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Odette Morin

Odette Morin

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What to expect with Trump as the new US President?

New York, NY USA - July 16, 2016: Donald Trump speaks during introduction Governor Mike Pence as running for vice president at Hilton hotel Midtown Manhattan

After a long and bitter campaign, the Donald Trump Republican party has firmly taken control of Capitol Hill, winning the Presidency, the Senate and the House of Representatives. While portfolio managers were positioned for a Hillary Clinton victory, the markets have been positive to a clear, uncontested election result and a pro-business president.

The market rally that followed the election, was almost as shocking as Trump’s win.  The Dow futures were 700points down as the Trump majority was forming up.  However, U.S. stocks rose sharply at market opening the next day on speculation that Donald Trump and a Republican-controlled Congress will pursue business-friendly policies.  The markets will be watching closely to see how Trump starts putting policy specifics to his broad plans.

President-elect Trump’s policies will be very different from President Obama’s. The primary beneficiaries of the Trump victory will be defence, infrastructure, engineering/construction and more domestically focussed companies. We also expect Trump’s victory to be slightly positive for oil prices.

The markets will be closely watching now for signs that Trump adopts a statesmanlike tone and selects a credible cabinet. . Remember that while Trump is president, he does not have a free reign.  He is constitutionally constrained by congress consisting of the senate and the house of representatives.

We expect higher volatility than normal as we go through the end of the year and into the first quarter. That’s where remaining disciplined with your asset allocation is really important.

Don’t hesitate to contact us should you want to discuss this event as it relates to your portfolio.  Either myself, Terry, Anthony or Frank will be happy to speak with you.

Below are the before and after November 8 election markets numbers.

Nov 8             Nov 10        Percentage Change
TSX             14,656            14,744            +0.60%
Dow Jones  18,332             18,807            +2.59%
S&P 500       2139                2167             +1.31%
Gold            $1247               1258             -1.26%
CDN$          $0.7516USD    $74.22USD     -1.25%

 

 

 

 

Vancouver’s Housing-Bubble Risk Unmatched on the Planet, says Swiss Bank

There is currently a certain fatigue felt in Vancouver regarding our Real Estate market. We get bombarded daily now by shocking news of unethical shadow sales deals, risky shadow lending, money laundering, property bought and sold like commodities, empty properties that could ease the scarce rental market and foreign buyers avoiding capital gains taxes on real estate gains. Many younger Vancouverites have given up hoping to ever own a home, while others have become instant millionaires recently by selling their west-end condos as a group to developers.

While this is happening, you can see cranes and construction at every corner of the city. Building towers are going up, and single family homes are being torn down to be replaced by multi-family dwellings. It’s everywhere and it is scary to see prices continue to go up, despite the common wisdom that this does not make sense. One of my clients is an architect for one of the prominent Vancouver developers. I asked him recently what his firm was doing right now in view of the current market. He responded: “We continue to build as fast as we can go”.

The recent foreign buyer taxes introduced by our city and government to attempt to cool it off seem to be working somewhat. It is still too early to tell, but this Greater Vancouver Real Estate sales price graph shows that prices have come down in August. Numbers of sales are also down.

gvrd-real-estate-graph

To gain some perspective, I looked at the Toronto real estate crash in the late 80s. I found a lot of similarities to our current situation.

According to Toronto Real Estate Board data, between 1985 and 1989 the average price of a house in the Greater Toronto Area (GTA) increased by 113%. Low unemployment, large inflow of immigrants and investment speculation helped to inflate the bubble.

“In (the) late 80s everyone thought that the housing prices were going to rise indefinitely. More people jumped into the market hoping to make a fortune causing an artificial increase in demand. Suddenly housing became scarce, which further increased the price. Developers decided to profit on this illusive scarcity by building condos left and right – many of them in downtown Toronto. During the peak of the bubble the borrowing cost started increasing and the 5-year fixed mortgage reached 12.7%. Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 the  average price of a house in GTA  declined by 40% adjusted for inflation. Downtown of Toronto was hit the worst with over 50% decline in value of a home. Unaccounted for inflation, it took 13 years for the average house price to recover in the GTA.” (*)

Looking at the graph above, similar drops happened in Vancouver in the 80s and 90s.

Real estate markets are tightly influenced by interest rates. While current interest rates are far from the double-digits of the early 90s, a rise of 2% or 3% can have a dramatic impact, as I described in my interest rate article. When interest rates start rising, our real estate market will cool off, hopefully gradually.

So what can you do to prevent financial hardship? It is impossible to know if, and when, the real estate market will crash. The market could tumble next year or it could simply cool off gradually. We just don’t know.

