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January 22, 2018

Asia Becoming Centre Of Financial World

By 2030, Asia will be the centre of the financial world driven by the economies of China and India, says Blair Reid, a partner and senior portfolio manager, multi-asset and income, at BlueBay Asset Management Inc. Speaking at the CPBI Ontario ‘Pension Investment Forecast,’ he said the world is changing. For 1,800 of the last 2,000 years, population size determined economic and financial dominance and the Far East was the dominant area. However, the industrial revolution changed that and by 1980 the world financial centre was in middle of the Atlantic Ocean between the U.S. and Europe. Today it is in the Middle East and moving quickly to Asia. It used to be the developed markets that were driving global growth. However, their influence is fading exponentially and all growth is coming from the emerging markets. He sees a bumpier road ahead where micro-country and sector issues play a bigger part in deciding which markets are not supported. Despite this, most portfolios are not changing as fast as the economy is, he said.

Smart Sustainability Marries ESG With Smart Beta

Tony Campos, director of ESG product management at FTSE Russell, apologizes for introducing a new term to the lexicon of responsible investing. However, he thinks ‘smart sustainability,’ the marriage of ESG and smart beta, is a developing trend. He told the ‘Smart Sustainability: ESG Integration into Passive Investing and Smart Beta Strategies’ session at its ‘Multi-Asset Seminar & Discussion’ that just as indexes have evolved over the past 15 years moving from information tools to investment strategies, interest in ESG (environment, social, and governance) evolved at the same time and it now aligns with smart beta by delivering rules based systems designed to achieve certain outcomes. Requests to include ESG in index construction can range from simple screens like tobacco and land mines right up to complete ESG inclusion. There is also a wide range of motivations from a desire to avoid long-term risk to doing societal good and improving performance. However, more client engagement now recognizes the need to invest in a world that is changing with ESG objectives that align with broader portfolio objectives as opposed to investing to change the world.

Risk Fails To Explain Security Worth

While many define risk as volatility and/or the expected change in the value of a security, Talbot Babineau, CEO of IBV Capital, sees things a bit differently. “The market assesses risk on the basis of volatility or the degree of change in the value of a security over time,” he says. While this might be useful in some cases to quantify, compare, model, and explain risk, it often does not reflect the reality of what the security is worth. This is the critical flaw with volatility ‒ it doesn’t consider what a security is worth, relative to what it’s currently trading for when it quantifies risk. Assessing and managing risk is the most important element of investing, he says, as how risk is defined has a material impact on how funds are invested and on the composition of returns. So, while many avoid volatile securities, since market participants associate volatility with risk, if the securities are attractively priced and exhibit the business characteristics, they are appealing.

Canada 'Favoured Market'

Canada is “the favoured market” due to its greater sector leverage to global growth and firming commodity prices, says GLC Asset Management Group’s ‘2018 Capital Market Outlook.’ It says Canada’s valuations are more reasonable than its global peers. As a result, GLC holds a positive view toward Canadian equities, believing financial conditions and the global economy have enough momentum to support Canada’s modest earnings growth target of 10 per cent coming from a broad swath of S&P/TSX sectors. With a solid 2018 dividend yield estimate of three per cent, it sees total returns in the neighborhood of seven per cent for 2018. Factors that should see the Canadian economy’s growth rate moderate in 2018 include the prospect of shrinking competitiveness due to a narrowing in U.S./Canadian corporate tax rate differentials; rising costs from carbon and other taxes, along with various provincial moves on minimum wages and regulations; and potential trade friction with the U.S. Even if NAFTA goes well, it says, the U.S. is moving toward a more protectionist stance.

Caution Issued On ICOs

The Autorité des marchés financiers (AMF) is cautioning investors about the risks associated with initial cryptocurrency or token offerings, more commonly known as ‘initial coin offerings (ICOs).’ ICOs are limited-time offerings over the Internet of digital ‘assets’ ‒ cryptocurrencies or tokens ‒ the use and eventual value of which are intrinsically tied to projects that, in many cases, are only at an early stage. Despite their growing popularity, cryptocurrencies and ICOs remain speculative, high-risk investments. Investors who are attracted to this type of market should make sure they fully understand how cryptocurrencies and ICOs work, know the many types of risk involved, and are prepared to potentially lose the entire value of their investment. Businesses that plan on issuing cryptocurrencies or tokens must understand and meet their obligations under securities laws. In particular, issuers and sponsors could be subject to prospectus and registration requirements.

