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Market Update. NAFTA is dead. Long live the USMCA!

October 5, 2018

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Market Update. NAFTA is dead. Long live the USMCA!

Market Insights

Markets have been riding high lately. However, uncertainty over international trade has not been helping. Trump’s tariff talk made investors question whether free trade even had a future. But as of this week, Canada, Mexico and the USA are good friends once again! Prime Minister Justin Trudeau put his signature on the USMCA deal, calling it “a good day for Canada.

Outside of world trade, some other factors getting our attention: parts of the tech sector going wobbly, as Facebook announces a major security breach and Tesla’s Elon Musk gets smacked by the SEC. Energy and real estate help boost the Canadian scene. The UK is still stuck trying to get a Brexit deal with Europeans who have every incentive to make it difficult. Meanwhile, a Japan-China-Korea alliance develops in response to ongoing trade pressure from the US.

How are these variables impacting your portfolio’s return? See our performance and additional insights below.

ETF Portfolios

Our portfolios held steady in September.

ETF Safety Portfolio was down 0.07% in September. It’s up 4.01% for the past year.

This portfolio’s September performance was mostly flat. Most of the positions had slightly lower returns, but the strong gains of the CAD-Hedged Dow Jones Index ETF and the High Yield Bond ETF offset those losses. The higher weightings in short duration bonds moderated any gains or losses from the ups and downs of equity markets.

ETF Conservative Portfolio was up 0.04% in September. It’s up 6.41% for the past year.

This portfolio contains a higher weighting in ZWA, the CAD-Hedged Dow Jones Index ETF, and ZHY, the High Yield Bond ETF. These two ETFs were the two highest performing ETFs of the group in September. As a result, the portfolio had higher performance than the ETF Safety Portfolio.

ETF Balanced Portfolio was unchanged in September. It’s up 8.62% for the past year.

This portfolio had further increased exposures to Real Estate and US equities, which resulted in a lower returns compared to the Conservative Portfolio. The increased exposures in HXT, the S&P 500 ETF, put a drag on the overall portfolio’s returns. At the same time, there is still a significant portion of the portfolio dedicated to diversification and risk reduction.

ETF Growth Portfolio was down 0.05% in September. However, it’s up 9.92% for the past year.

The majority of this portfolio’s lower performance can be attributed to the greater exposure to HXT(S&P 500 ETF). The total return from HXS underperformed for September. Since this ETF isn’t hedged, it also captured the downside from the weakening USD.

ETF Aggressive Portfolio was down 0.12% in September. However, it’s up 11.50% for the past year.

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

Private Investment Portfolio

Safety Private Portfolio was down 0.12% in September. However, it’s up 5.70% for the past year.

Canadian bonds were slightly lower last month. That said, the mortgages provided some income to offset this, and continued to reduce the volatility of the portfolio. The additional diversification to asset classes in the NWM Core Fund such as mortgages, commodities, real estate and private equity had slightly negative returns but remained a key component at mitigating risk.

Balanced Private Portfolio was down 0.29% in September. It’s up 7.49% for the past year.

The position in the NWM Core Fund gave us slightly lower performance, but the asset classes  such as mortgages, commodities, real estate and private equity within this fund provide great diversification and remained a key component at mitigating risk.

Aggressive Private Portfolio was down 0.39% in September. However, it’s up 7.95% for the past year.

The extra equity exposure in the NWM US Tactical High Income Fund resulted in a higher volatility portfolio which resulted in a slightly greater loss relative to the other Private portfolios. The core balanced position still provided additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk.

Market movers, at a glance

Now we can take a closer look at some of the market movers in September-October. Let’s begin.

For Canada, no tariffs, no trade war, no problem

The Canadian dollar jumped to 78 cents US and stocks climbed with the announcement of a new trade agreement between the US, Mexico and Canada. U.S. President Donald Trump was threatening auto tariffs if they didn’t reach a deal by Sept. 30 — and they made it just under the wire. Energy investors were particularly enthusiastic, which is always a good sign for Canada.

This deal’s benefits are already clear: “USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” Foreign Affairs Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer said in a joint statement. If this helps steady some of the ups and downs of the market, that’s a good thing from our perspective.

