The Weekly Bottom Line - March 28, 2013

Canada

  • Canadian economic momentum appears to be picking up in 2013. Real GDP advanced 0.2% in January, broadly in line with our view that economic growth accelerated in the first quarter of this year.
  • Consumer prices rose sharply in February, led by gasoline, food and auto prices. Still, on an annual basis, headline inflation is running at 1.2%, while core inflation is running at just 1.4% - at the lower end of the Bank of Canada’s 1% to 3% target range.
  • While the process has been slow and painful given international economic headwinds, the transition back to export-led growth appears to be a key theme unfolding in the first quarter of this year, supported by a revival in U.S. demand.

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Earnings, Revenues & Valuations: S&P 500 Sectors

Great set of summary charts - earnings, revenue, earnings growth, etc. for the 10 S&P 500 stock market sectors.

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Cyprus: Travails should lead to benign impact on rest of Europe

Highlights

  • After a week of intense negotiations, euro zone finance ministers reached agreement last night with Cypriot authorities on the key elements of a macroeconomic adjustment program.
  • The program will provide €10 billion in financial support for the sovereign in quarterly installments, over a period of three years.
  • Cyprus’ second-largest bank will be liquidated, and depositors over the €100K insurance limit will take losses.
  • Outside of Cyprus, the main risk is that depositors in other euro zone countries could withdraw their deposits from banks that are perceived to be weak. As long as this does not trigger a massive capital outflow in that country, the systemic consequences of Cyprus’ crisis should remain minimal.

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Global Insight Weekly - March 22, 2013

Global malaise is also occurring at the corporate level and could affect the upcoming earnings season. Two bellwether multinationals, FedEx and Caterpillar, surprised analysts with negative results during the week. Both are highly exposed to the global economy, meaning they have tentacles in multiple industries, and have significant exposure to North America, Asia, and Europe.

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Optimal Asset Allocation in Retirement: A Downside Risk Perspective

Once an individual has retired, asset allocation becomes a critical investment decision. Unfortunately, there is no consensus on what the optimal allocation should be for retirees of varying age, gender, and risk tolerance. This study analyzes the allocation question through a focus on the downside risks created by uncertainty over investment returns and life expectancy. We find that the range of appropriate equity asset allocations in retirement is strikingly low compared with those of typical lifecycle and retirement funds now in the marketplace. In fact, for retirement portfolios whose primary goal is to minimize the risk of depletion and sustain withdrawals, optimal equity allocations range between 5% and 25%. This quite conservative level of equity holdings changes little even when we significantly change our assumptions on capital market returns. We even find that more aggressive equity allocations, those that still retain some focus on depletion risk but also seek to provide substantial bequests to heirs, are also relatively conservative. The study suggests, in short, that the higher equity allocations used in many popular retirement investment products today significantly underestimate the risks that these higher-volatility portfolios pose to the sustainability of retirees’ savings and to the incomes they depend on.

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Strengthening Investor Protection In Ontario

  • The investor population of Ontario is generally older and more educated: Over 70% are over 44 years of age, and twothirds have graduated from university. Younger investors (less than 35 years of age) are of interest, as they are laying the groundwork of their financial future. These younger investors have smaller portfolios (19% have less than $50,000) but at the same time, have higher incomes (58% make more than $90,000 yearly). They are less engaged overall, and need more support.
  • Investors generally trust their financial advisers, but advisers need to give their clients greater assurance that their best interest is being served: Investors are somewhat skeptical about what their advisers are telling them: only 20% strongly agree that they trust their adviser’s advice, and 25% strongly agree (39% agree – 64% overall) that advice is influenced by adviser compensation.
  • There is strong support for a best interest duty: Support for a best interest duty is strong across all groups, with 59% strongly agreeing that it is needed (34% agree and 93% agree overall). Large portfolio investors are more likely to strongly agree that a best interest duty is needed, with 63% of those with $250,000+ portfolios strongly agreeing. In-person dialogue participants were even more supportive of a best interest duty, with 71% strongly agreeing this is needed.

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2012: Annual Global Flows Report

Bonds Continue to Shine and Equities Continue to Bleed Assets

The Canadian mutual fund industry had a positive year in 2012 as investors added CAD 15.9 billion in long-term estimated net flows. The 3.16% organic growth rate was significantly better than 2011’s 1.75% advance. Over the past 10 years, long-term annual flows have averaged CAD 10.8 billion, including 2008’s dreadful CAD 27.6 billion outflow. By way of comparison, U.S. long-term funds grew at a 3.38% clip.

As has been the case since the fallout of 2008, when no asset class was spared, fixed-income and allocation funds have carried the day for the industry as investors have opted for the perceived safety of bonds and professionally managed multi-asset products. Since 2009 investors have poured more than CAD 56.7 billion into bond funds, and another CAD 35.3 billion into allocation funds.

