Month: June 2017

5 common mistakes when working with an advisor

Special to the Financial Independence Hub

Canadians are often faced with complex and nondescript investment products that can be overwhelming.  As such, most people need professional advice. With personal recommendations as one of the most common forms of referrals, selecting the right advisor should also be based on qualifications, fees that won’t gouge, and the advisors autonomy to act in the best interest of the customer.

However, many people are now spending a significant amount of time surfing the web and seeking advice online, where it can be difficult to distinguish expert advice from the inept.

In Canada, 96% of registered advisors are “dealing representatives,” which means they are salespersons not legally required to look after your best interests. On the other hand, just over 4,000 advisors are registered in categories where they must act as true fiduciaries and are legally required to deliver clients advice that must be in their best interest. While there are many financial advisors who look after their clients in the same way as true fiduciaries and deliver exceptional support and guidance, there are a whopping 118,000-plus advisors who do not have to adhere to such standards.

As an investor in search of an advisor, your goal should be to find the right person to help you reach your future financial goals. While you can correct a poor choice down the road, you would have wasted valuable time and may have actually suffered financial setbacks. It is therefore paramount you avoid the following mistakes:

Mistake #1

Don’t fall for the opening pitch. No matter how enticing the discussion and no matter how obvious the initial set of benefits are, chances are you are only seeing one side of the equation. No one wants to reveal their warts, especial right off the bat. So take your time to establish a rapport with the advisor. Trust comes with knowledge and clarity so make your first appointment about gathering information and creating a connection.

Mistake #2

If investments and products are the first subject of conversation before attempting to build a profile of you and your family, take a pass. Remember you are looking for someone that can give you personalized advice and not a canned spiel or off-the-shelf solution. If the advisor starts talking about investments before understanding your fears then you should think twice.

Mistake #3

If the advisor starts spouting off jargon or buzz words, look to the nearest exit. Like most clients it is not your life long ambition to be fully versed in all things financial. You have a real life, with other priorities that require your focus and energy. After all isn’t that why you are seeking out an advisor in the first place? So demand straight talk without the mumbo-jumbo.

Mistake #4

Seek out a written and understandable set of recommendations. An unintelligible proposal is bad, but no proposal is even worse. Remember you want to avoid the sales pitch pressure. What better way to do that than having something tailor-made for your circumstances and then have the time to mull over the material before making a decision. It should be comprehensible, straightforward and written in plain English.

Mistake #5

You should be the one talking, not the advisor. Too often sales-first advisors talk too much and cannot be interrupted because they are pushing their agenda. Instead, they should be asking you questions; listening to your responses and providing concise answers given your requirements and needs. Verbal diarrhea should make you sick.

Your task is simple. Avoid falling for these mistakes. Ask yourself: “Have I experienced any of these mistakes?” If your answer is either “yes” or “I’m not sure” then perhaps change is necessary. Just remember you should never assume everything will be okay. Don’t assume it will be better down the road. Don’t assume your advisor understands your goals because you may find that only one of you is actually in it for the long haul.


June 29, 2017

Written by: Chris Ambridge


Motivated to Perform

How do you motivate people? Countless studies have indicated the same basic fact: people are not usually motivated by money alone. Of course everyone needs money to sustain their lifestyle and plan for the future, but it is often other factors that compel employees to come in each day and do good work to help their organizations succeed and their clients prosper. Likewise, the sense of satisfaction that advisors receive when they help clients achieve their financials goals trumps the remuneration they receive. Any payment system where rewards are based on the quality of service is a good one.

On the other hand, sometimes a select few receive tremendous rewards regardless of results produced. We see examples of these situations all the time in the business section of the newspaper. In these cases incentives have little chance of producing any lasting positive effects. If clients are left paying and paying without seeing results then the problem is exacerbated. Incentives need to be aligned.

The truth is that many investments provide little added value and once people realize that the Emperor is not wearing any clothes, they will eventually become extinct.

There are myriad of financial products available. Mutual funds are the most convenient form of investing as investors can allocate among different asset classes based upon different qualitative and quantitative parameters, not just performance. To really understand the industry you have to understand how fund companies and their portfolio managers get paid and for what. The concept of “pay-forperformance” among mutual fund managers barely exists; in fact, if there is one thing fund managers are not paid for, as a general rule, it is performance.

A ground breaking new study, “Are Mutual Fund Managers Pa id for Investm e nt Skill?” (February 2017 Ibert, Kaniel, Van Nieuwerburgh and Vestman), used publicly available tax returns of 529 mutual fund managers in Sweden to show the interests of fund companies and their portfolio managers are very much aligned; but the connection between the mutual fund managers and investors is muddled.

In a nutshell, they discovered that there was a very weak relationship between pay and performance, but a very strong relationship between pay and the size of the mutual funds as measured by fee revenue. This makes sense because most mutual funds charge a flat fee on assets under management, so as assets grow the managers remuneration climbs along with it. Compensation was only weakly related to superior manager investment performance.

