By Miles Clyne
I often state that there are two primary factors that move the market either up or down; those are natural disasters and political events.
2016 was a strong reminder of the impact of these factors:
• Death of Fidel Castro
• OPEC and key non-OPEC producers align in production cut
• The end of a three decade lower drift in US treasury rates
• Cubs win World Series
Amidst all this political chaos, the market moved higher to virtually everyone’s surprise, notwithstanding professional money managers. Staying defensive seemed prudent but proved to be wrong. I’ll be the first to admit I was in this camp.
Hindsight is just that, so what about 2017? I think we will get tired very shortly hearing about the “Trump Era” and what will happen. But if Mr. Trump follows through on his rhetoric, Canadians should see a benefit.
• A positive boost to non-energy exports from a weaker dollar
• Better business investment as a result of restarted oil projects
• An overextended Canadian consumer with high personal debt levels could restrain growth
• Canada should lag the US economy, but markets could perform on par with the US as Canadian corporate earnings growth should benefit from stronger oil prices
• Canadian preferred shares, which have performed poorly as interest rates fell over the past few years, could do well if interest rates move higher. The rate reset preferred shares should be the better performing sector of the preferred share market given they typically perform well if interest rates rise.
International developed markets remain foggy at best as to what 2017 will bring:
• Elections in France and Germany will test the extent of “populist” tendencies of the electorate
• Invocation of Article 50 of the Lisbon Agreement by the UK - how much will this affect the real EU economy?
China was an economy of concern in 2016 but for 2017 the mood is changing.
• An indicator of economic growth based on actual output levels (such as electricity use, passenger traffic, freight traffic and housing activity) that does not rely on official data confirms there was a sharp growth in activity in the fall of 2016. According to Capital Economics China Activity Report in December 2016, the Chinese economy grew by an estimated 6.5% year-over-year in November.
• This could bode well for Canada as a supplier of raw materials.
We believe that portfolio positioning in 2017 will require a more tactical approach. This would include:
• Overweight equities over bonds
• Overweight North American equities
• Overweight securities that favour the stimulus effects of a Trump administration
Here is the catch. As stated in the opening paragraph, two major catalysts that impact all markets are natural disasters and politics. Neither are predictable. Investors need to focus on strategies that have the most potential. I believe a tactical approach proves itself too frequently to be ignored. Traditional money management that maintains fixed asset allocations often struggles in the best of markets. In modern times where money can move far more swiftly than ever before, maintaining traditional strategies will be even harder pressed to perform.
All the best in 2017, may the markets be with you.