Meanwhile, investors yanked CAD 45.9 billion out of equity mutual funds over the same period (CAD 65 billion counting the roughly CAD 19 billion that headed for the exit in 2008). Investor confidence in stocks was clearly shaken in the 2008 financial crisis, and investors have yet to regain a taste for actively managed equity mutual funds. 2012 marks the fifth consecutive year of significant outflows from equity funds, from which an average of CAD 13 billion has bled per year.

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The Weekly Bottom Line - March 15, 2013

Canada

  • The Canadian economy has been stuck in a rut over the past year, and as a result, clocked in at a measly 1.8% annual average in 2012. Modest economic growth will persist for the first half of 2013. In spite of the muted outlook, there have been some positive economic developments to shine light on.
  • Last Friday, job creation blew past expectations in February with 50,700 net new positions. Strength was fairly broad-based across sectors, with full-time jobs doing much of the heavy lifting. Hiring intentions among small business owners is also stronger than is typical for this time of year.
  • Downside domestic risks for the near-term Canadian outlook are less intense than was the case a few months ago. New home construction has come down from 2012 highs; resale home price growth has ebbed of late. The pace of household debt accumulation is also retreating, although the debt-to-income ratio remains elevated.

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Long-Run Rate Of Return For Canadian Home Prices - Special Report

Highlights:

  • With the slowdown in the Canadian housing market well entrenched, many are worried about the future value of their homes. This is not surprising as real estate is the largest financial asset most Canadians have in their possession.
  • The housing market is prone to cyclical ups and downs and we should embark on a gradual, modest, downward adjustment over the next three years.
  • We project a 3.5% annual rate of return on real estate to prevail beyond 2015 – this is the long-run rate of increase for home prices in Canada. However, this pace will be moderately lower than they have been historically (5.4%).
  • A string of lacklustre performances over the next few years will mean that the annual rate of return for real estate in nominal terms will be roughly 2% over the next decade. In other words, home price gains should simply match the pace of inflation.
  • The long-run rate of return for home prices is primarily driven by macroeconomic fundamentals, such as income and economic growth, and demographics (e.g., population and household formation).
  • Structural changes, including an ageing populace and the number of immigrants as a share of total homebuyers, could influence real estate returns. However, the literature is mixed on whether these changes represent an upside or downside risk to our 3.5% status-quo projection.

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Global Insight Weekly - March 8, 2013

  • The Dow Jones Industrial Average rallied to a new all-time high on Tuesday and added to its gains each session that followed.
  • Made in Japan: The Japanese equity market has rallied powerfully on hopes about “Abenomics,” and has been aided by a much-weaker yen. But what really drives the yen over the long term? (page 2)
  • Global Roundup: Overview of Canada’s strong employment report, central bank meetings in Europe, activity in Chinese property stocks, and an important pledge by the BOJ governor nominee. (pages 3-4)

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The Weekly Bottom Line - March 8, 2013

Canada

  • The Canadian economy created 50,000 jobs in February; the unemployment rate held steady at 7.0%.
  • After a sharp drop in January, housing starts bounced back last month to 180,000. However, the downward trend is likely to continue.
  • The international trade deficit narrowed in February, as exports grew faster than imports.
  • The Bank of Canada held the overnight rate unchanged at 1.00%, but had a more dovish tone in its communiqué, suggesting lower for longer interest rates.
  • The Canadian dollar hit an 8-month low following the Bank of Canada announcement. Despite a rebound following the upbeat data reported on Friday, more weakness is likely in store for the loonie in the near term.

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Month in review: February 2013

Economic data released during the month suggested that a U.S. recovery continues to gain traction, while growth in Canada appears to be headed in the opposite direction. In Asia, developments in Japan have garnered the attention of investors as the yen’s decline against the dollar and the euro resulted in accusations of currency manipulation and speculation of a possible ‘currency war’. Elsewhere, Italy’s inconclusive election reignited concerns regarding the future of Europe’s debt crisis in the face of prolonged political instability.

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The U.S. Business Cycle in the Context of the Yo-Yo Years

Economic cycles are an inherent part of how every market-oriented economy in the world operates, and what happens around cycle turning points has always been ECRI's primary focus.

From the perspective, with the onset of the Great Recession - even before the Lehman Brothers collapse - we started to see some striking patterns emerge. In the summer of 2008, we recognized that we were on the cusp of the worst global recession since the early 1980s, and then we got Lehman.

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Market Indices, Asset & Risk Management Numbers: February 28, 2013

Great summary of investment performance - monthly, quarter, Year to date and 1-year stats.

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The Weekly Bottom Line - March 1, 2013

Canada

  • Canadian economic data over the past week showed that 2012 ended with a whimper. GDP grew by only 0.6%-annualized in Q4, and corporate profit growth was also quite weak.
  • However, we actually heaved a sigh of relief – it could have been worse. Domestic demand was quite resilient in Q4, and net exports made a small contribution to growth. Small businesses in Canada also became more optimistic in February.
  • Moreover, one of the most encouraging pieces of data for Canada, came from the U.S. this morning. The better-than-expected reading on manufacturing sentiment is a positive for Canada’s exporters, and should help growth improve as 2013 unfolds.

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