Long-term Trends Influence Price Of Gold

The future price of gold is best understood through long-term irreversible trends, says Nick Barisheff, president and CEO of BMG Group Inc. Today’s macro trend changes are part of a looming tectonic shift that started decades ago and have not been adequately reported by the mainstream media, he said in his remarks at the Empire Club of Canada’s ‘Investment Outlook 2018.’ They can be found at Macro Trend Changes For Gold In 2018 And Beyond at the Private Wealth Canada website.

Bargaining Environment Growing Complex

Economic uncertainty, the need to contain costs, and legislative changes are all factors that will make the bargaining environment increasingly complex this year, says the Conference Board of Canada’s ‘Industrial Relations Outlook 2018.’ “Despite stellar economic growth and record-breaking employment numbers in 2017, a slower Canadian economy and lingering uncertainties in the global economic climate will create a challenging bargaining environment this year,” says Allison Cowan, its director of total rewards and labour relations research. “Legislative changes surrounding employment and labour standards, minimum wage increases, and the legalization of recreational cannabis bring a number of additional complexities to the bargaining table.” Wages continue to be the top bargaining issue for both management and unions in 2018. For unionized employees, the average projected negotiated wage increase for 2018 is 1.4 per cent, slightly lower than the 1.7 per cent increase for contracts negotiated in 2017. Private sector organizations are projecting higher increases (1.7 per cent) than are public sector organizations (1.1 per cent). Aside from wages, top priorities for unions include reducing precarious employment and improving health and safety provisions for members. For employers, flexible work practices are the second most important issue after wages, marking the first time that they have been a top-three negotiation issue for management in over a decade.

More Moderate Growth Coming

HSBC Canada Asset Management’s ‘Outlook for 2018’ sees a “less-than-Goldilocks economy” likely to deliver more moderate growth. It says after such a long economic expansion, many economists say a recession is due. However, it disagrees. Growth trends are still synchronized across advanced economies and emerging markets. Recession risk is effectively zero for now. Typical factors that drive recessions ‒ significant monetary tightening, economic imbalances, and external shocks ‒ are not present and leading economic indicators aren’t pointing to an imminent downturn. The key risk comes from a meaningful pick-up in inflation that forces policy-makers to tighten more aggressively. A major rate surprise might require a significant market adjustment.

Executives Missing Chance To Grow

Canadian executives may be missing the chance to help others and grow their careers in the process. In fact, 61 per cent of chief financial officers (CFOs) report they’ve never served as a mentor, finds a survey by Robert Half Management Resources. However, those who have been a mentor say it provides the internal satisfaction of helping others (32 per cent) and the opportunity to improve their leadership skills (27 per cent). Twenty-three per cent say it helps them build their professional network and 17 per cent say it keeps them current on industry trends. Those interested in becoming mentors should start by determining their value and specifying the type of advice and assistance they can provide. Then, they can seek opportunities both within their company and outside of it. Many groups actively seek mentors for their members, including university and high school alumni groups, community and philanthropic organizations, and professional and business associations.

Affluent Consumers Shifting To Discount Retailers

Affluent consumers – those making more than $100,000 annually – are becoming more price sensitive as they embrace industry disruptors such as artificial intelligence (AI), Amazon, and mobile technology to compare prices, says a survey by technology company First Insight. The survey finds that 42 per cent of affluent shoppers now frequently shop at discount retailers versus only 27 per cent at full-price retailers. Another 36 per cent say their discount shopping has increased. Twenty-one per cent of affluent shoppers report they are more inclined to visit online discount retailers, compared to only 12 per cent of overall respondents. The survey shows a vast majority of affluent consumers (74 per cent) check Amazon for products and pricing before looking elsewhere, versus 60 per cent of overall consumers. This is likely driven by the affluent shopper’s view that product pricing online is better. Half of affluent respondents felt that prices of products in physical retail stores are increasing, while slightly less (46 per cent) felt online retail stores’ pricing was increasing.

