January 17th, 2016
Rob Kelland’s Market Commentary
Dear Valued Clients,
I want to send an update to clients based upon the difficult and challenging start to 2016 we have had. In the essence of time and space I have written this mostly in point form.
Valuation: at the end of the day in my opinion it is valuation that matters as much as anything. The recent bull market in the US was the second longest in history, and a correction was due. No one knows when it will come, or what it will look like. It feels to me like we are in the midst of a correction in the US and a bear market in Canada.
Emotions: eventually take over like a snowball in both an up market (euphoria) and a down market (fear). Valuations matter little when emotions take over. The emotion of ‘fear’ is also stronger than the emotion of ‘euphoria’ in such markets.
Ties on sale: I always like to use the analogy of trying to buy my ties on sale to purchasing equities on sale. Volatility becomes the friend of value investors as good quality names drop off in value.
The windshield in front of us (the future), is always murkier than the rear view behind us (the past). There will always be reasons not to invest. Always! Yet no asset class has outperformed blue chip equities over the past 100 years. I do not feel that this time is different from a long term perspective. As many studies have shown, it is ‘time in the market’, NOT, ‘timing the market’ that is a pathway to success.
In my 32 year career there are always events and economic reasons to be fearful. The crash of 1987 (20% drop in two days) and the great recession of 2008/2009 are two that come to mind. Yet the market recovered from these events, (is higher today) and from any other event along the way.
Emotions and fear are investors’ worst enemies. In my opinion, get your Asset Allocation correct between Fixed Income and Equity, have a ‘long term target rate of return’, and invest for the long term. Rates of return beyond GICs, Savings Accounts, and Savings Bonds will never be linear.
We as a Team care. We care immensely. Trust, honesty, integrity, peace of mind and professionalism mean much to us.
We customize each client’s portfolio based upon when they started with us and their Asset Allocation, and their target rate of return. In the vast majority of cases our clients have outperformed the TSX and 5 year bond index over the short and long term.
Our investment philosophy is to be diversified. High quality. Blue chip. We have been underweight energy and materials (gold, etc.) for many years which has aided our returns. This remains the case today. Do we get it right all of the time? No. But over time we have solid performance relative to the indices in Canada.
In recent years headwinds included Greece, tensions in the Middle East, SARS, and threat of a US Government shutdown. Today it is China’s economy slowing down, weak oil prices, and a weak C$ amongst other concerns. These concerns as always are legitimate, but as we stated above, we feel the pendulum of emotion is eventually taken over by the common sense of valuation.
We acknowledge that it is very difficult for Fixed Income investors today. GIC’s and Savings accounts yield less than 2.00%. This is simply not a high enough rate of return for many investors after tax and inflation, and based on their needs from their portfolios without eroding capital. To achieve a 3.00% + rate of return an investor needs equities to augment their returns.
There were two great articles in Saturday’s Report on Business, in the Globe & Mail. One by John Heinzl. The other by Tom Bradley of Steady hand. (PLEASE SEE THE ATTACHMENTS BELOW TO ACCESS THESE ARTICLES).
We do feel that it will be a bit of a belt tightening year for Canadian investors and equities. It is difficult to convert C$ to other currencies (currently) with the C$ so weak. We are perceived globally as an energy based currency and our currency tends to move closely in tandem with oil prices as pictured in our January Investment News. There seems to be an ‘anti-Canada’ trade on now which affects all sectors, not just energy, which has taken a severe blow. We even feel that our well capitalized and world class banks will have a tough year increasing revenues, with NIM (net interest margins) so low, oil prices down, some energy companies facing headwinds, and generally a tougher economic climate. Plus, elevated real estate prices in Vancouver and Toronto cannot go on forever. So our view is be patient, know that returns will not be linear, invest in quality, collect your dividends, and wait out this market correction/bear market storm. We would say that anyone who has less than a 2 year investment timeline should be more conservative. If your timeline for investing is 3 years or beyond and with interest rates where they are (low) investors should try to be patient and wait for value opportunities.
As a Team we were buyers of 3 new names in our Managed Portfolio Program accounts last week. Our investment thesis remains defensive and ‘recession resistant’.
Investing is a journey over years and decades, not a sprint over weeks, months or even a few years. Measure your performance over 5-10-15 years. Not 5-10-15 months.
From 1950 – 2013 US large cap (big) companies have averaged 11.20% per annum. The TSX in Canada has averaged 9.90% per annum. Five year GIC’s have averaged 6.70% per annum ( certainly not today), 90 Day Govt of Canada T-Bills (close to Saving accounts) have averaged 5.50% per annum (again not today) and the Consumer Price Index (Inflation) has averaged 3.70%. So investing in equities over the long term has always yielded the best returns through good markets and poor markets. There have always been reasons not to invest amidst fear of many political/economic factors over this time. These have included the Cuban missile crisis, recessions, Arab oil embargo, high interest rates, Kennedy assassination, Vietnam War, Iraq War, Watergate, NY City threatens bankruptcy, tech bubble burst, oil prices soar to over $150 per barrel, European debt crisis, US fiscal cliff. There has been and always will be a reason to be fearful and concerned. It is human nature. Yet through all of this one can see the performance of various asset classes over time. This is their average annual return. Not their actual return per each year.
We as a Team care. We as a Team are here to help.
Investing is never easy. That said to earn a return beyond 0.50% – 1.75% in today’s interest rate environment requires that investors hold equities with a portion of their portfolio.
Should you have any specific questions please feel free to contact a member of our Team.
We do expect this market volatility to continue for a period of time. We do feel it will be a belt tightening year overall for equities and in Canada particularly. That said, we are not deviating from our long term plans for each client, or our recession resistant, defensive thesis in terms of equities.
Again we are here to help, and no question is ever too small.
Rob Kelland, CIM®, FCSI®
Director, Wealth Management
‘Sell everything’ and other bad ideas to avoid by John Heinzl
The toughest decision in investing by Tom Bradley
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