There is a common adage which states “may you live in interesting times”, arguably taking a positive spin on living in challenging times. The past year has lived up to this idea and has raised concern for many, be it with respect to economic and social nationalism or outright xenophobia. These were ideas best left in the past but have come up once again due in part to widening income disparity and lack of opportunity for some in developed markets.
Global equity markets have certainly taken a “glass half full” view over the past year when predictable events were upended by a surge in populism. The Fourth Quarter rally pushed major US equity indices to record levels, driven by optimism towards the incoming Republican led administration. The Canadian market performed exceptionally well, rebounding off a disappointing 2015.
While some ideas espoused by the new US administration are disconcerting from a social perspective, some of the economic plans may provide a boost to the economy in a slower growth world. Principally, the idea of fiscal stimulus through lower taxes and increased spending has many encouraged that current moderate growth might accelerate.
Spending in areas such as infrastructure would have a positive effect in the near term as well as serving long term needs. Crumbling infrastructure in developed economies could have a far greater negative impact on future generations than the cost of debt used to repair it today. Credit to the Canadian government which earlier identified fiscal stimulus as a necessary tool beyond the flood of monetary stimulus that we have already seen (so long as it is implemented responsibly).
Another controversial theme that has provided a lift to asset values is the idea of less onerous regulation in financial services, healthcare and carbon intensive industries. There has been a lack of industrial spending over the last few years and less red tape could reverse that trend. Repealing Obamacare will be a complicated endeavor given it has provided coverage to millions and any changes will be disruptive to the healthcare industry overall. As for environmental regulations, much of the progress which has been made in the US could be at risk. That said, the emergence of natural gas as a low-cost alternative to coal will continue to be a major contributor in bringing carbon emissions lower.
Then there is the issue of trade. This year the concept of globalization has been challenged with the UK leaving the EU, talk of trade wars with China, the TPP looking less likely to succeed and, closer to home, the Canadian / EU pact (CETA) narrowly getting approved. Globalization has undoubtedly lifted the standard of living for billions across the globe over the last 30 years. Unfortunately, some in developed countries have seen their fortunes plateau or degrade as economies shifted to more advanced industries and services. The surge in populism can be linked to this but there is no quick panacea. Only retraining and education can truly help and this will take time. Most recently, many economists have pointed to a major skills shortage in the US, something the likes of Bill Gates have been pointing to for years.
In Canada, economic conditions were subdued but have improved. Optimism regarding renewed economic growth and reflationary policies drove commodity prices higher. An agreement from OPEC brought stability to energy markets benefitting Canadian oil producers. Rising rates and a modest economic recovery translated into very strong performance for the banks. All this resulted in the S&P/TSX index being the best performing index amongst developed markets.
Globally, US markets have also displayed optimism given continued employment gains and accelerated wage growth coupled with reflationary policies. Europe has seen positive signs in terms of employment and business spending, the UK has been steady and Chinese growth appears to be stabilizing. All this must, of course, be weighed against concerns of increased trade protectionism and continued economic uncertainty in many regions of the world. In addition, general elections in Germany, France and Netherlands in 2017 might continue the pattern of voter movement to more populist leaders.
Bond markets have also seen a major shift in response to reflationary policies as interest rates have begun to move higher. Normalization of interest rates is encouraging as the potential for fiscal policy to replace monetary policy takes hold. The prospect of ‘negative rates’ is troubling to savers and has the risk of many unintended consequences for economies overall. Despite the rise, bond yields remain generally lower than yields investors can receive on stocks.
As for your portfolio, our philosophy remains firm. Doherty continues to adhere to our tradition of investment excellence by maintaining our discipline and seizing opportunity in quality companies that are trading below their intrinsic value. We continue to look at risk as our top priority and will be vigilant seeking returns in a responsible and sustainable manner.
No one can be certain where the market is headed in the very near term even with the benefit of some foresight. The night Donald Trump won, gold surged 5% and subsequently fell 14%. What is predictable is that good companies with dynamic leaders and sustainable business models and dividends prove to win the day over time and through the cycle.
If you have any questions, please do not hesitate to contact us. We appreciate the trust you have placed in us and will continue to be strong financial stewards for your personal goals. All the very best in 2017.
January 2017