The study found no evidence that positive performance by a manager in a given year drove an upswing in funds under management in that year or the year after. However, fund managers were rewarded more for running additional funds or for taking over management of different funds with higher fees. The best performing fund managers are paid slightly better than the worst, but successful asset gathering was better rewarded. Consequently, closet indexing is becoming more rampant since performance and salaries are loosely connected. The real problem is while fund managers are protecting their own careers, clients are paying for active management to get indexlike results; minus the fees of course.

It is hard to blame investors who throw up their hands and just buy ETFs. Thankfully there is a true pay-forperformance model offered by Provisus Wealth Management for clients and their advisors on the Transcend platform that is set to revolutionize the investment landscape. Transcend’s novel spin on performance fees is to use them as way to present an attractively low base fee of 0.25% on equity funds to clients (lower than the fees charged by most equity ETFs in Canada). If the fund performs better than the benchmark, a performance fee equal to 20% of the fund’s performance above the benchmark will be charged. Operating on the philosophy that it will earn its fees when client portfolios outperform industry benchmarks, the firm is redefining the nature and delivery of financial services and directly aligning its interests with the clients. Pay-for-Performance™ will be a critical part of the compensation landscape going forward. Not because today’s investors need to be bribed to move their money into these types of vehicles. But, rather it will be because a static, inflexible, unchanging fixed fee strategy with no connection to the results achieved will be at distinct competitive disadvantage in a world as unpredictable and fast changing as ours.

Don’t Sell In May; Settle In

Stock investors often hear about “sell in May and go away” around this time of year. It implies that investors should sell their stocks in early May and buy them back in late October at a lower price. Since 1968 the S&P/TSX Index has risen an average of 8.0% (including dividends) from November to April but added only 1.5% from May to October. Interestingly enough, the “sell in May and go away” phenomenon appears to be universal across international stock markets.

Investors should be cautious about trying to trade around this phenomenon though. First, you would have to get two decisions right: the sell and the buy, which is extremely difficult. Second, the negative months in Canada were not that bad in absolute terms, so buying back the stock often cost you more. And finally, there have been multiple periods with good returns during the summer months (less than half of these months had negative returns).

Besides this phenomenon should be taken with a grain of salt, since most of the weakness was triggered by unpredictable events such as: Brexit last year; the Chinese equity market meltdown in 2015; the OPEC triggered oil price collapse in 2014; the world financial market selloff in 2008; and so on. All these were summer and early fall events.

In fact the really only bad month is September which, as seen in this chart, has posted an average decline of 0.38%. Only two other months, June and October, show any average loss. September is the worst month as the market fell more than 54% of the time, while over the same 49 year period stocks have only declined 42% of the time. October, feared as the crash month, shows an average loss of 0.11%, but it is the most volatile month. At the head of the pack was December with an average gain of 2.42% which was far better than the famed January effect.

Theories for September’s weakness are abundant: there is less money flowing into investments in the latter half of the year as bonuses and tax refunds came in early and frequently go into RRSPs; investors begin to pay more attention to investments after a summer off; and psychologically, when the leaves turn, vacations end and the days get shorter, there is a tendency for impatient investors to get rid of shares they had been thinking about selling. Then again it could be no more complicated than the fact that there are only 12 months in the year and there has to be a best and a worst one. Some month had to be September.

History shows investors could be better off rotating, rather than retreating. Investing in cyclical sectors (Consumer Discretionary, Energy, Health Care, Industrials, IT & Materials) from November to April and then gravitating toward defensive groups (Consumer Staples, Financials, Telecom & Utilities) from May to October could be rewarding. As the data to the left shows, the defensive stocks held up better between May and October, but only Utilities did better.

Reading too much into past trends can be a mistake however. The September market downturn is ultimately just a sort of emotional malaise. It is interesting to note that September’s negative seasonal bias is much less pronounced in years when the market is up year-to-date, as is the case this year.




This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.
While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

Q1 2017


During the first quarter of the year, investor optimism has been freckled with plenty of worries. Still, the world’s financial markets have been buoyant. While a bullish mood can be a self-fulfilling prophecy and lead to continuing gains, the opposite is just as true. Certainly there are numerous harbingers of fear to dampen the hearts of investors and ultimately inflict pain on the easily swayed. Fear mongering has become an art form with no expiry date. But astute investors focus on their long term goals and ignore the short term hype.

The Canadian economy kicked off the year with stronger than expected growth. It is expected that monetary policy will continue to remain very accommodative as the Bank of Canada remains extremely careful about reducing liquidity and impairing future prospects. As the Canadian dollar has been remarkably resilient, inflation remains very weak and retail and manufacturing sales are buoyant. Still the impressive beginning to Canada’s 150th birthday should be taken in stride as risks to the economy remain. Consider that while promising data over the past three years turned out to be mirages, so could this year’s start.