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January 15, 2018

Rosenberg Loves Japan

David Rosenberg, chief economist at Gluskin, Sheff + Associates Inc., loves Japan. And at a time when the economic cycle in North America is nearing an end, opportunities exist in economies like Japan to protect investment portfolios, he said in the ‘2018: The Year of the Dog (and Some Late Cycle Training)’ session at the Empire Club of Canada’s ‘Annual Investment Outlook.’ He said the current economic environment in North America is a once in a century event. The typical economic expansion lasts 60 months and the current one is in its 103rd month, the second longest expansionary period ever. This is abnormal, he said, and raises questions about how long it will last. In his view, the signals indicate this won’t be much longer. Consumer confidence is at peak levels and recessions usually follow this about a year later. As well, the U.S. Fed started tightening and raising interest rates in December of 2015. Since 1950, there have been 13 fed hiking cycles and 10 resulted in recession. Indeed, he said another two interest rate hikes and the yield curve will invert starting a recession. Credit spreads, unemployment rates, and other aspects all indicate the lateness of this cycle which may have another year left in the tank, he said. The role of the economist is to help investors understand where they are in the business cycle so they can protect their investment, he said. The later it is in a cycle means they need to be more cautious and take risk off the table by look for companies with earnings predictability not volatility. However, he said only North America is entering the last stages of this cycle and with 60 per cent of the rest of the world’s assets out there, investors need to “think outside the box. You can play the late cycle game in North America where the menu is limited or go outside to other economies which are earlier in the cycle.” Japan a good bet, he said, as it is out of recession and out of deflation. And its economy is not about a declining and aging population. It is about Sony, more women entering the labour force, and the number of foreigners working in Japan increasing. All of this is generating income and Japanese profit margins are at all-time highs and rising. Yet, its stock market is still 40 per cent below peak and only just starting to break out. Japan is under-owned, under-appreciated, and under-valued. And this is not just a 2018 story, it is a secular theme which will go beyond this year, he said.

Social Stability Biggest Threat To Economy

Declining social stability is the biggest long-term threat to the global economy, says Eric Winograd, senior economist ‒ global economics research at AB (Alliance Bernstein). Speaking at its ‘2018 Economic Outlook,’ he said the coming year will see more of the same in terms of economic performance with growth in aggregate the same as last year. He said the economy for the past three years has been in a high growth/low inflation business cycle. In this benign environment, growth is pretty good. And the economy is doing well because it is a global story, not just a U.S. story. Manufacturing and world trade are starting to pick up which means “we can expect more positive growth over the next couple of years.” However, there are secular trends that could change everything. Consumers are carrying large debt loads which are easily financed at low interest rates, but what happens if rates rise, he asked. Demographics trends suggest lower growth and inflation over the longer term with more elderly dependents being supported by a smaller group of younger workers and inflation kept low to reduce its impact on fixed incomes in retirement. And the elephant in the room is rising inequality which could lead to populism and generate poor macroeconomic outcomes. Populism can be left wing, right wing, or some combination, but it leads to unpredictable policy outcomes and thus limits growth, he said. Up until 2002, corporate profit growth rose at the same as employee pay. However, even with a depression since then that crushed profits, profits have taken off, rising must faster than income. The corporate sector is increasingly owned by the rich and concentrated gains by the wealthiest don’t fully pass through to consumption as the rich have a lower marginal propensity to consume. The question is will firms spend the benefit of tax cuts on wages or on dividends and buybacks. Recent history suggests the latter, he said. This raises a risk of losing that social harmony that “when times are good everyone wins.” In fact, the purpose of monetary policy is to keep the economy stable so everyone goes with the system and no-one is protesting in the streets. This will be hard to do in the current environment, he said.

Shift To Real Gold Could Drive Up Price

Shifting away from paper gold to actual physical bullion could drive the price of gold from its current $1,330 an ounce to more than $10,000 an ounce, says Nick Barisheff, president and CEO of BMG Group Inc. Speaking at the Empire Club of Canada’s ‘Annual Investment Outlook’ on ‘Macro Trend Changes for Gold in 2018 and Beyond’, he said suppression of gold and silver prices is no longer a conspiracy theory and manipulation of the gold price has moved out of theory into mainstream. In fact, a law suit in North America against six major bullion banks has been allowed to proceed and one of the defendants is looking to settle and assist the plaintiffs in their legal action. Much of the problem is that trading in gold is being done through futures and derivatives where the sellers never actually own bullion. This means the amount of paper gold dwarfs actual bullion which is forcing the price down, he said. Condition are in place for a major market correction which will result in a massive increase in prices of gold as investors flock to its historic safety, he said.

Economy Favours Equities

The global economy has enough momentum and inflation and financial conditions will remain accommodative long enough that they continue to favour equities over fixed income, says GLC Asset Management Group’s ‘2018 Capital Market Outlook,’ suggesting that investors moderate their overweight in equities and underweight in fixed income. “Today, investor, business and consumer optimism is high. Yet, as a natural progression, the further along the economy rolls, the harder it becomes for conditions to improve. Eventually a normal slowing of the economy is healthy and to be expected” says Brent Joyce, GLC’s chief investment strategist. The report lays out a series of late cycle economic signs that highlight a greater degree of uncertainty for capital markets. “At the current pace, we see supportive conditions lasting long enough that we believe it is too soon to move to a neutral stance, but caution is warranted and we need to be nimble in our investment positioning,” he says.

