00:09:46] And value and commodity investments doing very well.
Speaker2: [00:09:49] The Canadian index and in turn did very well. So in May, the
Speaker1: [00:09:55] Category was up one and a quarter. We're up point three three. So we're behind the category
Speaker2: [00:10:01] In May and we've had
Speaker1: [00:10:02] A couple of months of that this year. We're OK with that. We're not concerned about it. And the reason being is we think the investments were tilted towards
Speaker2: [00:10:12] Internationally and in the U.S.
Speaker1: [00:10:15] We think they have better upside, potential and lower volatility
Speaker2: [00:10:20] Risk over the next six to
Speaker1: [00:10:22] 18 months or so as the world opens back up and and hopefully gets back to a more normal economic state. But as the markets rotate from month to month based on data and,
Speaker2: [00:10:32] You know, investor appetite and such, there's going to
Speaker1: [00:10:34] Be months where it's going to have these rotations
Speaker2: [00:10:36] That go against us. We're not reacting to them. I don't think it's the right thing to do to react to these short term deviations. We're trying to
Speaker1: [00:10:44] Look forward and be best positioned for risk in return and also hedging a
Speaker2: [00:10:49] Hedge out against some other risks that exist that I'm going to talk about in a moment.
Speaker1: [00:10:54] Year to date, we're up four point six seven. As I mentioned, the benchmark, it's up five point thirty eight. So behind that, a bit over the last 12 months, we're still tracking
Speaker2: [00:11:02] Ahead of the category, which is good.
Speaker1: [00:11:05] So we're comfortable with everything. There's no issues with the investments we have. They're just not performing some of them, as well as the very
Speaker2: [00:11:13] Commodity centric Canadian equities that are pulling the category up a little better. But we're comfortable with that because there's a lot of risk in those investments as well. We have allocation and we have a good weighting and were participating, just not to the extent of a Canadian centric benchmark. But traditionally we've performed that benchmark over time by quite a bit and we think that'll continue to be the case.
Speaker1: [00:11:38] The opposite is happening in June, fortunately, so up
Speaker2: [00:11:42] To June 15th, which is the final day I'm recording this video, getting it ready to publish the benchmark is quite a bit behind our
Speaker1: [00:11:53] Model portfolio. We're actually at six point forty four percent
Speaker2: [00:11:59] For the month now or so a year to date
Speaker1: [00:12:01] As of June 15th. And we were up four point six seven starting the month. So we're up almost two percent in June already as we've had another rotation back into the
Speaker2: [00:12:14] Value investments and the things
Speaker1: [00:12:17] Were more heavily weighted towards
Speaker2: [00:12:19] And away from the Canadian more domicile type investments.
Speaker1: [00:12:25] They're all doing well. But the stuff that we're overweight in that we're anticipating will do well going forward has really picked up in
Speaker2: [00:12:32] June, and that's helping the portfolio quite a bit.
Speaker1: [00:12:35] So we're up six point four, four percent on the GP and a balanced growth model as
Speaker2: [00:12:39] Of June 15th year to date.
Speaker1: [00:12:45] Looking ahead to the rest of 2021 and into 2022, and there's a lot of
Speaker2: [00:12:52] Static in the data because there's a
Speaker1: [00:12:56] Great number of unknowns
Speaker2: [00:12:58] Right now between what
Speaker1: [00:12:59] Inflation's going to do, what central banks will have to do to combat inflation. If it does remain more persistent,
Speaker2: [00:13:06] What will happen
Speaker1: [00:13:07] If it's actually the opposite, if it is very transitory and inflation goes away quickly? So there's a lot of static in the data, but the consensus is still for good economic growth in twenty twenty one and that spilling over at least for the first half of 2022. And what we're looking at on the screen here is you're seeing five point eight percent expected growth globally in 2020, one in four point one in 2022. There's some nuances between developed markets or emerging markets, but on a global basis, it looks quite strong. And we're in that camp. We think that is going to be the case, but with some substantial risks that could derail
Speaker2: [00:13:50] That,
Speaker1: [00:13:52] Both from an economic growth standpoint but also from a purchasing
Speaker2: [00:13:56] Power inflation standpoint.
Speaker1: [00:13:59] But right now, the consensus and our feeling is growth should continue,
Speaker2: [00:14:04] At
Speaker1: [00:14:04] Least for 2021 or a little less confident for 2022, but at least for 2021. We think the growth
Speaker2: [00:14:10] Does continue and markets trend higher because of it.
Speaker1: [00:14:16] With that said, though,
Speaker2: [00:14:18] The topic
Speaker1: [00:14:19] That's on everyone's
Speaker2: [00:14:20] Mind and
Speaker1: [00:14:21] You can't watch a business channel or open
Speaker2: [00:14:24] A article on the markets without hearing about inflation today and
Speaker1: [00:14:30] Inflation and potentially central banks having to react to
Speaker2: [00:14:36] Inflation
Speaker1: [00:14:37] Is really the primary driver of the volatility we're seeing in the markets. For 40 years, roughly, we've had falling inflation and thus falling interest rates, and that's propped up the prices of almost every asset class in the investment universe, stocks, bonds,
Speaker2: [00:14:58] Real estate and and so on.
Speaker1: [00:15:01] If that trend now is ended, though, and interest rates can't really go any lower and inflation starts to rise and
Speaker2: [00:15:07] Subsequently interest rates start to rise.
Speaker1: [00:15:10] The question is, what's that going to do to all these asset prices that are highly valued due to low rates and low inflation? Will they have to readjust and sell off to get more in line with a new inflationary environment?
Speaker2: [00:15:25] And this is the the topic that's
Speaker1: [00:15:28] On everyone's mind currently. The U.S. Fed and most central banks around the world are suggesting that inflation should be transitory,
Speaker2: [00:15:38] That it's running hot right now because of base effects, meaning it's coming off a very low number from the start of the pandemic last year and supply
Speaker1: [00:15:47] Chain bottlenecks and that that should subside over the next little
Speaker2: [00:15:51] While and inflation should fall back down to around its two percent range that central banks want and feel that it's healthy for all variables concerned.
Speaker1: [00:16:02] There are some very prominent investors, in particular, some very successful hedge fund investors that think inflation could become a persistent problem and run much stronger or
Speaker2: [00:16:13] Higher than anyone wants. And we're seeing this as markets
Speaker1: [00:16:19] Rotate day to day,
Speaker2: [00:16:20] Almost between value and growth.
Speaker1: [00:16:24] Value tends to do better in a high inflation
Speaker2: [00:16:26] Environment, growth does worse. And between inflation hedged investments like commodities, what's called tips, which is U.S. bonds that are linked to the rate of inflation, various investments like that, certain real estate assets do well in that environment also.
Speaker1: [00:16:45] So we're seeing a lot of volatility based on this
Speaker2: [00:16:48] Question of inflation.
Speaker1: [00:16:51] We think inflation probably is transitory.
Speaker2: [00:16:54] There's a
Speaker1: [00:16:55] Lot of headwinds to inflation
Speaker2: [00:16:58] Or
Speaker1: [00:16:59] Unemployment is still relatively high. So there shouldn't be that much wage pressure overall.
Speaker2: [00:17:05] And a lot of the roaring
Speaker1: [00:17:08] 20s type of
Speaker2: [00:17:09] Environment folks are talking about that could happen is
Speaker1: [00:17:13] Probably going to be more on the services
Speaker2: [00:17:15] Side and not the durable goods side.
Speaker1: [00:17:18] And durable goods demand has been fairly strong over the last year while everybody's been locked down.
Speaker2: [00:17:24] That's more inflationary purchasing than
Speaker1: [00:17:26] Services, which is a smaller part of the
Speaker2: [00:17:28] Economy.