The U.S. continues to be incredibly consistent, with moderate and steady economic growth. Unemployment is less than 5%, down from 10% in 2009 and inflation is on target. Corporate profits are rising again after stumbling due to the decline in oil prices. The possible future stimulus from the new administration, as it attempts to lower taxes and boost public spending, could act as the ideal inducement to further accelerate a rebound in corporate profits and drive the economy to renewed heights.

The global economy is in the midst of a synchronized rebound as greater optimism about the sustainability of this recovery has provided a meaningful boost. Factories across Europe and Asia posted solid growth, rising to almost a five year high. Japan’s economy has continued its moderate recovery trend. Emerging market growth has accelerated to its fastest pace in six months. The prospects of higher short term interest rates remain a long way off and investor confidence has jumped to its highest level since the global financial crisis. The biggest uncertainties that could throw the rebound into disarray are political developments and U.S. trade protectionism.

The current bull market is still going strong after eight years and volatility is nowhere to be found. With corporate profits expanding rapidly, especially in Europe after seven years of stagnation, the future remains promising. Emerging Markets led the way with the best returns in the quarter at 10.5% (all figures in Canadian dollar terms). International stocks, paced by Asia thrived as well, up 6.4%. U.S. stocks were close behind, gaining 5.3%. Unfortunately, Canadian stocks were amongst the laggards only climbing 2.4%; although it was the TSX’s fifth straight quarterly advance and longest streak of gains since 2007. Even bonds got into the act gaining 1.2%.

While the second longest bull market in history has been very rewarding, the fact that it is long in the tooth has grabbed the attention of the skittish who need very little motivation to jump ship. However there is very little evidence that the markets are running out of steam or that a topping out process has even begun. In fact it is just the opposite. While it is always good to be cautious, it is prudent to remember that the finale to a bull market is usually more drawn out, marked by a rounding type top versus a sharp reversal. As always, time will tell.


Since the collapse of energy and commodity prices, which was followed by Brexit and Trumpism, there have been plenty of reasons for jittery investors to be cautious but those who stayed invested globally did well as world markets have proven once again to be resilient to the string of uncertain events. However Canadian investors were less rewarded with a weaker 2.4% total return over the quarter versus the world benchmark return of more than 5.5%. The Canadian economy kicked off the year with a stronger than expected 0.6% GDP growth in January, which was double the average estimate. The jobs numbers beat expectations in January and February and the unemployment rates as of February dropped to 6.6%, the lowest level in more than two years.

The great start for the economy in the first quarter is a sign that it has moved beyond the oil crisis that began over two years ago. Gross domestic product grew primarily because of expansion in goods and services industries. Retail, wholesale and manufacturing sales were stronger than expected as was international trade and job creation. In fact, the Organization for Economic Co-operation and Development has increased ts outlook for the Canadian economy this year. Despite this outlook, as is generally the case, there are concerns for growth. This time the focus is about the overheated housing market and the uncertainty of potentially new protectionist policies by our largest trade partner.

With the faded performance of Canadian markets in Q1 due to energy prices, which appear to show no sign of stabilization in sight, sectors such as Financials and Materials are expected to take leadership on the back of a stronger economy. The biggest risk to the economy and markets remains the potential for increased protectionism south of the border which will constitute a serious impediment to some highly U.S. dependent industries. However Prime Minister Trudeau’s diplomatic efforts to reach out to the U.S. and outline the mutual benefit of our close relationship will hopefully minimize any serious damage to the economy.


During the first quarter of 2017 the Canadian FTSE TMX Universe Bond Index gained 1.24% and the Bank of Canada’s target for the overnight rate remained unchanged at 1/2 of one percent, which is where it has been since July of 2015. In the U.S. the Federal reserve increased its benchmark interest rate in December and again in March. Each of the two increases was for a 1/4 point and marked rising confidence that the U.S. economy is poised for more growth.

A majority of economists polled by Reuters expect the Bank of Canada will wait until 2018 before raising rates. Uncertainty about the potential increase in trade protectionism by the Trump administration presents a downside risk to growth going forward and reason to keep Canada’s interest rate policy very accommodative.

Corporate bonds were among the best performers in the Canadian fixed income market. Steady spread compression since February 2016 drove outperformance in investment grade Corporates versus Provincials and Canada bonds. Over the course of 2016 Corporates returned 3.7%, Provincials were up 1.8% and Canada bonds lost 0.3%. The trend continued into the first quarter of 2017 with Corporates returning 1.8% versus 1.4% for Provincials and 0.6% for Canadas.

The U.S. Federal Reserve raised its benchmark rate in mid-March for the second time in three months, so it is now in a range of between 3/4 of one percent and 1%. The Fed is closing the chapter on its nine year old economic stimulus campaign which was launched as a response to the financial crisis. The Fed’s chairwoman, Janet L. Yellen, suggested that the Fed would have plenty of time to adjust its plans should President Trump and Congress cut taxes or spend massively on infrastructure. She does not share the focus of stock market investors and some business executives solely on the improving economic outlook. The Fed, which had made eliminating the risk of deflation a central objective in response to the financial crisis, said that it was now focused on stabilizing inflation. Ms. Yellen noted that inflation has risen a bit above 2%, just as it has been below 2% over the last few years. “It’s a reminder 2% is not a ceiling on inflation,” she said. “It’s a target.”


