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Monthly Archives: June 2016

Anthony Sabti

Post-Brexit Vote Analysis

 

The Results

Britain voted 51.9% to 48.1% in favor of leaving the EU, of which it has been a member since 1973.  The voter turnout was 72.2%.

Scotland and Northern Ireland voted strongly favour of remaining as part of the EU (62% and 55.8% respectively). England and Wales voted to leave by a relatively narrow margin. Voter turnout in these four nations was strongest in England (73%), followed by Wales at 71.7%; both Scotland and Northern Ireland saw voter turnout below 70%, lower than the 84.6% during the 2014 Scottish referendum.

The BBC link below breaks down the results with various maps and charts:

http://www.bbc.com/news/uk-politics-36616028

The Immediate Aftermath

The GBPUSD, which had traded higher before the vote (over $1.50) plunged a record 10% as the outcome of the referendum became clear. The currency touched a three-decade low of $1.3229, and is currently around $1.38.  In Canadian terms, The GDBCAD fell from around $1.90 to $1.72 and now sits at $1.77.

Rating agency S&P has already confirmed that the UK is likely to lose its final AAA credit rating.

David Cameron announced he will step down from his post by October.

Markets Today

Not surprisingly, Global financial markets sold off sharply early Friday morning. There has been a strong knee-jerk sell-off in risk assets.

The Nikkei (Japan) and Dax (Germany) were down 7.9% and 6.9% respectively.  The French CAC was down 6%.  Italian and Spanish markets posted their sharpest one-day drops ever, falling more than 12%.

London’s FTSE fell by 9% initially but has since reclaimed part of that drop to finish down 3.2%.  Some investors are speculating that the plunge in sterling could benefit Britain’s economy.  Some names in the UK financial sector fell as much as 30% before cutting losses in half later in the day.

The Toronto stock market (TSX) plunged more than 300 points within minutes of opening this morning but recovered slightly afterwards. The TSX ended down 239.5 points, or 1.69%, to 13,891.88.

The S&P 500 fell 3.6% to 2,037.35 in New York, the most since August 2015. The benchmark erased its gain for the year, which reached as much as 3.7% earlier this month. The Nasdaq Composite Index tumbled 4.1%, the most in almost five years.

The risk-off sentiment is also hitting commodity prices, driving oil down by 3.6% to $47.60 U.S. per barrel, putting further downward pressure on the Canadian dollar.

Gold prices benefited from the flight to safety, with prices rising to as high as $1,258 (U.S.) per ounce – the highest since early 2014.

What Happens Next?

As stated, Prime Minister David Cameron and head of the Remain campaign announced he will step down as leader of the Conservative party and be replaced by a leader of the Leave campaign within the next few months, before the Conservative Party Conference in early October.

The Bank of England’s contingency plans kick in – The UK will have two years to negotiate a deal with the EU.

According to European Commission President Juncker, Britain will have to negotiate withdrawal terms first, before talking about how the new relationship will work. In other words, there will be a deep dive into what other options or alternatives are available to the U.K. There is a web of issues around regulations and trade. Anti-EU parties in other countries will be watching closely, as an amicable split may fuel further efforts to exit the EU.

Impact on North America

The most immediate impact on the North American economy will come from today’s financial market volatility in the aftermath of the vote. The Federal Reserve has been very aware of global economic risks, and a Brexit qualifies, which rules out a July rate hike. A rate increase by December remains a possibility, if markets soon calm and the near-term economic fallout is minimal.

With Fed rate hikes now delayed even further, The Bank of Canada is expected to remain on hold until at least the end of 2017.  Consequently, global bond markets will be well supported, with yields likely drifting even lower in the near term.

The long-term economic consequences will be unclear for some time due to the two-year negotiation period.  However, the U.K accounts for a modest 3% of total U.S. trade and an even lesser 2.5% of Canadian trade. Such small shares and the likely modest impact on total trade suggest the direct risk to the North American economy is minimal.

In general, significant pullbacks in global stock markets tend to present opportunities for longer-term investors, although volatility can persist for weeks or months.  Many equity funds have been positioned conservatively and have been holding higher than normal cash positions in anticipation of these results.  This is when we would expect that cash to be deployed to buy companies at depressed prices.

Longer-Term Perspective

It is important to separate the short-term and long-term effects. Over the long run, the impact on the stock market and bond market should be considerably less.  The U.K. represents less than 3% of global GDP. These are still very early days, and developments in the relationship between the U.K. and EU are expected to play out slowly over many months or years.

The exit could cause the U.K. economy to meaningfully underperform, if not tip into recession.  The UK job market will likely suffer, particularly the financial services (which accounts for 8% of British GDP).   A number of global banks could potentially relocate some of their operations out of the UK.

The Eurozone will feel the biggest brunt of slower UK growth, as it sends roughly 16% of its total goods exports to the UK.

Foreign investment may decline as access to other EU markets could become much more limited. British goods trade with the EU account for 45% of exports and over 50% of imports.  And, the EU may not let go easily; they could make this difficult in order to discourage other countries from contemplating departure.