Speaker1: [00:17:30] So we think it's going to be transitory, but there are risks that it could get a little out of control. And as such, we've been putting hedges in the portfolio, things that benefit from higher inflation and potentially rising rates to
Speaker2: [00:17:43] Protect against that.
Speaker1: [00:17:44] That'll hold back returns if inflation is
Speaker2: [00:17:47] Transitory, just
Speaker1: [00:17:49] Moderately, because our weightings are pretty,
Speaker2: [00:17:52] Pretty minimal in those areas, just enough to protect but not change the dynamics of the portfolio entirely.
Speaker1: [00:17:59] But that's really the question
Speaker2: [00:18:00] On everybody's mind, where inflation is going. You can
Speaker1: [00:18:05] See from this chart consumer prices surged in April by the most in any 12 month period since
Speaker2: [00:18:13] 2008. And we've continued to see that into May and June. Again, we don't think it's going to last, but it
Speaker1: [00:18:21] Definitely is a risk and it's causing a lot
Speaker2: [00:18:23] Of volatility in the markets.
Speaker1: [00:18:28] So looking at
Speaker2: [00:18:29] Inflation, continuing to look at inflation
Speaker1: [00:18:33] For a moment, that volatility and rotation I'm talking about, you can see it in this chart here, you can see that this purple line is basically the volume of investors buying growth investments. And the orange line is the volume of investors buying value investments. And what you can see if you just kind of go over here, as you can see, value becomes in favor, then a kind of trend sideways. Now it's out of favor, in favor, out of favor. And it continues to rotate between this growth in value and that rotations based on interest or inflation expectations, interest rate expectations. So what will central banks do with their very accommodative
Speaker2: [00:19:19] Policies right now where they
Speaker1: [00:19:21] Continue to increase money
Speaker2: [00:19:23] Supply, make it easy to
Speaker1: [00:19:24] Borrow with low interest rates? They're out there buying billions of dollars in bonds to keep rates low. What happens if they have to reel that in sooner than the market thinks?
Speaker2: [00:19:36] Because inflation runs hotter than expected and this is the rotation that's going on and it continues to do that.
Speaker1: [00:19:45] I think we're well balanced. We've spent a lot of time making sure we're well balanced between growth and value and making sure that in both categories we have very high quality assets. So no matter what happens, we should see good returns over the next two, three, four, five years, regardless of whether one does better than the other.
Speaker2: [00:20:05] But we have
Speaker1: [00:20:06] Taken steps to try to benefit from what we
Speaker2: [00:20:09] See likely happening going forward as well. But I just wanted to point out a more visual graphic of this rotation that's going on day to day. The top chart you're seeing basically a divergence right here where value starts to outperform growth since about late February this year in particular. But that's starting to rotate
Speaker1: [00:20:37] And value and growth of actually over the last,
Speaker2: [00:20:40] Say, three weeks or so, we've seen value sell off
Speaker1: [00:20:44] And we've seen actually inflation, positive
Speaker2: [00:20:46] Investments sell off the last couple of weeks and growth come back. And that, I
Speaker1: [00:20:51] Think, is based on how strongly the U.S. Fed has been coming out, saying
Speaker2: [00:20:57] They feel
Speaker1: [00:20:57] Positive or almost positive
Speaker2: [00:20:59] That inflation is transitory and not going to be persistent. And the markets seem to be embracing that thought. But like I said,
Speaker1: [00:21:06] There, some prominent investors that
Speaker2: [00:21:07] Are questioning whether that's actually going to be the case or not.
Speaker1: [00:21:12] So overall, even though there's a lot of volatility, a lot of changes and a lot of rotation going on, we still see that we still feel that the world is in a quad two environment which is dominated by inflationary growth. We don't think inflation will
Speaker2: [00:21:26] Get too crazy, but there will be some
Speaker1: [00:21:30] We think growth will be contained so it won't get out of control either, like
Speaker2: [00:21:34] Some think, and go wildly up to the upside because of this roaring 20s mentality. We don't think that's going to happen for a host of
Speaker1: [00:21:43] Reasons, but we do think growth will
Speaker2: [00:21:45] Continue over the next six to 18 months to a certain extent, and be some
Speaker1: [00:21:50] Inflation as well. So we're investing according to quod to type investments. With quod to investing or overweight equities, and we're underweight bonds in particular, especially government bonds,
Speaker2: [00:22:07] But
Speaker1: [00:22:08] We have to be cognizant of the fact that valuations are exceptionally
Speaker2: [00:22:12] High across all assets because of this low interest rate environment we talked about.
Speaker1: [00:22:17] So we're gravitating to investments that will participate with growth, but not be too subject to harm if valuations correct somewhat because rates have to rise.
Speaker2: [00:22:33] And what we talked about
Speaker1: [00:22:34] And you can see from on this chart here that North American equities are priced roughly at 35 times earnings, what's called the P e
Speaker2: [00:22:42] Ratio. We won't get into the details of that, but that's as a common valuation metric.
Speaker1: [00:22:47] They're priced at roughly 35 times where the average has been 20 to developed markets. So this is outside of North
Speaker2: [00:22:56] America,
Speaker1: [00:22:59] Actually. No, sorry, that's not outside of North America. That is all developed markets around the world, not emerging markets. It's at twenty seven and a half, let's call it relative to 20 average EAFE.
Speaker2: [00:23:12] So Europe and Japan is at 20
Speaker1: [00:23:16] And the average has been 19. So it looks actually quite well valued.
Speaker2: [00:23:19] It's because Europe has had some struggles getting closer to a post pandemic world than, say, North America has.
Speaker1: [00:23:28] And then emerging markets are trading at seventeen point four times earnings relative to 15 average. So emerging markets actually look cheap as well. And because of this, we have been shifting assets a little bit away from the U.S. into international and emerging markets because the valuations look better, not tremendously away, because the U.S. still has the best economy right now. They're coming out of the pandemic quicker. They have good savings rates, lots of pent up demand. So we think they'll do well. But we like the fact that some other markets at cheaper valuations, which
Speaker2: [00:24:00] Give us a better safety net in case things don't go straight up. And we've been moving some assets over there because of that.
Speaker1: [00:24:11] So it's the environment we're in now and the portfolio positioning that we're doing, you can see on this graph here, there were certain investments that worked really well when we went into the pandemic. Then there were certain investments that benefited once a vaccine was announced. And we kind of knew to a certain extent
Speaker2: [00:24:29] We're going to come out of the pandemic. And those assets looked exceptionally cheap. Think of airlines and restaurants and travel and that type of thing.
Speaker1: [00:24:39] But we think we're more into this phase three now where the risk of a sell off is higher because valuations are
Speaker2: [00:24:45] High and a lot of the anticipation of a reopening economy has been built in or priced into markets.
Speaker1: [00:24:54] There's some question whether growth might
Speaker2: [00:24:57] Be transitory and
Speaker1: [00:24:59] Inflation, transitory or persistent. But growth could be transitory because as I was mentioning earlier, it seems like everybody bought their expensive items while they're in the pandemic.
Speaker2: [00:25:13] The new appliances,
Speaker1: [00:25:15] Home renovations, bought or sold a house, redid their deck,
Speaker2: [00:25:20] Their backyard.
Speaker1: [00:25:21] And those are the durable goods that really lead to inflation and strong economic growth. If the pent up demand today is more for services like going out to eat or traveling, that's only about eight percent of the U.S. economy, at least similar
Speaker2: [00:25:35] In other countries.