Hedge Fund Returns Significant

The global hedge fund industry performed strongly in 2017 with aggregate returns significantly higher than the previous two years, says eVestment’s monthly ‘Hedge Fund Industry Performance Report.’ Aggregate returns for the year were 8.83 per cent compared with 5.7 per cent the previous year and a loss of 0.71 per cent in 2015. Hedge funds focused on India and China were the strongest overall performers in the industry in 2017. India-focused funds returned 35.01 per cent for the year, compared to 4.53 per cent the previous year. China-focused hedge funds came a close second, returning 34.82 per cent in 2017, up from a loss of 5.39 per cent the previous year. Among primary markets, equity-focused funds were strong performers in 2017, returning 13.14 per cent for the year.

Real Estate Promises Strong Performance

Global real estate investment trusts (REITs) are expected to deliver returns of between eight to 10 per cent in the year ahead, says Timbercreek’s ‘2018 Market Outlook.’ It sees strong performance across many markets including Canada and the United States. Within the Canadian real estate sector, the report says the outlook for the sector remains positive, particularly for REITs that own office and retail assets focused in urban areas such as Toronto, ON; Montreal, QC; and Vancouver, BC. REITs are expected to add further value of existing property by creating mixed use assets where each use – retail, residential, and office – virtuously supports each other. It believes Canadian small cap REITs and REITs that own assets internationally (in Europe or the U.S.) are fundamentally mispriced and poised to deliver better than average returns in 2018. “We anticipate that this year’s market conditions will be favourable for global real estate securities as valuations remain attractive, both on an absolute and a relative basis, with global REITs trading below the 10-year global equities average – levels not seen since 2008-2009,” says Corrado Russo, senior managing director, investments and global head of securities, at Timbercreek. “These factors, when combined with projected dividend growth, should positively influence global REIT share prices in 2018.”

ETF Assets Grew In 2017

Assets invested in ETFs listed in Canada increased by 38.2 per cent during 2017 to reach a new high of US$117 billion at the end of December, says ETFGI’s December 2017 Canada ETF and ETP industry insights report. Assets invested in Canadian-listed ETFs grew by a record US$32.3 billion during 2017, eclipsing the previous record of US$19.8 billion set in 2016. The increase of 38.2 per cent, from US$84.6 billion at the end of 2016, also represents the greatest growth in assets since 2009 when markets recovered following the 2008 financial crisis. During 2017, ETFs listed in Canada saw record net inflows of US$18.9 billion; 48.5 per cent more than net inflows for 2016 and 44.3 per cent more than the previous record set in 2015.

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January 8, 2018

CEO Pay 209 Times More Than Average Worker

For the first time, Canada’s 100 highest paid CEOs netted 209 times more than the average worker made in 2016, says a report from the Canadian Centre for Policy Alternatives (CCPA). The report shows the country’s highest 100 paid CEOs on the S&P/TSX Composite Index now make, on average, $10.4 million ‒ 209 times the average income of $49,738, up from 193 times more in 2015. “Canada’s corporate executives were among the loudest critics of a new $15 minimum wage in provinces like Ontario and Alberta, meanwhile the highest paid among them were raking in record-breaking earnings,” says David Macdonald, author of the report and senior economist at CCPA. “CEOs are making 316 times more than someone who makes $15 an hour. If shareholders can afford this year’s CEO pay hike, they should absolutely be endorsing higher wages at the bottom as well.” The report finds the average CEO pay shot up eight per cent over 2016 and represents a new high in this data series since the 2008 global recession. On average, base pay made up only 11 per cent of a CEO's compensation. The lion's share came from share grants (33 per cent), bonuses (26 per cent), and stock options (15 per cent). He says one way to help shrink the inequality gap is for the federal government to tax top earners at a higher rate.

Increasing Risks Ahead For Business Leaders

Canadian business leaders and entrepreneurs are facing an economy that is increasingly complex and unpredictable, says a report by Borden Ladner Gervais. Its ‘Top 10 Legal Risks for Business in 2018’ report shows they are not only affected by the policies of Canada’s federal and provincial governments, but also by international changes such as the rise of populism and protectionism. This combination is bound to raise the level of uncertainty for businesses and have serious impacts on the economy, says the report. In its most recent Economic Outlook, the Organization for Economic Co-Operation and Development (OECD) states that the world economy has strengthened in 2017 and that its annual growth should improve slightly in 2018. However, long-term challenges may prevent the economy from reaching its full potential. On a national level, many challenges are facing Canadian business. OECD data shows the Canadian economy bouncing back to three per cent growth rate last year, before slowing to 2.1 per cent this year and 1.9 per cent in 2019, as policy stimulus dwindles down. In addition, the cost of doing business in Canada is constantly increasing at a time when other jurisdictions are reforming their tax systems to become more competitive. It says 2018 will be a year when Canadian business must navigate through unchartered territory as new challenges and opportunities are arising concurrently, making it difficult for businesses to adapt successfully.

