Market Insights

Market Update. Look beyond the headlines to a world of opportunity

August 15, 2018


Market Update. Look beyond the headlines to a world of opportunity

Market Insights

The good news: our performance is up overall, even though the market is a bit more up-and-down than we’d like. The culprit? Trade wars (or at least, ongoing bluster and threats about trade wars). But in the bigger picture, that volatility, may not matter too much right now. The overall direction is upward. A sign of the times? CNN declares “Trump’s right: The economy is doing well and he deserves some credit.” US economic growth above 4 percent is just good news, any way you slice it.

Tech stocks have led the way to growth in the past. They’re doing the same right now. Just a few days ago, Apple became the first US company to reach a $1 trillion dollar valuation. Yes, that’s ‘trillion’ with a ‘T.’ Even the bad news for tech is good news: many investors see Facebook’s sliding shares as a buying opportunity. The same goes for Amazon. As much as their share price has crushed expectations for years, investors still see plenty of room for growth.

These are just some of the broader trends we’re watching that are impacting your portfolio’s return. See our performance and additional insights below.

ETF Portfolios

Clients enjoyed even higher returns this month.

ETF Safety Portfolio was up 0.75% in July. It’s up 4.28% for the past year.

This portfolio’s July performance comes mainly from holding small exposures to High Yield Corporate Bonds, Preferred shares and Canadian/US Equities. The large weighting in short term bonds muted the returns of this portfolio. However, it  reduced the overall volatility of the portfolio. As a result, it moderated any gains or losses from the ups and downs of equity markets.

ETF Conservative Portfolio was up 1.31% in July. It’s up 6.66% for the past year.

This portfolio has the highest weighting in ZWA, the BMO covered call Dow Jones Industrial Average ETF. That was the best performing ETF in July. As a result, the portfolio had higher performance than the ETF Safety Portfolio.

ETF Balanced Portfolio was up 1.65% in July. It’s up 9.21% for the past year.

It had further increased exposure to Canadian and US equities, this portfolio was able to capture more of the positive performance in these asset classes. At the same time, there is still a significant portion of the portfolio dedicated to diversification and risk reduction.

ETF Growth Portfolio was up 1.81% in July. It’s up 10.61% for the past year.

The majority of this portfolio’s positive performance can be attributed to the greater exposure to High Yield Corporate Bonds, Canadian and US equities. The total return from HXS (S&P 500 ETF) was slightly subdued due to the strengthening Canadian dollar in July. This ETF isn’t hedged, which does help reduce the overall volatility of the portfolio.

ETF Aggressive Portfolio was up 1.95% in July. It’s up 12.47% for the past year.

We saw continued strength in the Canadian and US equities. This portfolio having the highest weighting in HXT (Canadian equities) and HXS (US equities). As a result, it had the highest monthly return across all of our portfolios. The high yield bond and the laddered preferred share ETFs provided further diversification and positive returns.

Private Investment Portfolio

Safety Private Portfolio was up 0.41% in July. It’s up 5.72% for the past year.

Canadian bonds underperformed slightly this month. However, the mortgages provided some income to offset this, and continued to reduce the volatility of the portfolio. The additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Balanced Private Portfolio was up 0.74% in July. It’s up 9.29% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Aggressive Private Portfolio was up 0.63% in July. It’s up 9.62% for the past year.

The extra equity exposure in the NWM US Tactical High Income Fund provided an additional source of return over the Balanced Private Portfolio. However, the returns were muted due to the strengthening Canadian dollar in July. The core balanced position still provided additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns.

Market movers, at a glance

Let’s take a closer look at some of the market movers in July-August. We take a look at the progress of trade talks globally, trends in the economy, stock markets, Japanese market moves and more. Let’s get started.

While some put up barriers, others see trading opportunities

We know that the US is the largest economy when it comes to consumers. However, right now, they are taking a somewhat conflicted approach to trade going forward. But other big countries have different ideas.

Flying under the radar of most North American news reporters, the European Union and Japan have signed an Economic Partnership Agreement. Now the EU can look forward to better access to a market of 127 million people. The leaders who negotiated the deal called it a clear message against protectionism.

This shift in sentiment can be seen in the positive returns in our international equities ETF, XEF.