Speaker1: [00:25:36] And that won't give the same economic boost to the economy like the durable goods do. So we could see growth disappoint going forward. And because of these things, because of inflation risks, the fact that we could have slower growth than the markets anticipating. We're gravitating and we're always in this camp, but we're gravitating now. Back to it a little more is we're making sure that we have a good allocation to high quality assets, companies with strong balance sheets that have pricing power. So if there's inflation, they can raise prices that pay us current income so that we're getting a return no matter what the markets do. And we're moving to those investments for a host of reasons to make sure that we maintain a very strong risk return profile going forward. We want good returns, but we want to control the risk if there is a hiccup or a sell off or something like that. So that's the portfolio positioning we're doing now on the profile where we're tilting towards things that we think makes sense. That Tilt now is going a little bit away from the reopening type investments. And we're starting to slowly because it's still a little bit early, we think, but we're starting to tilt towards these quality investments again. And that tilt, what in essence we're doing is we're shortening duration and duration basically means are we looking at getting income from an investment in the way of dividends, earnings, interest, rental income, whatever. Are we looking at getting it shorter in the short term or in the longer term? A growth company, let's say like like Uber. They don't make any money, they lose billions, but they're growing rapidly, so that's long duration that it's some time anticipating by investors that down the road five or 10 years, they'll make all kinds of money and pay high dividends. But it's not coming for five or 10 years. If you have high inflation, that's worth less because
Speaker2: [00:27:43] Our costs are going up over that time frame and
Speaker1: [00:27:46] We're not getting any money from these
Speaker2: [00:27:47] Investments until sometime in the future.
Speaker1: [00:27:50] Shorter duration bonds that pay a high interest rate mature in the shorter time period or equities that pay US income today. Those are short duration assets and they do much better in an
Speaker2: [00:28:02] Inflationary environment or a rising interest rate environment. So as we move
Speaker1: [00:28:07] To quality, what we're doing, in essence, is shorter, shortening our duration of our
Speaker2: [00:28:12] Portfolio to account for
Speaker1: [00:28:14] Potentially rising inflation.
Speaker2: [00:28:16] And as the as the graph
Speaker1: [00:28:18] Here says, it's kind of the mentality of a burden, a hand worth is worth more than two in the bush. We're not going to anticipate or completely bet on what might happen in the future. Give us some money today and
Speaker2: [00:28:31] Let us have it right in our hand now. And that takes a lot of risk out of the equation on what happens with growth or interest rates or markets in this and so forth going forward.
Speaker1: [00:28:45] So as we kind of move to the end of this month's update,
Speaker2: [00:28:49] We think the
Speaker1: [00:28:51] Growth should continue based on past cycles and where the data is showing
Speaker2: [00:28:56] Or showing up currently. And if we look
Speaker1: [00:28:59] At past cycles and look at where we are today, even though it's very different because of the pandemic and everything, the closest picture we can get from looking at past cycles suggests that we're in this part of the market. And this means that over the next call it forty nine months or whatever, based on this data, real earnings of companies
Speaker2: [00:29:22] Should go up. OK, so
Speaker1: [00:29:25] On the blue, you're looking at the real price return of investments
Speaker2: [00:29:31] And that's the
Speaker1: [00:29:31] Actual return, what the return of the equity investment should give us over the next time horizon in that six percent return. And that's based on valuations coming down as rates rise
Speaker2: [00:29:46] Potentially, and and the economy matures,
Speaker1: [00:29:50] But corporate earnings going up. So if corporate earnings rise, but the amount we're willing to pay for those earnings drops. This data suggest we should get about a six percent return
Speaker2: [00:30:03] For the next 49 months per year.
Speaker1: [00:30:07] After that, as things get a little more
Speaker2: [00:30:11] Mature in the recovery or we should get about
Speaker1: [00:30:18] A very significant, strong late cycle bounce where people that maybe have missed out on the growth or are getting in late or they're chasing momentum, they rush into the
Speaker2: [00:30:29] Market right near the end, which is very common with retail investing. They see the gains that have been happening. They feel like they've missed something. They want to get in on it and they rush in.
Speaker1: [00:30:39] That pushes the market up substantially. P e ratios. Valuations go up. The economy's getting mature, though. Earnings start to fall. And then shortly after this is when you get into a bear
Speaker2: [00:30:53] Market where
Speaker1: [00:30:55] Interest rates are rising, maybe calm down inflation a bit. Earnings are starting to fall. The market then realizes that. And boom, all of a sudden you get a 15, 20, 25 percent
Speaker2: [00:31:06] Drop in the market in the cycle, as it always does continues.
Speaker1: [00:31:10] So we think we're here based on the data for a while, but we're getting prepared to participate, but also protect against what comes after this environment. And this could be, you know, we're showing 49 months here from
Speaker2: [00:31:25] This Goldman Sachs research,
Speaker1: [00:31:27] But we think that could be a lot
Speaker2: [00:31:29] Shorter because of the way this pandemic is playing out. In a way, the economy's playing out.
Speaker1: [00:31:34] So we're investing based on this. But we're also very cognizant
Speaker2: [00:31:40] Of the fact that the sell off that comes after this could be a lot sooner than what the what the previous data suggests.
Speaker1: [00:31:47] So we're we're cognizant of that and we're making
Speaker2: [00:31:50] Decisions within the portfolios based on those thoughts.
Speaker1: [00:31:54] So to put a little bow on that and wrap it all up for this month, we think growth continues from the reopening of the economy and through 2021 into 2022 or overweight equities over bonds due to potentially rising interest rates at some level and potential inflation. We got shorter duration and all are in all of our investments where corporate bonds over government bonds, because of potential of rising rates and inflation, we're slowly, continually moving to higher quality, higher current
Speaker2: [00:32:29] Income equities over growth investments that have no earnings and high valuations.
Speaker1: [00:32:36] And we're very cognizant and making changes in the portfolio, protect against the potential risks which are runaway inflation, persistent higher inflation, transitory growth. So disappointing growth numbers leading into 2022 from what the market is anticipating, potentially higher taxes, corporate taxes coming down
Speaker2: [00:32:58] The chute, especially in the U.S., probably not in Canada, and
Speaker1: [00:33:02] Less government support as the economies re-open and inflation maybe becomes an issue. And that could significantly
Speaker2: [00:33:11] Create a short
Speaker1: [00:33:12] Term knee
Speaker2: [00:33:13] Jerk reaction in the markets where we can see a 10 to 15 percent correction very easily.
Speaker1: [00:33:18] So these are the things that we're thinking about watching and working into
Speaker2: [00:33:22] Our investment strategy to make sure
Speaker1: [00:33:25] We continue to put up good long term investment returns, but keep risk within our risk budget so that we don't lose all our gains that we make during the good times through one short bad time period. We continue to do this as we always do, day in and day out.
Speaker2: [00:33:41] And as always, if you have questions on any of this that we've talked about in the video, the investment strategy, our current thinking where we see the markets, any of that, as always, call email any time. And we're happy to answer any questions you may have.
Speaker1: [00:33:59] And lastly, let's talk on briefly, very briefly, because I know this video is running long as they do every month, it seems, because they have so much to share with you all. Hot topic that certainly everyone's been hearing about to some extent or another is cryptocurrency and bitcoin.
Speaker2: [00:34:17] These I'm going to call them new assets. They've been around since 2008 ish.
Speaker1: [00:34:26] They are a real thing. Now, when I say they're a real thing, they are assets, not currencies. They're assets, speculative assets that have got enough traction in the world that they are what I would call real
Speaker2: [00:34:43] Investable assets now.
Speaker1: [00:34:45] But they're speculative for sure. And they have very strong camps on either side, both pro and con. And the arguments on both are equally as strong. Crypto currencies in a nutshell. OK. And I'm talking mainly Bitcoin here, there's a lot of what's called alternative crypto assets, things that aren't Bitcoin, but bitcoin is the primary one. Bitcoin has the qualities of gold. And this is why it's getting a lot of traction. It originally came out as a potential alternative
Speaker2: [00:35:20] Currency,
Speaker1: [00:35:21] But it doesn't really have the qualities that a currency requires. So it probably will never be a currency in its current form. There may be other digital currencies that come out from central banks
Speaker2: [00:35:31] Or whatnot that
Speaker1: [00:35:32] Probably will take hold in the future, but it
Speaker2: [00:35:34] Won't be Bitcoin and in my opinion,
Speaker1: [00:35:38] But it does have gold qualities and those qualities are it can be a store of value that's not tied
Speaker2: [00:35:47] To a central bank or a government or whatnot.