The Standard & Poor’s 500 index climbed 6.1% in U.S. dollar terms and 5.3% Canadian dollar terms over the first quarter of 2017. In March, the U.S. bull market celebrated its eighth birthday and while it has been a long run, the longest post war bull market lasted for nearly 10 years until March 2000. Not including dividends, the S&P 500 index has risen 250% between the closing low on the 9th of March 2009 to the end of the first quarter of this year. To put that rise in perspective, during the financial crisis the index fell 57% from the closing high on the 9th of October 2007 through to the closing low.

The main source of concern for the U.S. equity market had been the potential for dramatic shifts in policy under President Trump’s new administration. The long term negative implications of an economy achieving the President’s growth targets are a stronger U.S. dollar and higher government borrowing costs. A strong dollar could undermine the new administration’s efforts to revive export based manufacturing. The President has also promised to spur growth with corporate and personal tax cuts, as well as to use tax credits to fund infrastructure projects. These initiatives could help the economy but would increase the fiscal deficit and likely lead to increasing bond yields.

Consumers are more confident with current conditions as the Consumer Confidence Index hit 125.6, its highest level since December 2000. The glaring problem is that the Trump bump has not been as pronounced on the economy as many were hoping. It’s not that the economy is stalling, far from it, but the growth in the first few months of the Trump administration is looking much the same as it did under President Obama. Economists are only expecting first quarter GDP growth to come in at around 1% on an annualized basis, which is less than half the pace in the second half of 2016, and a long ways from the President’s 4% target.

U.S. industrial companies are facing challenges at home and overseas as demand in many sectors is only growing modestly, if at all. Employers are adapting by using more technology but that requires employees with a high level of competence in computers and math. There is growing evidence that finding workers with the technical skills employers need is getting more and more difficult as the economy reaches full employment. Nevertheless the U.S. economy is expected to expand by about 2% in 2017, which is in line with the rate of recovery during the previous administration.


The steadfast recovery that is underway in the global economy is at risk from economic nationalism and diverging central bank policies. With economic nationalism being a very big wildcard (one that has not yet been translated into actual policy), it still hangs over the head of financial markets. However, all things being equal, relaxed monetary policy and some fiscal policy easing should continue to allow for steady growth this year and next. Markets, to a certain degree, are becoming disconnected from economic reality as consumer spending and business investment remains weak.

Businesses across Europe spent the first quarter ramping up activity to the fastest pace in five years to meet increasing demand. This has led to broad based strengthening such that the economy finally appears to be firing on all cylinders. After years of unprecedented stimulus, the seemingly never-ending stagnation could be now giving way to a new period of prosperity. Of course, now that things are just starting to look up certain segments of the marketplace are calling for an end to easy money and tougher fiscal measures. Thankfully the European Central Bank has pledged to extend its bond buying program and negative interest rate policies for the foreseeable future. Conversely the U.K. economy, which finished 2016 strongly, may have reached a high watermark as uncertainty clouds the future due to Brexit.

Activity in China’s manufacturing sector expanded during the first quarter. Still the Chinese economy, the world’s second largest, expanded by 6.7% last year which was its weakest showing since 1990. In fact, the future target for growth has once again been reduced to around 6.5%. Growth is slowing due to many salient challenges facing China and could spill into the growth prospects for other Asian economies. However the government appears to be comfortable with the country’s trajectory as they have repeatedly said that they will maintain a neutral monetary policy this year and work to grow the economy through domestically focused initiatives.

Increased capital expenditures in Japan’s private sector buoyed the country’s economic growth in 2016, although growth still remains far behind its potential. On a perversely positive note the government’s extraordinary fiscal and monetary measures have finally been successful in causing an uptick in inflation. Unfortunately private consumption growth is non-existent which is reflected in the stock market’s 0.3% gain in the quarter.

Investors have been piling into Emerging Markets as they are drawn to the improving global economy and attractive valuations. The Emerging Markets stock index rose to a world beating 11.2% gain in the first quarter (all figures in U.S. dollar terms) led by rallies in China, Korea and India, its best showing in nearly two years. International stocks as a whole rose 7.4% as all sectors outside of commodities were in positive territory. Asian stocks climbed 8.1% and European stocks lagged with gains of 6.7%.

Global equity valuations do not appear to be overly stretched, especially since 2017 should see healthy earnings growth for all major markets. This upturn in earnings is the first since 2010 and is very much welcomed. Much of the future optimism for international stocks stems from this heightened earnings outlook as global growth continues to gain traction.