Canadian economy steams ahead, despite trade headwinds

We’ve been noting this trend for months: US tariffs have yet to affect the overall upward direction of Canada’s economic fundamentals. (Saudi Arabian government has announced intent to divest their Canadian assets, but the consequences haven’t been felt yet. The economic relationship is relatively tiny overall.)

In fact, exports are up. The economy also added 32,000 jobs, according to a recent report. The numbers are so good, leading to some describing a ‘fantastically good’ economic scene. This prompted another interest rate hike in July. With second-quarter growth above 3 percent, another rate hike in September could be coming.

Connected to those higher interest rates and anticipated increases, the price of REITs have declined. However, we intend to remain patient. We aim to obtain above-average dividend yields while the economy strengthens.

Oil is down slightly from its healthy high in July, from $74 down to about $69.  We see that the regulatory environment in Canada, plus low growth in China means less investment by oil companies in their own sector. That ought to be putting a bit of a brake on the Canadian market, but as we’ve seen above, the economy has been shrugging off bad news all summer long.

With the strengthening Canadian economy, our low fee Canadian equities ETF, HXT has captured a lot of this positive return. Our bond ETFs may have underperformed due to the rising interest rate environment. However, it still continues to provide good income and diversification to all of our portfolios.

Facebook falters, Tesla talks going private, Amazon and Apple go big

The leading tech companies of Silicon Valley that set the pace for the S&P 500 had some big numbers and good news to share recently.

But first, the bad news on the tech stock scene: Facebook. Over a very dismal afternoon, the company lost $120 billion in market value and its share price fell 20 percent. Revenue and user growth that was slower than expected triggered the drop.

August has seen only a modest recovery for Facebook, but that didn’t make up for the steep slide. Many haven’t forgotten the images of Facebook founder Mark Zuckerberg relentlessly apologising to anyone who would listen (in particular, Congress) back when its data scandal was top of mind. As mentioned, slower user growth is top of mind, with investors choosing not to pay attention to quarterly revenues that grew a phenomenal 42 percent.

Meanwhile, Tesla CEO Elon Musk has announced that he is considering taking the company (which is burning through billions in cash) private. That’s prompting whispers of “irrational exuberance” in the market — the dismal phrase we associate with the 2008-2009 market downturn. A 4 percent drop in Tesla’s share price shows investors aren’t fully on board with this plan.

It wasn’t all doom and gloom on the tech scene. Far from it, as Apple became the first $1 trillion company. Flush with cash from iPhone sales and an unbeatable brand name, it continues to set the pace. Meanwhile, Amazon Prime Day recorded 100 million product sales for Jeff Bezos’ company. Its share price didn’t seem to benefit right away, but sloped gently upwards in early August.

Although the share price of some of the biggest tech firms fell, all of our portfolios enjoyed positive returns this month. By investing in ETFs that are well diversified and tracking the market broadly, we reduce risk.

Japan investing in emerging markets

Europe is far from the only, or main, point of interest for Tokyo. As China is attempting to expand its economic sphere of influence in southeast Asia and beyond, Japan is ready to compete:

“Japan needs to diversify its portfolio. The country wants back in the game and is enlisting partners where it can. India, which feels encircled by China, is eager for an ally. In September, prime ministers Shinzo Abe and Narendra Modi jointly announced plans to build a bullet-train line financed almost entirely by Japan. India gets infrastructure, and Japanese companies like Hitachi and Kawasaki Heavy get contracts. A few months earlier, the two leaders unveiled the Asia-Africa Growth Corridor, aimed at joint development in Africa. The contest with China, which has made big inroads into Africa, is impossible to miss.”

Emerging markets have been underperforming this year. That said, it appears that investors are now paying closer attention to the opportunities these markets hold. We are constantly monitoring this sector for opportunities.

Market update. Conclusion

Look at what isn’t being reported in your daily news. There’s a lot more going on than tariff negotiations. In an interconnected globe, there is a world of opportunity for the savvy investor. We continue to manage our portfolio with diversification in mind, helping to protect gains and enjoy even better growth over the long term.

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  1. MR

    Are the rate of returns you indicate above for the Private Investment Portfolios net of fees?

    • Jonathon Narvey

      Yes, indeed. They are net of fees. Thanks for asking!

  2. Enrique

    These Market updates are great! Thanks for spending the time to write them every month.

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