So, to avoid financial distress, make sure to buy real estate for the long-term. Think with a 10-year window to make sure you can ride the potential downturn. Make sure that you can afford your mortgage, even if rates go up to 5% or 6%. Finally, only buy if your job is secure or you have sufficient short-term savings to be able to meet mortgage payments for at least 6 months in the event of a job loss or sickness.

Talk to us before buying a property. We can help you confirm whether your cash flow can safely cover the mortgage, property taxes, insurance, lifestyle and savings for retirement and children’s education.

 

(*) Read the full story here about the Toronto Real Estate bubble in the late 80s.

 

 

 

How Much is Too Much Equity?

how-do-you-feel-about-your-finances

When you come in for your annual review meeting, we tell you that you have 80% equity and – in some cases – you get concerned. Is that too much to be investing in the stock market, you ask? Shouldn’t you have more of safer fixed income especially as you get closer to retirement? These are valid questions.

The old investing rule of thumb was to have an equal amount of fixed income to your age.  So if you are 50, you should have an equal proportion of fixed income and equity.  This is now thought to be too conservative because of three main reasons:

  • We live longer, and we therefore have a longer time horizon and need more money to fund a longer retirement. Many now live now live beyond the 80-85 year life expectancy.
  • Fixed-income yields have plunged in past years, and are likely to stay very low in this low interest rate environment. If inflation is higher than the saving rate you get, you are actually “losing” money with a safer investment.
  • Dividends keep up with inflation, which is very important over the long-term, and also because many pension plans no longer guarantee inflation adjustments.

While stocks are more volatile in the short-term, they tend to rise over the long-term. The longer the holding period, the higher the probability that you will come out ahead. Morningstar data service, shows that the S&P500, for example, has produced positive returns in about 95% of rolling monthly 10-year holding periods from 1926 to 2015. For 15-year periods, the return was positive 99.8% of the time. That is why we always buy quality, diversify, and hold regardless of market sentiments.

So, how much equity and fixed income should you hold in your own portfolio?  It highly depends on your personal risk tolerance, as rated when you first became a client; also, it depends on whether you are retired & need income from your portfolio, or are still in the accumulation phase.

Other factors include how much other liquid savings you have on hand in case of an emergency, and if you also are part of a pension plan. Typically, we like our retired clients to have a minimum of 30% fixed income, and our younger clients only 20%. Therefore, 70% to 80% equity is normally what we recommend.

These are general guidelines. We look forward to discussing your personal asset allocation at your next annual review meeting.

 

 

 

Where are Interest Rates Headed, and Why Should You Care?

Text Interest rates on up trend arrow, with financial data visible on the background.

All eyes are on Janet Yellen, Chair of the US Federal Reserve, these days to try to anticipate where interest rates will go. For the United States, the talk is all about when and how high, not if.  In Canada, it is a different story. Bank of Canada Governor, Stephen Poloz, reiterated that rates are not expected to go up yet. Many analysts believe there won’t be a rate increase until some time in 2018. Our economy is not growing meaningfully enough, and there is no inflation to worry about. Rate increases are a monetary tool to tame rapid growth, and to contain inflation.

While low interest rates are good for Canadians’ pocket books, for now, eventually, rates will go up here in Canada too and this is nothing but bad news for those with too much debt. Unlike the Americans, Canadian debt levels have steadily been increasing in recent years. Raising rates too high or too quickly  risks a huge debt problem for many Canadians.

A recent report by credit monitor TransUnion shows that up to a million Canadians would suffer financial stress if rates increased by 1%. However, rates are likely to increase by 2 or 3%, not only 1%. The Bank of Canada’s own research, states that the Bank’s natural rate of interest is in the range of 3% to 4% (*). This means that the best bank rate to consumers would be in the 4% to 6% range. That kind of increase would translate to considerable economical damage, and would be devastating to real estate markets.

We should care very much about interest rates as they impact us in many ways. Our best word of advice is to use current low interest rates to reduce debt as much as possible. Make sure that you can easily afford a 5-6% interest rate on your mortgage, for example. Manage your credit responsibly, and borrow only what you can afford at the anticipated higher rate.

Rate increases will also have an effect on your investments. Make sure that your portfolio is well balanced, keep fixed income in the lower range of your target allocation and select dividend paying equities which will help keep up with inflation and reduce volatility. Finally, don’t miss your annual portfolio review. This is becoming more important as we approach these uncertain times. This is when we rebalance your portfolio and review your circumstances in light of the current economic environment.

(*) Globe & Mail – Unlike the Fed, the BofC is constrained by a paradox of household debt. Sept 22, 2016 Louis-Phillippe Rochon Professor at Laurentian University.

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.