Q2 2017


After nearly a decade of flooding the world with easy money to jump-start sluggish post-recession economies, central bankers are changing their tune. Investors have ramped up expectations that tight monetary policy and stimulus are coming to an end as Canada, the U.K. and Europe will soon be following the U.S. down a hawkish path. The net effect has been a rise in bond yields and fatigue in the world’s stock markets as the markets in general have become somewhat lackluster.

Canadian economic growth accelerated at a 3.8% annual rate over the past six months, as the impact of housing and autos have surged at a 12% pace. Machinery manufacturing was up almost 15% and the high-tech sector expanded at an 8% clip. Even the financial sector managed to churn out nearly 6% annual growth. Commodities sectors continued to constrain the economic expansion so much so that not even the weak Canadian dollar (despite its recent 6% rebound) was able to boost it. All in all, the recovery now seems very well entrenched.

The current U.S. recovery is long in the tooth and a recent batch of weak economic data and doubts that Donald Trump could enact his pro-growth agenda has tempered its outlook. Still, industrial production was shown to have ample slack and potential for further growth. The Federal Reserve is staying the course and continuing to tighten monetary policy despite the U.S. dollar posting its biggest quarterly decline in seven years which may have consequences to the economy’s continued expansion.

Recovery in Europe is strengthening and broad based unlike the last uneven and fragile upturn in 2013. In fresh signals of healthy growth, employment rose to reach a record high surpassing its previous peak in 2008. The European central bank is expected to maintain sub-zero interest rates and massive bond purchases but there is a chance this may not happen as a change in direction could come quickly if inflation appears persistent. The volatile U.K. elections have led to a number of questions
over the Brexit timing and a slumping currency as politicians scramble to deal with the fallout.

Confidence among Japan’s manufacturers hit its highest level in more than three years adding to signs its recovery is sustainable. This expansion is being propelled by robust exports and a boost from private consumption. The job market is the tightest it has been in 25 years and inflation remains subdued. China has cut its economic growth target to 6.5% to give policymakers more room to push through painful reforms and contain financial risks after years of debt fueled stimulus. Meanwhile, company profits have accelerated as investment income and sales have jumped noticeably.

Equity valuations are starting to become somewhat rich and are above their 10 year averages, while bond yields across the world remain near historic lows. Canada, the world’s fastest growing developed economy, had the worst performing stock market, dropping 1.6%; its first quarterly drop since 2015. Weakness in commodity prices and fears of an overheated property market were the main reasons for the underperformance. U.S. stocks touched record highs, gaining 0.7% in the quarter (all
figures are in Canadian dollar terms). International stocks climbed 3.7%, principally based upon Europe’s strongest quarter in six years. Bonds did manage to eke out a 1.1% gain.

In a world where central banks are looking to hike interest rates, investors might think about rushing for the exit. Efforts by hawkish central bankers to move away from low rate policies is just a baby step to normalizing financial markets and tiptoeing towards reversing stimulative policies. Yet with inflation nowhere to be found and economic growth increasing it is much too early to flee the markets. There is no need to get ahead of ourselves.


The second quarter of 2017 saw an improving world economy with solid advances in Europe and the Emerging Markets. Canada also posted strong growth for six months in a row signaling a significant turnaround for the economy versus earlier declines. As the global economy showed traction, major central banks reverted to a hawkish tone, even in regions like Europe where some countries experienced negative rates months ago. In Canada the central bank has maintained a dovish rhetoric as recently as in the first quarter, but quickly reverted to a possible rate hike on the backdrop of solid growth. Unfortunately, just like at the start of the year, the Canadian markets have moved in the opposite direction vis-a-vis the economy. While the first half of 2017 was decent for global equity markets, some even with double digit returns, the TSX lagged considerably and struggled to keep its performance in positive territory. It managed unsuccessfully to find support and broke down to six month lows with a loss of 1.6% on a total return basis for the quarter; one of the worst performing benchmarks. Year-to-date it is recording a meager 0.7% return.

The strong rebound of the Canadian economy has naturally been very beneficial to the labour market with jobs numbers not seen in four years. This has led to a 6.5% unemployment rate, the lowest since the last recession. The Loonie has declined due to the volatility of oil prices but as the Bank of Canada has explicitly reverted to a hawkish stance, there is a clear path upward. For some analysts the Bank of Canada policy shift appears aggressive as inflation is well below its 2% target and indebtedness, though elevated, has recently stabilized. Thus an aggressive tightening move is raising concerns over the potential for an adverse impact on an economy that a few months ago was at the brink of a recession. The Canadian economy seems on pace for decent growth this year despite mixed contributions from the energy sector. All things considered, the future state of the energy sector, household indebtedness, and Trumpeconomics will continue to be the determining factors for the course of the economy.


