Until people are confronted with the need to generate income, they won’t accurately appraise their alternatives. When presented with five ways of capitalizing on home equity, four out of 10 were unwilling to consider any option. Among those who were willing to consider some of the options, the alternatives that looked best when assessing possible future behaviour did not correspond to what people have actually done in the past. Downsizing looks like a great idea in theory, but people are more likely to take a home equity line of credit instead. While it is clear that the decision to use home equity has a heavy emotional component, the findings make it clear that economics are the primary driver of action.
The biggest emotional decision is selling off a home and becoming a renter. The attitudinal data points to this conclusion. Based on past behaviour, we also know that some 44% of those who sold their home and moved into rentals were driven by either illness or other limitations on their mobility. It takes an enormous force, either economic and/or healthdriven, to cross the divide from homeowner to renter.
The market portfolio concept has a long history and dates back to the seminal work of Markowitz (1952). In that paper, Markowitz defines precisely what portfolio selection means: “the investor does (or should) consider expected return a desirable thing and variance of return an undesirable thing”. Indeed, Markowitz shows that an efficient portfolio is a portfolio that maximizes the expected return for a given level of risk (corresponding to the variance of return). Markowitz concludes that there is not only one optimal portfolio, but a set of optimal portfolios called the efficient frontier. By studying liquidity preference, Tobin (1958) shows that the efficient frontier becomes a straight line in the presence of a risk-free asset. If we consider a combination of an optimized portfolio and the risk-free asset, we obtain a straight line. But one straight line dominates all the other straight line and the efficient frontier. It is called the Capital Market Line (CML). In this case, optimal portfolios correspond to a combination of the riskfree asset and one particular efficient portfolio named the tangency portfolio. Sharpe (1964) summarizes the results of Markowitz and Tobin as follows: “the process of investment choice can be broken down into two phases: first, the choice of a unique optimum combination of risky assets; and second, a separate choice concerning the allocation of funds between such a combination and a single riskless asset”. This two-step procedure is today known as the Separation Theorem.
- This morning’s news that manufacturing shipments plunged 3.1% in December only added to what has been a long list of ugly economic data released over the last two weeks.
- Existing home sales for January provide hints that housing activity stabilized, following what was a sharp decline in the second half of last year triggered by tighter mortgage insurance rules introduced by the federal government on July 9th.
- Looking beyond the volatility in housing activity caused by the changes to mortgage insurance rules, there is no denying that the Canadian housing market has lost some steam and we are still of the view that the housing market will continue to unwind moderately over the next few years.
In value terms, gold demand in 2012 was US$236.4bn – an all-time high. Gold demand in value terms for the final quarter of the year was 6% higher year-on-year at US$66.2bn, marking the highest ever Q4 total.
Global gold demand in Q4 2012 was 1,195.9 tonnes(t), up 4% on the same quarter in 2011. In Q4 2012, the average gold price reached a record level of US$1,721.8/oz, up 1% on the previous record average price in Q3 2011. The average price during 2012 was US$1,669.0/oz, up 6% from US$1,571.5/oz in 2011,
Post-war baby boomers in major developed markets are retiring, withdrawing their accumulated savings from pension and welfare systems that states and corporations are increasingly unwilling to fund for younger generations with less aggregate savings to deploy. New flows in developed markets will come from investors who have grown up in less attractive market conditions than their babyboomer parents did; in emerging markets, younger investors making their first foray into investments will drive organic growth. Both demographic trends will impact product demand.
The number of intermediaries for asset management products and services—retail and private banks, insurers, brokerages, and asset consultants—continues to shrink as aftershocks from the financial crisis spur weaker players to consolidate. More importantly, as other lines of business (such as investment banking) become less lucrative for large global financial conglomerates, they have placed greater emphasis on operations that generate asset-based, non-cyclical cash flows—such as distributing asset management products and offering wealth management services. Intermediaries globally are becoming professional buyers: more selective in the asset managers they choose to distribute, more competitive in terms of the asset allocation advice they provide, and more expensive in terms of revenue-sharing and retrocessions.