Outside of the trade news, Canada’s economic forecast is a bit mixed. Jobs numbers have been turbulent and nationally, unemployment is now up to 6 percent. Energy companies enjoying a steady drip of profits from a $72 oil price are still not reinvesting in new operations, citing uncertainty over pipelines and regulations. On the other hand, in Canada’s healthy real estate market, REITS remain a good option in a time of rising interest rates.

With the uncertainty surrounding NAFTA negotiations looming for the most of September, the S&P/TSX 60 index was lower last month. This resulted in HXT (S&P/TSX 60™ INDEX ETF) creating a dip in the performance in our portfolios.

USA is A-okay

The US economy hummed along in August and the bull run continued — and that trade deal we just talked about won’t hurt matters. The situation seems balanced, according to the Federal Reserve. Labor and inflation are now matched by rising interest rates.

In the markets, the health care sector is providing some healthy returns. For instance, Pfizer (PFE) was recently up while the S&P 500 was down and one analyst reports, “the drugmaker had gained 3.67% in the past month. In that same time, the Medical sector gained 3.21%, while the S&P 500 gained 2.79%.” Gilead was another standout for the sector as they launched a generic version of a leading HCV treatment.

While the S&P 500 generated positive returns in September, some of our exposure was diversified away by our unhedged version of the S&P 500 ETF (HXS). As a result, with the CAD strengthening, the total returns from HXS were lower.

The health sector news shows that Silicon Valley doesn’t have a monopoly on innovation. But speaking of those folks…

Google has a happy birthday, Facebook fumbles, Tesla trips up

As usual, we’re watching big tech companies drive the market forward (and in some cases, a little bit backwards).

It’s hard to remember what life was like before we all started Googling, but the big kahuna of search engines actually turned 20 on Sept. 24. It’s worth considering that every one of the FAANG firms, worth billions (or in Apple and Amazon’s cases, over a $1 trillion) didn’t start out that way:

“Google also got its first funding in the form of a cheque for $100,000 written by Andy Bechtolsheim, co-founder of Sun Microsystems, in August 1998 to “Google Inc”. The trouble was that Google Inc didn’t exist yet, so after a rush to get the paperwork lined up Google was incorporated on 4 September 1998 so the pair could bank the cheque. Later that month the duo moved out of their dorm rooms and into the garage of friend Susan Wojcicki (now CEO of YouTube) in Menlo Park, California, complete with ping-pong table and bright blue carpet, receiving further investment from Amazon founder Jeff Bezos, among others.”

Facebook’s share price, meanwhile, took a bit of a tumble recently thanks to the announcement of (yet another) hack. This time, 50 million accounts might have been breached. It doesn’t look good — but as investors, we need to take a long-term approach and avoid recency bias. For some perspective, keep in mind that Facebook’s stock was at about $25 just five years ago and in February, it peaked above $190.

Facebook CEO Mark Zuckerberg at least had the good luck to not be Tesla’s Elon Musk. The latter had to step down as chairman (though not CEO) of Tesla to settle fraud charges. Tesla’s stock price actually bounced back up after nearly two months of floundering. Perhaps the electric car company has turned a corner.

Although Facebook and Tesla both pared back some their gains, the overall US stock market still had positive returns in September. The currency hedged Dow Jones Industrial Index with covered call strategy ETF (ZWA) was our biggest gainer.

Trying to maintain the status quo around the world

Change is scary. That may be why, far from our shores, stability is the name of the game. In Europe, Brexit negotiations stall as the UK tries to get a deal out of partners who were never keen on this divorce in the first place. They fear a wider breakup of the EU family, so they basically quote the Eagles to Elizabeth May: “You can check out any time you like, but you can never leave.”

Meanwhile, in Japan, Shinzo Abe was re-elected last month, for his final term. The veteran politician is focused on stability at home, while forging a trade agreement with partners China and South Korea, to balance off US trade pressure.

And in the bigger picture, the OECD suggests the world economy may be out of the expansion phase that has endured since 2009. This may be a time for developing markets to shine, as they tend to do better nearing the end of an economic cycle.

All this news has led to positive returns in the international market. However, our international market ETF (XEF) saw a relatively flat September due to a strengthening Canadian dollar diversifying away the gains.

Market update. Conclusion

The sparkling new USMCA deal is simply good news for the North American economy. While portfolio growth has been somewhat flat lately, the ups and downs of the market may level out as investors gain confidence. Our long-term, balanced approach aims to make the most of this investment environment.

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