Speaker1: [00:35:50] So like art, like any collectibles that can be a store of value
Speaker2: [00:35:57] And gold especially,
Speaker1: [00:35:58] Which has been a store value for thousands of years, it can be a store value because there's enough agreement that it is that's its only quality is that if people agree it has value and they'll accept it as a store value, it creates a store of value like gold. It's got limited supply. So Bitcoin is limited to twenty one million bitcoins.
Speaker2: [00:36:21] And I
Speaker1: [00:36:22] Think it's 2040 or 2041 or something like
Speaker2: [00:36:26] That. It will hit. That limit is a certain amount that's created all the time and that creation number drops consistently. So I think it's
Speaker1: [00:36:35] 20, 41
Speaker2: [00:36:36] Ish around there that the limit has hit.
Speaker1: [00:36:39] It's fungible, meaning that each bitcoin is identical to another Bitcoin. So it can be interchanged
Speaker2: [00:36:47] Without any quality considerations or anything like that.
Speaker1: [00:36:53] It's decentralized so it doesn't get inflated away. If governments print
Speaker2: [00:36:57] More money in this type of thing,
Speaker1: [00:36:59] It's more easily stored than gold, which is a benefit. And it's more easily transported and recorded because of what's called block chain technology, which is what the Bitcoin sits on top of is this black block chain technology, which in theory is an exceptionally simple and secure recording method. And it's got a lot of potential applications going forward.
Speaker2: [00:37:23] And I think it'll almost be ubiquitous in the future that it's used for basically recording all kinds of things. But that's another another story.
Speaker1: [00:37:35] So Bitcoin has these qualities like gold, but it's a very speculative asset because it hasn't been around as long as gold,
Speaker2: [00:37:44] Just like gold is speculative as well.
Speaker1: [00:37:47] I don't believe it could ever be used as a currency in its
Speaker2: [00:37:49] Current state because of a host
Speaker1: [00:37:51] Of reasons. But like gold, which has very minimal industrial use, gold doesn't have much industrial use.
Speaker2: [00:38:00] It has some and it's used for jewelry and that type of thing.
Speaker1: [00:38:03] So even less so than gold. There's no intrinsic value to Bitcoin. It is a completely made up asset with zero intrinsic value. It cannot be used for anything. So it has no true value. All its value is derived from people
Speaker2: [00:38:19] Believing it has value.
Speaker1: [00:38:21] You could say the same about a
Speaker2: [00:38:23] A Van Gogh
Speaker1: [00:38:25] Painting. It really has no intrinsic value. It's got about five dollars worth of materials. But at least with Van Gogh, there's not another Van Gogh. So it has the value in the sense
Speaker2: [00:38:38] That it can't be created again, per say. So it
Speaker1: [00:38:43] May have some intrinsic
Speaker2: [00:38:44] Value because of that, but
Speaker1: [00:38:47] Bitcoin has no value, no intrinsic value.
Speaker2: [00:38:50] Nobody can argue that.
Speaker1: [00:38:53] So it all comes down to this gold quality, whether it's scarce and the uses for it are great enough to give it value.
Speaker2: [00:39:00] And people continue to agree it has value. That's where its future value will be derived from. And that's anyone's guess.
Speaker1: [00:39:07] The risks to Bitcoin are tremendous, and most of it revolves around government regulation. Bitcoin exists because governments allow
Speaker2: [00:39:19] It to exist. Anybody that thinks different than that doesn't truly understand the power of governments around the world.
Speaker1: [00:39:28] And there are some countries
Speaker2: [00:39:32] Putting regulation out that's
Speaker1: [00:39:34] Negative to Bitcoin. And there's some countries like El Salvador recently who decided to legalize Bitcoin as a legal currency.
Speaker2: [00:39:42] And there's a host of reasons why they did that. So the debate on what government's going to do relative to Bitcoin is out as well
Speaker1: [00:39:52] Because of all these reasons. And you can see on the chart here, this is the global stock market. It's worth about ninety. Five trillion dollars, as of today, the U.S. stock market is fifty one trillion U.S. dollars in circulation, six point six dollars trillion roughly, Apple is worth two point three trillion. Amazon's with one point six trillion in Bitcoin has a value today of roughly 863 billion dollars. So it's still a very small
Speaker2: [00:40:19] Piece of the global asset universe. But it's popular. It's getting network effects by more people talking about it. So we'll
Speaker1: [00:40:31] See where it goes because it has no true value and because it's a speculative asset, we won't invest in it
Speaker2: [00:40:40] For clients portfolios. OK, it just isn't what we do because it's pure speculation. It's casino money.
Speaker1: [00:40:50] There are some significant global investors, in particular hedge fund investors who are allocating, say, five percent of their portfolios to Bitcoin as a hedge against things like inflation, where it's going to go in the future, block chain technology, all these
Speaker2: [00:41:07] Various things, an asset that's
Speaker1: [00:41:10] Not correlated with the stock markets or bond markets. So there may be some value there, but you have to understand, it is purely speculative.
Speaker2: [00:41:18] Nobody nobody can determine what the value will be in the future. And it's
Speaker1: [00:41:24] Very, very
Speaker2: [00:41:25] Much like gambling to its purest extent.
Speaker1: [00:41:29] We're well versed, my team in Bitcoin, we know how to invest in it for clients. If you want an investment in
Speaker2: [00:41:37] Bitcoin,
Speaker1: [00:41:38] Give us a call or an email. Send me a note and we can chat about how to get an allocation within your portfolio if you want it. I just wanted us to briefly in this
Speaker2: [00:41:49] Video, talk about what it was for those folks that weren't entirely sure and
Speaker1: [00:41:54] Let folks know that we won't put it in portfolios ourselves, but we know how to do it
Speaker2: [00:42:01] If folks want allocation and just reach out to us and we can chat more about that.
Speaker1: [00:42:08] So with that. Let's end the video this month and let me say please have a great summer stay. Well, hopefully we're getting close to a post pandemic world. The vaccine rollout continues to accelerate globally.
Speaker2: [00:42:27] And with any luck at all, new variants won't cause a wrinkle in that plan. And we can get back
Speaker1: [00:42:33] To a more normal world sometime soon and hopefully get a chance to see you all face to face in
Speaker2: [00:42:41] The very near future.
Speaker1: [00:42:42] So until then, have a great day. Reach out to us if you have any questions or need
Speaker2: [00:42:47] Anything and have a wonderful summer. Bye for now.
GP&A March 2021 Market Portfolio Update
GP&A March 2021 Market & Portfolio Update
Speaker1: Welcome, everyone. Dan Girard here from Girard Pilkey and Associates Wealth Management, which is part of CIBC Wood Gundy. And this is our March twenty twenty one market and portfolio performance update. This is actually the first of our updates that we're doing by video. As you many of you may recall, for many years, I've actually written our monthly updates and based on client input, changing times and the fact that we've spent the last couple of months getting comfortable with the technology and how to shoot these videos. This is now going to be the new format that we'll follow going forward. So please reach out to me by email or phone and let me know what you think of the commentary is being done by video. If you have any suggestions for improvement, please let us know, because we're always trying to improve and make things better for our clients. So don't hesitate to let me know if you have any comments or or thoughts on the videos. So today, we're going to go through a quick recap of 2020's performance and what the markets were doing during twenty twenty. And as I'm sure you know, it was an interesting year and then we'll move into twenty, twenty one. This update will be a little longer than most will be going forward. Most of them. I'm going to try to keep it about 20 minutes. This one will probably run around thirty five minutes because we're going to recap last year first before getting into this year.