During the second quarter of 2017 the Canadian FTSE TMX Universe Bond Index gained 1.1% and has risen 2.4% so far this year. The Bank of Canada is where it has been since July of 2015. In the U.S. the Federal Reserve increased its benchmark interest rate in December and twice so far in 2017, once in March and again in June. Each of the three increases was for a 1/4 point and marked rising confidence that the U.S. economy is poised for more growth. The minutes of the U.S. Federal Reserve’s May meeting confirmed that the central bank is now committed to shrinking its massive balance sheet. The Fed does not want to sell the assets on its $4.5 trillion balance sheet, but it will let them shrink as its bonds mature. That information put the long term debt market on a more comfortable footing as the U.S. has a plan to very gradually increase yields so as not to disrupt global bond markets. Higher rates seem to be a global trend; the Bank of England is starting to think about making its own move and the European Central Bank has been talking about moving away from quantitative easing.

Canada now has one of the fastest growing economies in the G7. The latest inflation figures could play a key role in any rate hike decision as the headline inflation rate has moved away from the bank’s 2% target. Weak growth in gasoline prices were a factor in lowering the annual inflation rate to 1.3% for the month of May. Canada’s inflation rate is now well below that of Britain, the U.S., China and the EU. Senior deputy governor Carolyn Wilkins indicated the weakness in core inflation is due to the lagged impact of past quarters but inflation is expected to rebound over the course of 2017 which should help justify an interest rate hike. Any increase in rates is expected to be gradual however.

It appears we have seen the end of the secular bond market bull run but that does not
mean that we are heading into a bear market for bonds. In bond market terms, the yield curve has been flattening, which means that short and long term interest rates have been moving closer together. If the trend continues and short term rates rise above long term rates, the yield curve will become inverted. An inverted yield curve would express deep skepticism about the health of an economy but it’s important to note that just because the yield curve is flattening doesn’t mean that it will invert. One exception might be in Britain where the Bank of England is battling Brexit-induced inflation pressures and other concerns so it may be vulnerable to a downturn. The probability of a recession in Canada or the U.S. in the next 12 months though is low. More likely bond yields will remain low for some time as inflationary pressures are expected to be subdued.


The Standard & Poor’s 500 index climbed 3.1% in U.S. dollar terms over the second quarter of 2017 and year to date the index was up 9.3%. In Canadian dollar terms the respective change was 0.7% for the quarter and 6.0% year to date as the loonie gained 2.4% during the second quarter and has strengthened by 3.3% so far this year. The long bull market in the U.S. has now passed its eighth birthday and, while it has been a long run, the longest post war bull market lasted for nearly 10 years until March 2000.

U.S. gross domestic product (GDP) increased at a 1.4% annual rate in the first quarter of 2017, following a 2.1% rate of growth in the fourth quarter of 2016. The first quarter GDP number was not too far off the 1.6% expansion recorded in 2016 but it was the slowest growth rate since the second quarter of last year. However, the slowing pace of growth is not a true picture of the economy’s health. The unemployment rate fell to a 16 year low in May and the labour market is near full employment, generating stronger wage growth, and consumer confidence is near multi year highs. That suggests the mostly weather induced slowdown in consumer spending is likely to be temporary.

The Trump administration’s objective of swiftly boosting U.S. growth is facing numerous
challenges. Since 2000, the economy grew at an average rate of 2% and a sustained average of 3% growth has not been seen since the 1990s. While the Atlanta Federal Reserve is forecasting annualized GDP growth of 2.9% in the second quarter that may be overly optimistic as the president’s economic program of tax cuts, regulatory rollbacks and infrastructure spending has yet to get off the ground.

U.S. banks passed the first round of the Fed’s stress tests to see how they would perform under adverse conditions like a 10% unemployment rate and turbulence in commercial real estate and corporate debt. The Fed’s chairwoman, Janet L. Yellen, made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely “in our lifetime.” All major U.S. banks are now cleared to pay dividends after they all passed the qualitative portion of the Federal Reserve’s stress test for the first time in seven years.

A continuing source of concern for the U.S. equity market had been the political gridlock emanating from Washington. The U.S. Congress is trying to repeal the Affordable Care Act and to overhaul the tax code; two efforts that have stalled and consumed more time than was initially expected. Congress also needs to raise the national debt limit by early to mid-October to avoid defaulting on loan payments. There are many legitimate political concerns but the economy has continued to keep growing despite the politicians.


A year can certainly make all the difference. After an extended period of slow and slowing growth around the world, the outlook for investors had been one of trepidation and dismay. However, it appears now, to a large degree, that the world is entering a sustainable period of recovery. The nature of this recovery is very different from previous short-lived global recoveries because the global economy appears to be in much better shape this time around. We are finally overcoming the lasting residue of the financial crisis of 2008.

Europe is the last major regional bloc to essentially recover from an extended period of malaise and significant uncertainty. They appear to have finally gotten it right, certainly compared to past short-lived dalliances with recovery. It may be in its best shape since 2008 and is following in the footsteps of the U.S. economic recovery. There are several key reasons for this new optimism: monetary policy remains supportive; labour productivity has been improving; capital investment has rebounded very well; populism appears contained; and investor sentiment has hit a ten-year high.