The issue of Scotland’s independence is also likely to again come to the fore, further weakening Britain’s
position, especially since the Scots voted heavily in favour of staying in the EU.

There are likely to be some positive offsetting impacts. UK domiciled industry may seek to move or extend operations within the union as quickly as possible, boosting EU investment. Similarly, EU firms that have deep ties to the UK could relocate or expand operations into the UK, offsetting the decline in investment due to increased uncertainty.

Overall, the impact should be somewhat negative due to higher tariffs, less immigration and the slight diminishment of London as a financial hub. This means that Brexit hardly prophecies economic stagnation for the U.K., though it does unhappily shave as much as a quarter percentage point off growth annually over the coming decade. Potential savings on transfers to Brussels and greater regulatory sovereignty are attractive, but do not constitute complete offsets. But the precise effect depends enormously on what sort of subsequent relationship the U.K. negotiates with the EU.

Bottom Line for Investors

This event will indeed lead to greater political uncertainty and financial volatility.  A UK separation from the EU will take years to negotiate.  Meanwhile, companies continue to do business much as they did before and the global economy continues on its path of slow but positive growth.

Your portfolios are globally diversified and are constructed to mitigate against volatility.  In fact, we expect many fund managers to take advantage of the current stock market decline and use it as an opportunity to buy quality companies at attractive prices.

If you have any questions about your investments, please feel free to contact us anytime.

Sources: TD Economics, Financial Post, BBC, Globe & Mail

Odette Morin

Get ready for the Brexit Boogeyman

Brexit Direction Sign

Start building your courage, we are in for a ride ahead of the June 23rd referendum date in the United Kingdom, when British citizens will vote on whether or not to remain part of the European Union. You can expect the markets to move downward a few percentage points leading to the vote, with polls indicating that the race is tight, and a deeper dip if the British vote in favour of leaving the EU.

Should you be spooked by the Brexit Boogeyman? Should we be taking some actions now to mitigate this risk?

The June 23rd referendum clearly represents uncertainty for markets, businesses and the central bank. Independent economists say a vote to leave the EU could cause a drop in the pound of as much as 20% and push the economy back into recession.

Manulife Asset Management’s Chief Economist, Megan Greene believes that the UK’s best and most likely path forward is to remain in the EU. “By doing so, it can try to reform the EU from within”. She explains why the alternatives to EU membership would all leave the UK less well-off and how a Brexit could potentially lead to a weaker pound sterling as well as looser monetary policies from the Bank of England. Interestingly, Ms Greene also notes that “…while Brexit may not be in the UK’s best interest, it might not be the unmitigated disaster that some fear”.

If Brexit occurs, the UK will negotiate some agreement that is mutually beneficial for the UK and the EU.  An agreement will be eventually reached, potentially, similar to the successful agreements with Sweden and Norway.

For investments however, the best buying opportunities come from trading against an emotional crowd. “This may be a buyable dip for those who have the courage to be greedy when others are fearful.  A week of two after the Brexit vote, the unknowns will have been ironed out and we will move forward with a plan.” Says Jani Ziedins from Cracked Market.

Capital Economics has been commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact of ‘Brexit’ on the British economy.

The in-depth analysis concluded that “although the impact of Brexit on the British economy is uncertain, we doubt that Britain’s long-term economic outlook hinges on it.”

Here is the full 47 pages report which covers the economic impacts of the most important elements of the Brexit debate.

Don’t let this uncertainty rattle your long-term focus.  Remain rational and avoid making risky bets.  Staying the course with your current long-term quality investments – within a balanced portfolio  – is always the safest course of action.

If you are in your saving years and have funds to invest, this dip may prove to be a great opportunity to enhance your returns.

 

Terry Broaders

Weekly Update June 13 2016

“It’s Hard To Be Humble When You’re As Great As I Am” -Muhammad Ali

 

TSX Falls On Friday

The Toronto Stock Exchange saw a triple-digit loss on its last trading day of the week in a decline led by energy companies as the benchmark price for crude slipped. The S&P/TSX composite index was down 202.48 points Friday at 14,037.54, led by the energy sector, which was down 3.8%. The metals and mining sector of the TSX slipped 3.29% and base metals stocks declined 3.02%. The Canadian dollar lost 0.27 of a U.S. cent to 78.39 cents US. That’s despite the fact that Statistics Canada reported that the economy gained 13,800 jobs in May, pushing the jobless rate down to 6.9%, its lowest level since last July.

In New York, markets were also down as uncertainty around global economic risks weighed on investors’ minds.  The Dow Jones industrial average was down 119.85 points at 17,865.34, the broader S&P 500 composite index slid 19.41 points to 2,096.07 and the Nasdaq composite fell 64.07 points to 4,894.55.  Some of the key risks that have traders worried include the upcoming referendum on June 23 that will determine whether the United Kingdom will exit the European Union, as well as uncertainty relating to June meetings of the U.S. Federal Reserve and the Bank of Japan..