Speaker1: But going forward, the format will be roughly about 20 minutes. So let's move on to our agenda. We're going to start, as I mentioned, with a quick recap of the markets last year and how market performance was, and like I said, it was an interesting year, to be sure. Then we'll talk a bit about our portfolio models and how they did. We'll discuss our investment strategy currently what we were doing last year and now what we're doing this year based on our research and structuring that we're doing in portfolios and also how that's translating and translating into specific positions and investments that we're making and then what our outlook will discuss, what our outlook is for twenty, twenty one based on the research again, that we're doing both on the economic side and the market side. And then we'll close out with a brief update on our practice. We've been adding resources and personnel so that we can keep managing your money in the best possible fashion and also trying to get more efficient as these markets move more quickly than they have in the past, both in investment sectors, but also in the sense of taxation and estate planning and those various financial planning topics. So we'll go through a recap of that as well. What we've been doing in the practice. So looking at last year, looking at 2020, you may recall, we started the year pretty strong.
Speaker1: Everything was looking good economically and market wise. And as the bullet points on the screen indicate, we had a strong housing market, we had very strong equity markets. We had one of the longest actually the longest economic expansion on record, exceptionally low unemployment. And the Fed was being very accommodative all around the world. I'm talking about us when I say the Fed, but the Canadian Central Bank, European Central Bank, everybody really was making it easy for the economy to do well and markets do well based on liquidity and low interest rates, liquidity, meaning the amount of money being pumped into the global economy. So we started 20, 20 looking pretty good and that was coming off a very strong twenty nineteen, as you can see on the screen. We came out of a sell off in twenty eighteen where the market sold off quite strong in the last quarter and then we had a very strong rebound in twenty nineteen. Our model portfolio did roughly fourteen and a half percent that year and we started twenty twenty looking very strong as well. But then of course we all know what happened. The rumblings we heard out of Wuhan, China, about a viral outbreak quickly spread to become a pandemic. And on, was it March, March 11th, the World Health Organization declared covid-19 a pandemic and voiced their concerns about a number of things, but also how low the action was from countries around the world in planning for this and taking precautions and of course, pandemic talk quickly made the markets become concerned.
Speaker1: And all the positives that we had seen quickly became yesterday's news and the markets suffered a severe shock. The volatility index, which measures really the height of investor concerns, hit a all time record on March 16th. And consider what that means, an all time record, because it hit a higher VIX recording than we saw during the financial crisis of 2008. And during that crisis, there were folks calling for the collapse of the global financial system and this time the volatility index hit a new high. So there was a lot of concern, to say the least, out there. And that concern translated into one of the sharpest and certainly the fastest market corrections bear markets in history. The market fell. And when I get my pointer here, the market fell from February 19th to March. Twenty third by thirty five percent. So in a little over a month's time, it went from a new high and everything looking rosy to a negative thirty five percent drop. And at that time, there were economists. Most economists were calling for a deep global recession and prolonged at that, and some were calling for a potential depression in the Depression. Word was being used quite a bit, actually, because we went into that environment with a lot of debt. And even though the economy was doing well and unemployment was low, a pandemic, of course, was going to change all of that and a prolonged deep recession, potentially depression was really top of mind for everyone.
Speaker1: So the drop made sense in the speed of it made sense. But it was it was quite devastating at the time. Fortunately. The Federal Reserve and market forces in general took interest rates, so based on the US 10 year Treasury rate, which is kind of the benchmark we look at from an interest rate relative to equity price standpoint, the interest rate on the 10 year U.S. Treasury dropped from at that point, it would have been roughly one point five, one point six percent. It had been approaching three percent the year before. But the Fed had lowered interest rates to get the economy going and get the markets really going again after 18. And it was about one point six prior to the pandemic announcement and it dropped to an all time low of 2.5. You can see here on the screen point five to on March 9th. That, combined with the fastest and the most massive stimulus package the US has ever conducted. They put three trillion new dollars into the US economy in twenty twenty. And the combination of the low interest rates and the massive amount of money that went into the economy in record time, because you may recall, they did similar what's called quantitative easing measures back in 08 to help the economy and the market back then. But it took them months to get that through Congress to come up with what they were going to do and then get it through Congress.
Speaker1: This time they were able to get it through within weeks. They already had the playbook. Congress was already familiar with it. And, of course, a pandemic didn't have the same political nuances to it that the financial crisis did. So they got the stimulus through very quick interest rate cuts and the market took the interest rates low very quickly. And the combination of those two things gave us the most loosest financial conditions on record as well. This is the Goldman Sachs Financial Conditions Index, and it hit a record low down here. You can see during that period in March. And that means that borrowing money and having money in the economy, so making it easy to invest or spend or whatnot, hit an all time record. And there's an old saying in investing and it goes, don't fight the Fed. And this is what it's talking about. When the Fed makes it very accommodative, very loose financial conditions, markets tend to go up based on that environment. Well, they certainly went up now. It wasn't solely because of that. There was also a lot of folks at home that didn't typically invest in the markets. Sports betting was shut down. They were getting stimulus checks. They became interested in investing. So between the loose financial conditions and the large amount of new investors that came into the market, at the same time, we had just a massive recovery.
Speaker1: After dropping thirty five percent in a little over a month, we went up fifty five percent from March. Twenty third, which was the low in this chart, goes to August twenty first and it kept going after that, but that was a fifty five percent recovery while we were in a pandemic and in a recession. And at that point there was no announcements or assuredness that we were going to have a vaccine. So this was purely on the hope that a vaccine was coming and all this money that was put into the economy. So that was very unexpected, welcomed. It may cause some issues in the future based on all the debt that we're getting, but it really helped in the short term. There we go. The pointer is stuck for a moment. So the recovery we got wasn't entirely uniform, though it was very concentrated into the type of companies that were benefiting from people being locked in their homes, basically things that allowed folks to shop from home, entertainment work from home. These types of things and other companies that need a normally functioning or normal functioning economy didn't do nearly as well. And you can see on the chart here on the screen that these ones here are all dominated by the large growth companies, tech companies, Zune, Netflix, Amazon, Microsoft, Apple, these types of things. And they did exceptionally well down here.
Speaker1: We have things that allow economies to function normally. So the financial sector, which gets hurt very bad by low interest rates, energy people aren't driving, factories aren't running utilities, real estate folks aren't going into the office. There's some concern and thoughts about what, even after the pandemic, the workforce will look like from an office standpoint. So those companies that did well did exceptionally well. And the companies that weren't doing well did exceptionally bad ones, though there was a vaccine announcement. What happened is this kind of flip flopped. So on the last four months of the year, what had been doing, terrible financials, materials, energy and so forth, have been the best performers. And the companies that benefited from the lockdown have been the weaker performers for our portfolios. Fortunately, we are overweight financials and kind of real economy or normal economy investments that have more stable earnings, paid dividends, have strong balance sheets, low debt levels, that type of thing. It doesn't mean we don't have the growth. We certainly do, but we tend to gravitate more to the higher quality companies. And that's been helping. We've been getting very strong returns relative to the benchmark the last five or six months or so. We'll talk more about that in a in a few moments. So how did all that translate into performance? Well. The Canadian market, which is more dominated or heavy, heavier weighting towards financials, commodities, energy, that type of thing, had moderate returns and that was really on the back of some of our tech companies that we have, primarily Shopify.