Mercedes-Benz Achieves Strong Sales

Mercedes-Benz Canada had total sales of 52,298 passenger vehicles, vans, and smart units in 2017, an 8.2 per cent increase over sales of 48,320 in 2016. Sales of Mercedes-Benz passenger cars and luxury light trucks equalled 45,456, up 12.2 per cent from 40,526 the previous year. This total was divided almost evenly between the two segments with 22,781 (+7.2 per cent year over year) passenger cars and 22,675 (+17.6 per cent) luxury light trucks. The new E-Class Coupe and Cabriolet saw the most significant gains in the passenger car segment at 33.1 per cent over 2016. In luxury light trucks, the GLC SUV and Coupe together had an 86.3 per cent increase in sales over 2016. Mercedes-AMG sales were 10,124 units in 2017, a 50.6 per cent increase over sales of 6,723 in 2016. The Mercedes-AMG unit sales have accounted for an increasingly large proportion of overall sales over the years; in 2014, the brand represented six per cent of total Mercedes-Benz passenger vehicle sales in Canada, while in 2017 it constituted 22.3 per cent of overall sales.

Robust Returns Won’t Return

Equities will continue to perform well in this year, but without the robust returns of 2017, says UBS Asset Management’s 2018 investment forecast. It also says that although the global equity markets have not suffered a major drawdown for an unusually long period, the risk of recession in the U.S. and other developed nations is low and equities globally remain attractively valued. The report says that European Central Bank (ECB) policy, improving consumer and business sentiment, accelerating credit growth, and a healthier banking sector are all contributing to the recovery in Europe. Although geopolitical risks in the Eurozone have lessened near-term, they have not entirely disappeared, citing 2018’s elections in Italy as the most obvious potential flash point. For the U.S. economy, there is upside to current expectations for U.S. economic growth and corporate profitability from corporate and personal tax reform with events in Washington likely a key focus for investors in the coming months.

Fund Indices Improved Last Year

Forty-one of the 44 Morningstar Research Inc. fund indices increased during the calendar year, including 12 indices that increased by 10 per cent or more. The best performer among the fund indices was the one that tracks the Greater China Equity category, with a 35.9 per cent increase, mirroring the 36 per cent increase of Hong Kong’s Hang Seng Index. Funds in this category that hedge their currency exposure will likely outperform their peers that do not since the Hong Kong dollar depreciated by 7.3 per cent against the Canadian dollar during the year. European equity funds benefited from a combination of strong market performance and favourable currency movements and the Morningstar European Equity Fund Index posted a 14.6 per cent increase for the year. In the United States, the S&P 500 Index posted a total return of 21.8 per cent ‒ its ninth consecutive calendar year in positive territory and best performance since 2013. However, Canadian fund investors only captured a fraction of this gain as the Morningstar U.S. Equity Fund Index increased 13.2 per cent for the year, hampered by the loonie’s seven per cent appreciation against the U.S. dollar. Domestic equity funds had positive results for the year, but trailed their foreign counterparts. The Morningstar Canadian Equity Fund Index increased 7.7 per cent, underperforming the benchmark S&P/TSX Composite Index which had a total return of 9.1 per cent, while the fund indices that track the Canadian dividend and income equity and Canadian small/mid cap equity categories were up 7.9 per cent and 3.2 per cent, respectively. Despite the interest rate hikes enacted by central banks in many countries including Canada and the United States, seven of the eight fund indices that track fixed income categories increased in 2017. By far the best-performing fund index in this area was preferred share fixed income with a 14.1 per cent increase.

Canadian Assets Hit Record

Assets invested in ETFs listed in Canada increased by a record $28.3 billion during the first 11 months of 2017, the greatest annual increase on record, to reach a new high of US$113 billion at the end of November, says ETFGI. Its November 2017, Canada ETF and ETP industry insights report shows assets invested in ETFs grew by 33.5 per cent from $84.6 billion at the end of 2016. With one month of 2017 still to go, the increase of $28.3 billion far surpassed the previous record of $19.8 billion for the whole of 2016. If the trend continues through December, 2017 is also on track to see the greatest percentage increase in assets since 2009 when markets recovered following the 2008 financial crisis.

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