A Comment -- General Comments From an Expert (A Commentary)

Bonds will face a challenging year. We see higher interest rates of 25-35 bps. The good thing is for the first time in many years where we have the global economy growing at 3% or more, which is great for earnings and the stock market as a whole. The Central Banks, however, are pulling back on their bond purchases. This is healthy from our perspective as we see great fundamentals.

Our thesis is we are seeing “re-flation”, but not inflation. Wage gains are not that pronounced and unemployment rates are very low. At the end of the year we will see positive returns on the bond and equity markets. It won’t be huge.

Canada vs US market. Canada will struggle to compete with US markets. We have high crude oil differentials and the US has tax reform.

Can you suggest a REIT stress test? Firstly, he looks at leverage because if interest rate increase risk. Secondly, if the payout ratio is higher than 85% it is riskier. Residential REITs are safer because they get funded by CMHC. In a credit event, yields move out and they have to fund at a higher rate.

Senior Housing. The senior housing market is difficult to determine, because of vacancy rates. There will be headwinds with minimum wage hikes as it has limited ability to pass rising costs through. Although demographics are improving, people are resisting going into these facilities, which is resulting in high vacancy rates.

Tax treatment on REITs vs dividend. Generally, REITs will offer some return on capital, so it is more tax efficient than dividend income.

Volatility. This week has been a reminder of market volaility. It's normal thought not fun to see 5-10% corrections. It will take time to work out this volatility. Some stocks are still overvalued, while some are bargains. The worst thing is getting upset and selling, then missing on the upside. Take this opportunity to take stock and get back to your appropriate allocation. We've seen a lot of program trading and many traders shorting the VIX which had an effect on the markets.

Robo advisors. Active management is the way to go for most investors, particularly in these times. Robos rely on passove ETFs, so it's hard to pick bottoms and buy individual stocks. For some small investors, robos are not a bad way to start and start saving, because those people don't have the time to study stocks and investments. But in your 40s and 50s you need an advisor to consider taxes and financial planning.

Marijuana stocks. When you invest in commodity stocks and that commodity keeps falling, with marijuana to fall to $7/gram, you don't want to be in them. At least the ETF HMMJ-T gives you broad access to this space, but he wouldn't be in it at all. The market value of cannabis nowhere resembles what the market could be in the near term. There are few competitive advantages and these business are at over-capacity. Eventually these stocks will make some money, but he'll stay away from this for now.

Gold. Why would someone invest in a gold company as opposed to an ETF? Individual stocks pay better returns. He doesn't own any gold stocks, just some bullion because gold holds it value in periods of panic and considered a hedge against inflation.

Recommend a REIT with 10-year horizon? REITS are a great source of income, but have recently sold off due to interest rate fears. REITs should make up 5-10% of a portfolio. Start with an ETF, like ZRE-T to get into industrials, apartments and healthcare, or get internationally diversified (i.e. Brazil and Germany) with NWH.UN-T.

Volatility. Commenting on the current pullback and volatility, he says that people are paying too much attention to short-term price action. Over a few days, the market can drop significantly and then come back. The last few years have been unusual in having low volatility and no negative years (years in which the market ends at a lower point than the previous year). It is normal for the volatility to come back.

Yield Plays. The pullback is creating yield opportunities as it drives down the price of stocks. In the decline of 2008, the Canadian banks were paying 5% dividends. There has been a significant pullback in the price of Telcos, as much as 9%. This has to do with rising interest rates, not with the business itself. Higher yields as a stock pulls back must be evaluated in the context of a rising interest rate environment. If there is no possibility of growth of the company or of the dividend, the price of the stock will drop further as bond rates rise.

Canadian Banks. At this time, he prefers Canadian banks to U.S. On a valuation basis, U.S. and Canadian banks both trade at about 12x earnings. The big U.S. banks cheaper than Canadian banks a year ago but they had such a run that the two groups are now comparable. Canadian banks pay higher dividends and the Canadian investor is better off receiving the dividends from Canadian banks for tax reasons.

Canadian-Based North American Dividend ETF? He suggests looking at the Vanguard and iShares websites for currency-hedged stocks.Unless you have a clear view of where the relationship between the US dollar and the Canadian dollar is heading, having a currency hedge is important.