Speaker1: So we did a five and a half percent return last year, the Canadian market including dividends. The US market, which is dominated on the S&P 500 by the Megahed tech or mega cap, the very large tech growth companies, so Microsoft, Amazon, Google, Netflix and all that, those companies did so well that even though most of the S&P 500 didn't have much of a return last year, the top five or 10 companies had such strong returns, it pulled the index into very positive territory. And they actually had a very good return based on their overall index, which was eighteen point four percent last year. Europe was more like us, that's more dominated by Europe and Japan is more dominated by financials and I'll call it older economy companies. So they did six and a half emerging markets did pretty well because they came out of the pandemic sooner or mostly they came out of it sooner. And they also have some large tech companies in the in their index. So they did 14 and a half percent. Canadian bonds did pretty well at eight point sixty eight. But all that pretty much was done in about a month's time. The bond shot up there in March and a bit of April and then pretty much went flat for the rest of the year. But they ended the year with a good index return, eight point six eight oil had a very weak year, obviously, with nobody driving and the economy shut down.
Speaker1: So negative 20 and change. And then the Canadian dollar went up about two percent against the US dollar. There's a consensus that the US dollar likely continues to drop for a while. And it's based on all the money they have to raise through bond auctions and various things to pay for the debt. And then gold had a pretty strong year after doing nothing for about five years. It got some strength from the fear that went into the economy, into the markets in twenty twenty. So overall, considering we were in a pandemic and a recession and what many had thought was going to be a deep recession and lasting, the markets did actually pretty good. And fortunately, we were able to get a positive return on the back of that last year, which was very unexpected, but also very welcome. So our a balanced growth model, which everybody's portfolio is based on all my personal money is in that portfolio. And that is, in essence a pension fund that we manage and we base every family's portfolio off of it. And then we customize each family's portfolio based on their particular risk return profile, tax situation, cash flow needs, savings rate, all that type of thing. We did five and a half or five point four or five percent last year. That was OK. We are thrilled with it, but we're happy with it in the sense that it beat the target return because that model portfolio, same as pension funds, have a four and it has a four and a half percent plus inflation return target.
Speaker1: Inflation was zero point seven last year, which means five point two is our target and we made five point four or five net of costs. So we beat the target. That was after coming off roughly fourteen and a half percent return the year before. So we're trending above Target now, two years running and we went through a pandemic. Why I say that we're not thrilled with it is because we were about a half a percent behind the benchmark, our category average. And that was entirely because in March we got a little too conservative. Now, I don't think we got too conservative based on the data that was available at the time. Our clients have done on average very well during their life and they either today or will have enough money to enjoy retirement. So we tend to put more emphasis on protecting their wealth and making sure that they can live the life they want and not putting it to at risk than we do trying to squeeze every nickel out of the upside of the markets. So the data available in March and going back and looking at the last two recessions in 08 and two thousand, those recessions dropped forty two and thirty three percent respectively, lasted about 14 to 18 months.
Speaker1: On average, the bear market and the economy went into recession for let's round it off and say, a year. In those cases it was eight months in one case and a year and a half and the other. And that's kind of a normal outcome in a recession, in a bear market, in this recession. The folks that were unemployed, many of them had a higher income than when they were working in the recession. And bear market lasted roughly two months. So it really recovered strongly. What could have happened could have been so bad based on the environment. We took about 10 to 12 percent of equity off the table to shore the risk up in some of the highest risk equity we took off or took down. And it turned out we didn't need to do that because everything roared back based on what the Fed did and some other factors that we talked about. So it cost us probably about two percent based on what our portfolios looked like before we did that, but we think it was probably the right thing to do at the time, given the data we had coming off pretty good, strong returns from the year before. We were looking fairly defensive already, but there was still a lot of risk there if we went into a depression. So we tried to protect the gains from the year before and be well set up in case it got worse.
Speaker1: Turned out we didn't need it, but I think it was still the right thing to do that time. Hopefully you agree. So we're behind by half a percent in 2020. But the good news is we're still outperforming the category on all other time frames. So over the six months, we really outperformed it well over three years and over five years we're outperforming. And then year to date, we're also outperforming by almost one percent year to date. So in most of the time frames, and especially the ones that matter the most, the longer ones, we're still beating the category by quite a bit. But we got a little more defensive than we needed to be last year. So we were behind a little bit for 20, 20. So what's twenty, twenty one looking like, well, we've been very active in portfolios, you may have noticed both last year and this year, if you looked at all in your transaction section of your portfolio statements, we've been doing a lot of research. And because of that, we've been doing a lot of tweaks to the portfolios to get them lined up with what we think the economy's going to look like over the next few years. We've also been making some structural changes to how we manage portfolios and implement changes, and we've been getting them set up so that we can react quicker when the environment changes. Not that we care that much about the day to day nuances of the market, but if we want to increase or decrease equity exposure or change sectors more quickly, we've set portfolio is up over the last six or seven months to be able to do that more effectively.
Speaker1: So economically, the data is all suggesting to a very strong twenty, twenty one and twenty twenty two for the economy, for the global economy, five and a half percent expected growth on the global economy. That's including the developed markets and emerging. That's for twenty, twenty one and then four point two for twenty twenty to two to two and a half percent is what we've gotten used to for GDP growth. So those are very strong numbers. And based on the data that we're reviewing, they make perfect sense. There's a lot of pent up demand out there. People have been shut in, they've been saving money and they want to do stuff when they get out. Interest rates are exceptionally low. There's no alternative other than the equity markets really right now because bonds are probably going to lose money over the next year or two. Real estate is in a bit of a flux and it's expensive. So equity markets are getting a lot of cash flow because of that. And there's just a massive amount of liquidity in the economy. They globally, there's just so much money has been pumped into the economy and that's going to find its way into goods and services, but also into equity markets.
Speaker1: The one concern that some folks are having right now and we're seeing it in the markets a bit, is potential inflation because of all that pent up demand that's coming and because of all the money that's gone into the economy, normally flood the economy with new money. Prices go up and that causes inflation and they have to raise interest rates. Well, if they raise interest rates in this environment with every asset really on the planet propped up by low rates, it's going to cause some knee jerk reactions and a lot of turmoil in the markets. And we saw that a bit over the last week or so. The markets have been selling off strongly, especially for growth investments. Growth investments are helped massively by low interest rates not to get too technical, but they're high growth rates and future potential earnings get discounted back to today's dollars, the present value, it's called. And if the interest rate goes up, the present value is lower of those future earnings and they sell off quite strongly. And we've seen that recently. It helps the kind of stocks that we mostly have outside of the growth names. It's very good for financials. It's good for insurance companies. Banks preferred shares like we own, and it also helps some of the value investments. So we didn't take the pressure last week in the market, sold off nearly as much as many did. But it still hurt the overall market in the indexes a bit so that inflation potential is being backed up by the fact that interest rates are rising.
Speaker1: That's kind of the market's reaction to potential inflation coming. We don't think inflation is going to be a serious problem. There's some deflationary forces out there that I think are stronger than the inflationary ones. But there probably will be some inflation and higher interest rates to a certain extent. We think they'll probably top out about two percent on the US ten year, which the market can easily handle after a knee jerk reaction that is probably short lived. But the rising the GDP growth and the rising interest rates and inflation probably puts us in what's called a quiet two environment. We look at portfolios based on this four quadrant model, and what we do is we overweight investments that behave well in the quadroon we think we're in. We think we're going to quod to environment, which means overweight equities and especially value equities and cyclical equities, things that benefit from rising rates and inflation like commodities and financials. And we underweight bonds and we just be careful of growth investments not to get too carried away with them. So based on thinking more in the quad to the environment, the expectations we have for this year is that stocks, equity investments outperform bonds. We need some bonds still because we need protection in the portfolio and liquidity, but we'll minimize them as much as possible.
