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

BREXIT. The biggest thing from their perspective is, what does Scotland do. Scotland wants to hold a referendum in late 2018 or early 2019. Once they go through the two-year period of the negotiations to either stay or not stay, it is a mess. We haven’t felt one iota of economic impact in terms of trade, etc., and we probably won’t know for a year, or maybe 2, on how this plays out. It does speak to the fact that the UK and the EU doesn’t work, and eventually it is going to start coming apart. This is just the beginning.

Sectors with the best value right now? A couple of weeks ago, low volatility areas had been underperforming significantly. Markets have been strong since the Trump election, up 10%, 15%, 20% depending on where you look and what sectors. Low volatility sectors like utilities, consumer staples have underperformed. Those sectors, right now, screen as cheap because they are much more defensive. What typically happens with fund managers, is when they are positive on the outlook for the market, they are investing in more cyclicals; whether consumer, industrial or technology, companies that are going to get much more of a beta lift when the markets are doing well. When the markets are expected to correct, they can’t go to cash, most managers have to stay fully invested. They sell their consumer cyclical and they buy a consumer staple; they sell their industrial and buy a health care; sell their financial and buy a utility. This takes down their beta or their sensitivity to the downside. The low volume sectors are somewhat attractive right now compared to some of the more cyclical sectors.

Sectors you like and dislike? Real estate is interest rate sensitive, so not his favourite right now. He is underweight. What is really cheap? A couple of days ago, gold was cheap and he was nibbling in this sector. However, if you are talking about a strategy for the long-term, the next 2, 3, 5 years, financials in the US are still pretty cheap. When he is tactical, and moving money around pretty actively, he is looking out 3 months, maybe 6. He has no idea what is going to happen 4 or 5 years from now.

Educational Segment: Long-Term Investing. This is on geopolitical and global macro, because a lot of global hedge funds macro views and look for themes in markets. This week, Canada has their budget. Global investors look at things like this and look for what is diverging and what is different, and is it good or bad compared to others. The US is cutting taxes, both corporate and personal, while Canada is raising taxes. Global money follows the flow of funds. Canada has net outflows on capital account, net outflows on current account, so we run trade deficits. There is less money coming into Canada so the global investors see that Canada is vulnerable and if they Short Canada as well as the currency, will the Bank of Canada raise rates? Investing in Canada has a lot to do with oil, and as oil goes, so goes the TSX.

If the budget is as bad as he thinks it is going to be, in terms of taxing capital and savings, you use inverse ETF’s. HBP 60 Inverse ETF (HIX-T) is an inverse play on the TSX 60. While Canada is somewhat cheap this year, it is only going to grow at 1.5% a year over the next 5 years, and only because they are borrowing money.

Markets. YOMO (Year of Missing Out) is a great description of the Toronto housing market, but we are also starting to get this in equity markets. Stocks are moving, but simply because everyone is afraid to Sell as you don’t want to miss out, and valuations are starting to get stretched, and no one wants to get out of equities because Donald Trump is going to solve all the world’s problems. We have seen this great interest rate increase, which is usually a sign of good times, but investors are already paying for the tax that is going to get cut, and we are already paying for the regulations that are going to get cut. If people’s expectations are not filled, they tend to get disappointed, and the next response is to Sell.

When will Canadian banks have stock splits? The time is close. Once they get over the $100-$120 level, it is probably time for a split. Splits don’t matter. They are just basically creating more shares at less price.

Zinc. Inventories are down and supply is limited. Chinese are shutting some capacity in, in terms of the refining of the raw metal. Zinc is on a roll. It has been tight, and will probably stay tight as mines have shut down. There is no reason the price cannot spike up to the $2 levels. The best 3 plays in Canada are Teck Resources (TECK.B-T), the world’s largest net zinc producer; Hudbay Minerals (HBM-T) an intermediate play; Trevali Mining (TV-T) a more junior company.