The U.K. economy slowed more sharply than first thought in early 2017 as household consumption was hit by rising inflation that followed the Brexit vote and exporters have struggled to benefit from the weak currency. The Conservative government lost its parliamentary majority which raises a great deal of uncertainty over Brexit policy. It is too early to judge how large and persistent this slowdown might be so the Bank of England is keeping monetary policy very supportive for now. While there is slack in the labour market, the acceleration of inflation to a near four-year high of 2.9% intensifies the debate about how long interest rates can stay low. This uncertainty is tarnishing the long term growth outlook and could increase the pressure on struggling consumers.

Japan’s industrial production rose thanks to increases in the production of automobiles for the domestic market and electronic parts for export. Consumption-related indicators are also robust. Inflation remains near zero, despite extensive efforts to improve wages and retail activity. So the prospect is very high that continued stimulative financial support will be maintained, putting Japan on the outside looking in as the rest of the world’s central banks take away the cookie jar. China on the other hand is actively trying to slow down growth targets as the government strives to change the country to a more domestically focused nation. Beijing has continued to tighten the screws on riskier financing which is expected to drag on the world’s second largest economy in coming months.

For the most part the second quarter was very good for international stocks as the market as a whole climbed 6.4% (all figures are in U.S. dollar terms). This, on top of a very strong first quarter pushed the year-to-date returns to a very impressive 14.2%. Overall, European stocks increased 5.9% last quarter, which is better than Asian stock markets which only gained 3.3%. Emerging Market stocks continue to produce stellar results, climbing 5.5% despite increased volatility.

Some parts of the world are out of sync with the general positive economic prosperity that is unfolding, but they are in the minority as sustainable growth is now in vogue. Europe in particular is only just beginning to hit its stride. Assuming that this worldwide pattern continues,it should entrench itself in investors’ mindsets and the prospects for a bright outlook could improve even further.

Q3 2017


Aside from the occasional wobble, investors exercised patience and caution despite the apparent threats of military conflict and outright whimsical bluster. The global economy appears to be in much better shape than just three months ago, with clear signs of a synchronized global expansion. The financial markets were propelled higher by steady earnings growth and continued low interest rates, with little indication that a widespread capitulation is on the horizon.

Canada’s economy is leading all major developed nations in terms of growth with the rate of expansion approaching an 18 year high. Yet there remains an excessive level of pessimism among investors as to the longevity of this economic cycle. While jobs are being created at almost an all-time record rate and nearly every province is growing, the Bank of Canada still feels the need to put the brakes on a bit. Meanwhile, Canadian companies are in very good condition and if there is any sort of commodity-based rally and only moderate interest rates increases, then beaten down Canadian stocks (which are extremely cheap by global standards) would be poised to outshine their international peers.

The U.S. economy remains in good shape, as Americans got out and spent more which is nursing the economy back to health after a feeble start to the year brought about by seasonal quirks like poor weather and late tax refunds. Its economy has expanded for eight straight years in the wake of the 2007-09 recession energized by an extremely strong labour market, which has driven the unemployment rate down to a nearly 16 year low. Inflation has slowed dramatically. In fact, U.S. employment and inflation today are amongst their least volatile in the past 50 years.

What a difference a year makes. All economies in Europe are improving which is a first in the post-crisis period. Europe is the last of the world’s major regional blocs to recover and may be finally entering a sustainable period of recovery. The nature of this recovery is different compared to previous short lived global recoveries as conditions are improving, monetary policy remains supportive, labour productivity has improved, capital investment is strong and populism appears contained for now. The U.K. economy on the other hand is becoming increasingly sluggish largely due to the uncertainty about its divorce terms with Europe. Britain’s suffering is likely to grow as the benefits of extremely low interest rates and a devalued currency wane.

Asia has entered a period of resurgence with Japan’s economy growing for the sixth straight quarter, backed by strong domestic demand, an upswing in exports, weaker currency and very low inflation. China continued its expansion but the economy has become increasingly reliant on new debt to foster growth which has led to several downgrades by bond rating agencies. India is expected to resume faster growth as the government’s de-monetization move last year led to several months of acute shortages which are now easing.

Currently, it is a very favourable environment for equities with the usual factors that warn of a bear market or recession have gone missing. This has led to another winning quarter for stocks as indices around the world hit new highs. Canadian stocks gained 3.7% while U.S. equities were up 0.7% (all returns in Canadian dollar terms). International stocks climbed 1.7% with European stock leading the way, up 2.3% followed by Asian stocks eking out a 0.4% increase. Emerging markets climbed 3.3% in the quarter. Interest rates are rising gradually which has made bonds a dark spot, losing 1.8%.

The recovery in global growth is on firm footing and the broader based upswing should be sustainable for now. There could still be any number of policy missteps or miscommunications which might negatively impact financial stability mid-term, but as of right now they are all known complications.