Speaker1: We've already done that just to the minimum protective level that we want. And then we'll move that money into high quality equities because they should outperform. We probably have a rotation and we've seen a bit of this already from growth to value. So we're positioned for that. Emerging markets and international markets likely outperform the US a little less conviction around that, but they should, based on their overweight, the financials in value and the fact that the US is quite expensive from a market standpoint. Innovation, though, continues to change the world in the pandemic, pulled that forward by at least a couple of years. This is in things like DNA sequencing, biotech, autonomous driving, electric vehicles, green energy. So we're invest in those areas, but they're expensive. So we're there for participating when they work. But we've left lots of room to average down if they pull back from these expensive prices. The fact that inflation is likely going to pick up, we are in investments that benefit from that to take advantage of it. And we are concerned, though, that when the stimulus stops and things get back to a little more normal, there are companies that are being displaced by technology and had a lot of debt going into this that probably don't survive. So insolvencies may pick up. So we're monitoring that and making changes in the portfolio to protect from that in some areas, potentially take advantage of it.
Speaker1: And we likely see the US dollar continue to weaken, but not dramatically, just a bit, so we've reduced our U.S. dollar exposure over the last six or seven months in the portfolios so that we're invested in the US investments we want, but we have less U.S. dollar exposure. And we can do that by investing in the US investments in what's called a hedged version. So we get the U.S. investment, but not the US dollar. So based on those expectations are tactical asset allocation strategy and tactical means, what we're overweighting or under waiting slightly around our long term strategic allocation and our strategic allocation is based on everyone's risk return profile. And then the tactical, like I say, be overweight or underweight on investments based on our research, the quad that we think we're in, this type of thing. So we're increasing corporate bonds, moving away from government bonds, looking at private debt investments which do better in this environment, and blue chip high dividend paying equity rather than bonds or overweighting those. We've increased the quality of our corporate bonds in case of bankruptcies pick up. We're adding in inflation, positive inflation, investments like commodities, base metals, inflation linked investments, these are floating bonds and fixed rate preferred shares, these types of things. Were slightly reducing our S&P 500 allocation because it's very expensive and you may see a bit of a sell off in that to go to these more value areas and we're upping our value exposure, reducing the US dollar exposure to roughly 20 percent of portfolios.
Speaker1: We're increasing our allocation to specialty managers, so this could be in the way of mutual funds, hedge funds, private equity, any type of external portfolio manager, primarily mutual funds, but not the big, broad based ones you often hear about. These are more boutique style that have a very specialized team that invest in areas that we think are attractive and for the small fee we pay them in the ones we use. Ueshiba point eight percent, one percent a year. We think they can perform by quite a bit more than that. So it's good value. And keep in mind that I put all my money in the same investments we used. So I don't think a manager is adding value. I'm not going to put them in my portfolio either, which means it's not in your portfolio. Only when we think they're going to add value that we use them. But this is an environment where they can be quite valuable in the right areas and the right teams. We're increasing our international equity, so f, which is seventy five percent in Europe, twenty five percent Japan. We've increased that emerging markets, we're increasing both through indexes, very low cost indexing for those areas. And same with us small cap value that does exceptionally well coming out of a recession typically. So we've added at a very low cost index with exposure to that area and the areas that we're adding, the external managers are in innovation primarily, and we've increased our allocation to innovation and kind of new world growth investments in general, some through indexing, through some through external managers, but in the areas of autonomous driving, biotech, electrification of the world, green energy, digitization of the world as well, everything seems to be going kind of digital and online
2020 year-end tax tips: COVID-19 edition
Your taxes this year may look different due to COVID-19. For example, no tax was deducted at source from CERB payments, so you may need to pay tax on CERB amounts received when you file your 2020 income tax return.
2020 year end tax tips: COVID-19 edition
[Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Private Wealth Management]
It's that time of year where we talk about year end tax tips, and things are a little bit different in 2020, of course, because of COVID-19.
[Pay attention to your taxes payable]
So, let me begin with the first tip that we will suggest to everyone this year, is pay attention to your taxes payable. And I say this in particular, if you've been receiving the CERB, the emergency response benefit, because that amount, which was two thousand dollars per period for up to seven periods—that's 14 thousand dollars. That amount was not subject to any tax deductions at source. And that means that the amount of tax that you owe on that CERB will depend on your 2020 income. So, it's probably a good idea between now and the end of the year to really do an estimate of what your 2020 income was.
[A hand types on a calculator. A coffee and scone are brought on a tray by a waitress. An empty cafe. A waitress walking through a café.]
Did you receive income, let's say prior to March, when you perhaps lost employment and went onto the CERB? Or did you regain employment over the summer? And estimate what your total income is for 2020. For some people, there may be no tax at all owing on the CERB, because their tax rate is very low. And in fact, maybe the basic personal amount covers all of the taxes. For others, who may have received a bonus in January and then were let go as a result of COVID-19, the tax on that CERB could be as high as 54 percent, depending on what province you live in and how much income you have for the year. So, a good idea is to take a look at your 2020 income, estimate that money and then you set that aside, so it doesn't come as a surprise next April when you have to pay the taxes on the CERB. The other government benefits that were recently announced over the summer are subject to a 10 percent withholding tax. Again, that may not be sufficient.
[A hand types on a laptop. A woman types on a laptop in a home office. A computer in a home office shows Tax Savings tips on the CIBC website.]
So, again, take a look at your income for 2020. There are a variety of online tax calculators where you can sort of judge the amount of tax you are expected to pay, and if there's a shortfall based on the withholding on the new government benefits, then you may want to set aside that money as well.
[Advice for investors]
The second area that we talk about every year, of course, is tax loss selling. Depending on what you were invested in in 2020, you may have lost money in a non-registered account. Whether it makes sense to then crystallize those losses will depend on the investment decision. Does it make sense to continue to hold that name in your portfolio? If not, it may make sense to rebalance that portfolio. Capital losses can be used against any other capital gains this year, carried back three calendar years to get a refund, or carried forward indefinitely. One of the things you want to pay attention to when looking at your losses is the superficial loss rule. If you buy that stock or security back within 30 days, or your spouse buys it back, your partner buys it back, your corporation buys it back, even a trust that you're affiliated with—like an RRSP or TFSA—buys it back, the loss is denied. So, it's best to, if you're going to recognize that capital loss, realize the loss and then wait at least 30 days before buying back that identical security.
[Tax sheltered accounts (RRSP, TFSA and RESP)]
In terms of other stuff that we talk about near year end, RRSPs, of course, you have the RRSP deadline, 60 days after the end of the year. TFSAs – there are no deadlines. There are certain restrictions on RESP contributions depending on the age of the child.
[The 2020 year end tax tips: COVID-19 edition, is visible on a laptop screen]
Our year-end report covers all these different planning opportunities. We encourage you to take a look at it.
One final thought to leave you with. If you do have expenses that you want to claim on your 2020 tax return, some of them do need to be paid by the end of the year.
[Hands types on a laptop. Tax documents are placed on a desk. A hand types on a calculator.]
And I'm thinking things like interest. If you have deductible interest expense because you borrowed money for the purpose of investing, you must pay the interest by December 31st, to get a tax deduction for the 2020 year.
Similarly, with charitable giving, many people make most of their charitable giving towards the end of the year in October, November and December. If you want that charitable donation receipt, make sure that the gift is made by December 31st. And, a final reminder that if you do have some appreciated securities that have gone up in value over the last number of years, consider making a donation in-kind. If you do it by the end of the year, you get a tax receipt for the fair market value, and if you donate securities, mutual funds, segregated funds “in-kind” to charity, not only do you get that receipt, but you pay zero capital gains tax on any accumulated depreciation. All of these tips, and more, are contained in our brand new, updated 2020 year end tax tips COVID-19 edition.