Canadian Banks? These are in a very enviable regulatory environment, having very few competitors. They have stable businesses, make a lot of money, pay good dividends with reasonable growth. Also, there is the issue of the housing market. If there was a significant correction in Vancouver and Toronto housing, that would hurt all the banks. These should be a core part of your portfolio.

Canadian Federal Budget. We’ve heard that there might be some tax increases coming, potentially in the capital market, which would not be encouraging. The government needs to raise money for some of the initiatives they have, especially with infrastructure building which is behind schedule. To the extent that they use the money to accelerate infrastructure building to encourage innovation, that would be a good thing.

Market. To some extent, weak consumer sentiment is holding back Canadian stocks. The consumer in Canada is largely overspent. Debt levels have been rising to very, very high levels, which would put a lot of pressure on a lot of people if interest rates were to go up very much. Also, our economy has been a little more tepid than what has been in the US. There is a lot of expectation built into the US market that could prove to be somewhat disappointing down the road. This is a time to be cautious, paying really hard attention to valuations, what you are paying for stocks, why you are buying them, what is your holding period and how does it fit into your portfolio. This is a good time to have a reserve on the side.

Market. We are starting to see a global recovery, although the US market is still in the lead. He is waiting for more certainty on policy to be introduced by the new administration to back that up. NAFTA will be a year or 2 out, and certain sectors will benefit and others might not. That uncertainty tends to gyrate up or down, and we haven’t seen that. There have been over 100 sessions of the S&P 500 where it hasn’t dropped more than 1%, very unusual given the uncertainty. You need to be a little reserved when investing, to take into account factors that are not necessarily being factored in now. Globally, certainly in developed countries, equity markets are over valued in certain sectors. There is caution warranted, but not overly extensive. A bit of a “wait and see” game.

Lifecos? They have 2 components. One is the investment side, and the other is the business of selling life insurance. With interest rates going up in the past little while, that has been constructive for these companies, because of their investment portfolio getting listed in the income. Conversely, the selling of the actual life insurance is going fairly well, and that is the focus where you should be looking.

Market. Investing is understanding the risk profile of the investment you are making. For example, if investing in healthcare, the ball has been volleying back and forth and we are hearing lots of rhetoric. If you invest based on the daily news feed, you are really not going to end up in a very good place. We have to understand what is likely to end up happening. Both sides want the vast majority of Americans to be insured, so let’s go to a place that offers that insurance, and know that despite the volleying going on, the likelihood is that insurers, especially the ones in size and scale, are going to get the volume and probably the pricing power.

Market. He has had to go far and wide to find decent equities. He has had analysts in China, Japan, the UK, throughout the US, all in the past month. Today it is tougher to find value. Valuations are fairly full. He is finding more value in the UK now than he has pre-BREXIT.

Market. The US Fed just increased interest rates by 25 basis points, but no one expected only 2 more rate hikes so the market rallied. The big thing was in currencies. The US$ Index went down about 1% and the Cdn$ went up about 1%. That had a huge impact on commodity prices. The big surprise was that the strongest, based on ETF transactions, was not in North America, but outside in things like emerging markets, up about 2.5%. The key is to think outside of the box (North America), and you can do very well.

Canada. Technically the TSE composite broke a fairly important support level yesterday, 15,396. This is important, because the TSE composite completed a head and shoulders pattern yesterday. That is not good for Canadian markets going forward.

U.S. In the Dow, markets normally do okay until the new president comes out with his State of the Union address, around the end of February. Markets have a history of moving slightly lower in the next few months, because usually new presidents are trying to form new cabinets which takes time. After that, markets move higher. The key is to be patient for the next couple of months. You aren’t probably going to make much money in either the Canadian or US markets until after that.

European markets are outperforming both the US and Canadian equity markets despite all the European elections going on. Even better than that, are the emerging markets. They have the dynamic economies right now. That is where the real action is going to be over the next few months.