 

Canadian Baby Boomers To Inherit $750 Billion In Next Decade 

Canadian baby boomers will inherit an estimated $750 billion in the next decade, according to a new CIBC Capital Markets report. It will mark the country’s largest-ever wealth transfer and is expected to alter the retirement landscape. There are currently more than 2.5 million people over the age of 75 in Canada, about 45% of whom are widowed, according to the report. That’s a 25% spike from the level seen 10 years ago.

According to the report, just over half of Canadians between 50 and 75 have received an inheritance. Of those, half received it within the past decade. The average inheritance was $180,000, with British Columbia leading the way in the amount of the average bequest. More money is going to people already in higher income brackets, the report found; Canadians who earn more than $100,000 inherited almost three times more on average than lower-income Canadians. Those with higher education levels also received more. About 40% of higher-income Canadians saved or invested their inheritance, while lower-income people tended to use the money for daily expenses, the report found.

 

Weekly Market Wrap Up as of June 10 2016

North America
The TSX closed at 14038, down -189 points or -1.33% over the past week. YTD the TSX is up 8.08%.
The DOW closed at 17865, up 58 points or 0.33% over the past week. YTD the DOW is up 2.53%.
The S&P closed at 2096, down -3 points or -0.14% over the past week. YTD the S&P is up 2.54%.
The Nasdaq closed at 4895, down -48 points or -0.97% over the past week. YTD the Nasdaq is down -2.24%.
Gold closed at 1277, up 28.00 points or 2.90% over the past week. YTD gold is up 20.59%.
Oil closed at 48.95, up 0.33 points or 0.68% over the past week. YTD oil is up 32.12%.
The USD/CAD closed at 1.277878, down -0.0168 points or -1.30% over the past week. YTD the USD/CAD is down -7.64%.

Europe/Asia
The MSCI closed at 1689, up 10 points or 0.60% over the past week. YTD the MSCI is up 1.56%.
The Euro Stoxx 50 closed at 2911, down -87 points or -2.90% over the past week. YTD the Euro Stoxx 50 is down -10.92%.
The FTSE closed at 6116, down -94 points or -1.51% over the past week. YTD the FTSE is down -2.02%.
The CAC closed at 4307, down -115 points or -2.60% over the past week. YTD the CAC is down -7.12%.
DAX closed at 9835, down -268.00 points or -2.65% over the past week. YTD DAX is down -8.45%.
Nikkei closed at 16601, down -41.00 points or -0.25% over the past week. YTD Nikkei is down -12.78%.
The Shanghai closed at 2927, down -12.0000 points or -0.41% over the past week. YTD the Shanghai is down -17.29%.

 

Sources: Bloomberg; Investment Executive;  CIBC; advisor.ca,

Terry Broaders

Weekly Update June 7 2016

“It Was June and The World Smelled of Roses” -Maud Hart Lovelace

 

TSX Enters Bull Market Territory

The Toronto stock market entered bull market territory Friday June 3, rising more than 20% over its lowest close in 2016 to date.  The S&P/TSX composite index gained 89.79 points at 14,226.78, a 20.1% jump from its Jan. 20 close of 11,843.11.   The loonie rose 0.95 of a U.S. cent to 77.26 cents US as the greenback faded against most major currencies following a disappointing American jobs report. U.S. markets closed in the red as investors grappled with the lower than expected jobs numbers for May. The lower-than-expected labour figures were good news for gold prices though as investors bet on the Fed delaying a rise in interest rates.
The Dow Jones industrial average was down 31.50 points at 17,807.06, while the broader S&P 500 lost 6.13 points to 2,099.13 and the Nasdaq stepped back 28.84 points to 4,942.52. In commodities, the August contract for gold rose US$30.30 to US$1,242.90 a troy ounce, the July contract for benchmark North American oil fell 55 cents to US$48.62 a barrel, while July natural gas fell 0.7 cents at US$2.398 per mmBTU.

 

Clients More Reliant On Financial Advisors, Surveys Find 

The Canadian Securities Administrators’ (CSA) 2016 edition of its investor education survey found that a growing number of Canadians are relying on advisors, with 56% reporting that they utilize an advisor, up from 43% in 2006 when the CSA first carried out the survey. Moreover, investors cited advisors as their primary source of investing information and credited their advisors as the reason for reassessing their risk tolerance in the past year. The CSA survey found that 61% reviewed their level of risk tolerance during the year, up from 49% in 2012.
In addition, a survey from France-based Natixis Global Asset Management has also found that advice is the most important factor driving Canadian investors’ financial decisions, as 43% cited advice vs 21% who credited online research. The Natixis survey also found that investors generally value that advice, with 63% saying that those with advisors are more likely to reach their financial goals and 62% saying that advice is worth the cost.
The CSA survey was carried out by Innovative Research Group, which polled 4,298 Canadian adults online from Feb. 10-20. The Natixis survey was part of a larger global study of more than 7,100 investors in 21 countries. The Canadian component canvassed 300 individual investors with a minimum of $258,000 (US$200,000) in investable assets. It was also carried out online in February.

 

Sources: Bloomberg; Investment Executive;  advisor.ca,