[Disclaimer: CIBC advisors provide general information on certain tax, investment and estate planning matters; they do not provide tax, accounting or legal advice. Please consult your personal tax advisor, accountant, licensed insurance professional and qualified legal advisor to obtain specialized advice tailored to your needs. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed 4 in this video are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC). The material and/or its contents may not be reproduced without the express written consent of CIBC.]
Biden Wins - Investment View
Luc de la Durantaye discusses how the results are likely to benefit tech companies and Asian economies, while the U.S. dollar could lose ground and push up the loonie.
Biden Wins - Investment View
[Midtempo upbeat music plays]
[Biden Wins – Investment View]
[Luc De la Durantaye, Chief Investment Strategist and CIO CIBC Asset Management]
Both parties after the election have an interest now to come up with a fiscal package to support the U.S. Economy in the time of a continued sort of deterioration of coronavirus cases. So we do expect some fiscal stimulus from even a split Congress, but a milder or smaller one. Lower fiscal stimulus means also that the Fed needs to, is going to need to step in a little longer, maintaining interest rates lower and potentially increasing their quantitative easing in at the December meeting.
[The United States Federal Reserve.]
So that means lower rates even for longer. It means a bit flatter curve. That has also some positive impact to risky assets, a positive impact for credit spreads and interest sensitive sectors. The other important element are on the regulation front. For big tech, it probably means less risk of pursuing a breakup of big techs or having strong regulation against big techs. So that's been positive for the tech sector.
[A large computer server. A computer technician standing at the end of a hallway of large computer servers. A young tech businessperson making a presentation with a large screen to three other businesspeople.]
And the last piece, that's also given those results, is we're not going to have or very low chances of a tax hike, corporate tax hike.
[Soft music plays]
[Impact of Biden presidency]
The impact will be more at the international front.
[A photo portrait of Joe Biden. The U.S. and Chinese Flags. A large shipping boat docked at a shipyard.]
We think that a Biden administration will be a bit more inclusive in terms of trade negotiation, less aggressive towards China, still disputes, but probably less use of tariffs, intervention and a more cooperative environment. That is positive for global equities in general and non U.S. equities in general, and particularly for Asia and China, which have already also have an ace in their pocket, having managed the coronavirus pandemic better than other regions. So the continued outperformance of Asian assets would be likely and we would continue to tilt in that direction our strategy. Climate change, energy changes will take longer to be implemented.
[Wind turbines in a lightly mountainous area.]
So from that perspective, it delays these types of policies.
[Soft music plays]
From a currency perspective, the main implication is with the Fed increasing and having to step in as fiscal spending will be lower than originally expected, that translates into likely a weaker U.S. Dollar and from a broad perspective, as the U.S. continues to deal with lower fiscal spending and continued impact from the pandemic. On the reverse side, from a Canadian dollar perspective then part of the strength of the Canadian dollar will be from U.S. Dollar weakness.
[Several Canadian one dollar coins. Several different denominations of Canadian coins. A pile of old U.S. dollar bills.]
And over time, with a continued economic expansion, we continue to think that the Canadian dollar will outperform the U.S. Dollar at a moderate level.
[Soft music plays]
[Delayed election results?]
Will there be continued delays into the official results? Most probably. There's already been a legal dispute being implemented by the Trump administration.
[A photo portrait of Donald Trump.]
We don't think, though, over time that will result in a very different result for the final election results. And so from that perspective, that is not something that we see as a major impediment for investors at this stage of the game.
[Midtempo upbeat music plays]
[Disclaimer: This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated and are subject to change.
®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license.
The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]
Biden Wins - Economic View
Avery Shenfeld, CIBC Chief Economist discusses how the outcome may soon lead the U.S. to pass a scaled down version of a stimulus bill.
Biden Wins - Economic View
[Avery Shenfeld, Chief Economist CIBC World Markets]
So, we certainly had an eventful election period, and there's still a hair of doubt given legal challenges on the result, but it looks like we're headed for Joe Biden being president of the United States.
[A Whitehouse portrait photograph of Joe Biden. A time-lapse of the Capitol Building.]
But the Republicans, by a hair, continuing to run the Senate. And what that means is that, we will get some flavour of a Biden presidency.
[An American flag waves on the Capitol Building. Representatives talk on the Senate floor. A wide shot of the senate floor. A time-lapse of the Capitol Building.]
But those who watch U.S. politics will understand that the Senate has a lot of power to block and prevent some of the more dramatic changes in U.S. policy.
[Impact on investors]
For investors, that means that we will likely still get a stimulus bill.
[A slow zoom out on the Treasury Department building.]
In fact, we may even see one in December before the new president takes office. But it could be a bit scaled down from the two trillion or so that the Democrats were seeking, perhaps somewhere in that one to one and a half trillion range. And that's why we've seen bond yields actually drift a little bit softer on anticipation that perhaps government financing needs won't be as strong.
[Computer-generated images of stock market data.]
The equity market actually may like this combination because, if we get that stimulus package, it is good for the economy. But what looks less obvious is that we're going to get some other items in the Biden agenda that weren't as favorable for equity markets.
[A Whitehouse portrait photograph of Joe Biden.]
And in particular, I'm speaking about the plan to raise corporate taxes.
[The door to the Senate floor.]
That's something that a Republican Senate is likely to block, as well as perhaps some of the personal tax increases on high income individuals that the Biden administration might have otherwise pressed for.
[Energy policy and climate change]
[Aerial views of wind farms. An aerial view of flooding in a city.]
Even on other policy files, things like energy policy, climate change, while we will still see a drift in that direction, because some of that is in the hands of states.
[The exterior of the Utah state senate. The doorway to the Utah governor’s office. President Donald Trump and First Lady Melania Trump wave to the camera on the steps to Air Force One.]
And as we saw under the Trump administration, the president can do a lot in terms of regulatory policy changes that affect things like the energy sector. On other matters, you do need legislation. And again, we're expecting a slower turn there.
[A time-lapse of the Capitol Building. Aerial views of wind farms and solar panels. Oil derricks at dusk. An aerial view of an oil refinery.]
And so, a bit less drama on the public policy front for individual equity sectors like alternative energy that we've seen, for example, as a winner had the Democrats swept this election and perhaps U.S. oil companies being less concerned politically.
[A tracking shot along a gas pipeline. A timeline of the Canadian Parliament building at dawn.]
For Canada's energy sector. We have to remember that Biden was an opponent to the Keystone XL pipeline, but there's not necessarily a clear blocking of that yet.
[An aerial view of a natural gas production facility.]
On the other side of that, tougher regulations on U.S. shale oil production is actually a little bit of a positive for Canada, by leveling the playing field in the oil and gas sector. And perhaps reducing the competitive threat to Canadian oil producers from a return of more shale oil production as the global economy recovers.
We're still going to be watching now for how the new administration responds on the other key issue, and that's the coronavirus.
[A man getting tested for COVID-19. An aerial view of an empty highway in a city. A woman in a mask outside walks towards the camera holding paper towels.]
It's still true that the virus is the number one threat to economic growth globally and in the U.S.
[Two officials talk at a desk in a medical lab. A scientist tests blood samples.]
And we can hope that a more concerted effort to centrally manage some of the response to that virus and contain it can help the U.S. avoid what we're seeing now in Europe, which is the need for a deeper economic shutdown again, to bring things under control.
[An aerial view of an empty Berlin by the Brandenburg Gate.]
So, those are the files worth watching most closely. The stimulus bill coming up, which we do expect we'll still see one, as well as, can, when the new administration takes over, can they do a better job containing the coronavirus that we've seen so far?
[Rows of vials. A hand puts down a clear vial labeled “COVID-19 Vaccine”.]
And further down the road, of course, managing that all important process of getting the vaccine out and into American arms, because that will be the shot in the arm for the U.S. economy and by extension, the Canadian economy as well.
[This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.
®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC). The material and/or its contents may not be reproduced without the express written consent of CIBC.]