Investors poured $86 billion into long-term open-end mutual funds in January. Combined with the $29 billion flow into exchange-traded funds, it was by far the largest one-month flow on record. All asset classes and each of the top 10 open-end fund providers in assets-under-management terms experienced inflows into long-term funds, including a $31 billion inflow into taxable-bond funds and an $18 billion inflow into international-stock funds. American Funds saw its first monthly inflow since June 2009. While it is too early to declare a paradigm shift in investor behavior, the magnitude of the flows is impressive.
Market observers have been waiting for a sign that the multiyear trend of investors buying fixed-income while selling U.S. stock funds would reverse in a so-called “great rotation.” Indeed, the $15 billion inflow to U.S. stock funds, the largest since 2004, plays into that story as does the strength of flows into active U.S. stock funds, which recorded their first inflow in 23 months. For the month, the S&P 500 gained 5.18% while the Barclays Aggregate Bond Index fell 0.70%. The slight rise in Treasury rates last month provided further evidence for those who are calling for a shift to equities.
Most equity markets languished in negative territory for much of the week as large mutual funds and pension funds stepped to the sidelines and fast-money hedge funds took profits following strong gains since late last year. However, a number of markets pared their losses or flipped into positive territory on Friday with the help of solid Chinese and U.S. economic data.
Chinese exports rose by a swift 25% pace in December versus the year-ago period, and consumer inflation declined to 2% in January from 2.5% (see page 4 for details).
- The Canadian labour market lost 22,000 net jobs in January and the unemployment rate edged down to 7.0%. January’s poor result should be seen as more of a pay-back for the outsized job gains seen in late 2012 when economic growth slowed. Job creation should come in around 10,000-20,000 in the next few months in a modest growth environment.
- At 160,600 units in January, housing starts came in at their lowest level since July 2009, down 18.5%. The sharp January decline is not that surprising following what is believed to have been an unsustainable pace of construction in 2012. Given the current cooling of the housing market in general, Canadians should not look to residential construction as a source of strength moving forward in 2013.
- While Canada’s international trade deficit narrowed in December to $0.9 billion, both exports (-0.9%) and imports (-2.8%) declined, painting a discouraging picture of Canada’s economy at the end of 2012. Although December’s slip is hardly uplifting, export growth should bounce back in 2013 matching increased demand from the U.S.
- 2012 was a very good year for the U.S. housing market. Home prices were up almost 8% and housing starts by close to 30%. The gains have prompted questions about whether the market has come too far too fast.
- An examination of long-term fundamentals suggests that housing still has considerable upside potential. Housing starts have only just surpassed the average trough experienced in previous housing cycles over the last fifty years; construction is still well under expected household formation; and, the improvement in housing affordability suggests little downside risk to home prices.
- The growth in construction has been led by multi-family units. In December, the level of multi-family starts surpassed the average over the last cycle running from 1995 to 2007. With continued pressure on the homeownership rate, rental demand is likely to remain strong and support continued gains in the multi-family sector.
Great summary of investment performance - monthly, quarter, Year to date and 1-year stats.
Despite some strength seen as the year came to a close, commodity prices were, on average, lower in 2012 relative to 2011. The weakness was driven largely by energy and industrial metals prices, as a global economic slowdown hit demand.
Looking ahead, economic activity around the globe is expected to pick up towards the end of this year and into next, which bodes well for commodity prices. As such, we expect the commodity complex as a whole to bounce back somewhat in 2013 – led by natural gas and lumber prices. In 2014, the uptrend in energy, base metals and forestry prices will remain largely intact, while precious metals and agriculture prices are expected to lose some ground.
- Domestic data releases dominate the docket this week with markets trading sideways on mixed news through Thursday, before advancing on today’s data.
- Advance estimate of U.S. fourth-quarter output shows GDP slipping marginally into contraction. But details appear very constructive, as private domestic demand steams ahead.
- Payrolls come in a notch below expectations, but revision to previous months solidifies the theme of ongoing job market recovery.
- January manufacturing reports lend further credence to the idea that the soft-patch is behind us. U.S. manufacturing ISM gains almost three points, and is away from the precipice. Chinese PMI remains in slight expansion while eurozone PMI indicates the declines in activity may be coming to an end.
- Canadian 10-year bond yields touch 2.00%, marking an 8-month high.
- TD Economics has pushed back the first Bank of Canada rate hike to the first quarter of 2014.
- November GDP surprises markets on the upside, growing by 0.3%.
- Small business owners were more optimistic in January, with near-term hiring intentions at a post-recession high.