The third quarter saw a stew of major geopolitical developments including tensions between the U.S. and North Korea, as well as the protracted war in Syria. Also during the quarter, Hurricanes Harvey and Irma dominated the news as they caused unprecedented flooding in Texas along with major disruption to refineries, pipelines and fuel storage facilities. Global markets in general brushed off the bad news and maintained the momentum from previous quarters. The Canadian stock market, on the contrary, performed worst amongst G7 countries although Canada’s GDP growth has been the strongest.

It has been a difficult year for Canadian investors so far as the TSX’s downward spiral has been discouraging, with a mostly negative technical pattern amid lower highs and lower lows. However higher oil prices later in the quarter, mostly due to natural disasters, brought the TSX back to levels not seen in months. It ended the quarter with a respectable 3.7% gain on a total return basis and was up 4.4% year to date. This is a remarkable improvement from previous quarters although still at the bottom of the pack vis-a-vis other global markets.

After a robust first half, the Canadian economy might take a breather for the rest of the year but is still expected to deliver about 3% GDP growth for 2017, the best projected performance in six years. The job market has been the natural beneficiary with nine straight monthly gains that pushed the unemployment rate down to 6.2%, a nine year low.

Though the economy has blown past expectations, uncertainties related to global trade negotiations including NAFTA, housing imbalances, and energy markets continue to pose potential risks to the recovery. In a recent report, the International Monetary Fund criticized the rapid interest rate tightening and suggested the continuation of expansionary fiscal policy was something they would rather see.

The performance of the TSX in the third quarter was the best in 14 months and seems to mark a trend reversal. Earning revisions have turned positive amid higher energy prices and manageable risks for the big six banks according to a recent Fitch report. Thus the TSX is in the position to recoup some of its past losses and be among the leading global indices in the upcoming months.


The Canadian FTSE TMX Universe Bond Index fell 1.8% in the third quarter of 2017.  Year to date the index is barely in positive territory with a 0.5% gain. The Bank of Canada raised its target for the key overnight interest rate twice over the course of the summer by a quarter of a percentage point each time, The Bank’s two rate hikes erase the two cuts it implemented in 2015 in response to the oil price shock. The target for Canada’s overnight rate is back to 1.0%.  In the U.S., the target range for the Federal Funds Rate is between 1.0% and 1.25% following the four increases in the target rate that began in December 2015. Each increase was for a quarter of a percentage point and marked rising confidence that the U.S. economy is poised for more growth. The U.S. central bank is expected to raise interest rates again in December and three more times in 2018, Higher rates are now a global trend as the Bank of England has signaled that it is about to make its own move and the European Central Bank has been talking about moving away from quantitative easing.

Canada is in the midst of one of its strongest growth spurts since the 2007-09 recession. While Canada’s gross domestic product was essentially unchanged in July, as the oil and gas, mining and manufacturing industries all shrank, the economy had been growing at a 4.5% annual pace at the end of June. That’s the fastest among Group of Seven countries and double what the central bank considers Canada’s capacity to grow without fueling inflation. The Bank of Canada said recent data has increased its confidence that the economy will continue to grow above potential, meaning excess capacity is being absorbed, and estimates that the economy will return to full capacity by the end of 2017. Governor Stephen Poloz has downplayed recent weakness in inflation, judging the sluggishness to be “mostly temporary” and predicted that inflation will near its target of 2% by the middle of 2018, which is later than was predicted in April.

The U.S. Federal Reserve Chair Janet Yellen suggested that the central bank is on course to raise interest rates in December, as well as three more times in 2018, and begin to reduce its balance sheet. She believes that the economy is robust enough to withstand further rate increases and the reduction of the Fed’s $4.2 trillion portfolio of Treasury bonds and mortgage backed securities as it exits the crisis era policy a full decade after the global financial crisis began. The central bank’s strategy represents something of a gamble because it risks keeping inflation well below the Fed’s 2% target. Core consumer price inflation has ebbed this year even as the economy and the labour market have improved. After briefly poking above 2% earlier this year, it has more recently fallen back to 1.7%.


The Standard & Poor’s 500 index rose 4.5% in U.S. dollar terms over the third quarter of 2017 and in Canadian dollar terms the index was up 4.0%. Year to date the benchmark is up 14.2% and in Canadian dollars it was ahead 13.8% as our currency recovered some of the ground it had lost to the U.S. dollar.  Investors in the U.S. market continue to ride one of the longest bull markets since the 1940s as the S&P 500 index has more than tripled since bottoming out in March 2009.

U.S. Gross Domestic Product (GDP) expanded at a 3.0% annual rate, its fastest pace in more than two years, according to the Commerce Department in its second estimate of second quarter GDP. Businesses increased their investments and consumer spending remains healthy. Consumer spending, which makes up more than two-thirds of the U.S. economy, grew 3.3% which was the fastest in a year. It seems that the strong consumer spending came at the expense of savings, as the savings rate slipped and wage gains have been weak. Households will not be able to rely on savings indefinitely to fund consumption so any pickup in wages going forward would help underpin the economy. More recent retail sales and business spending data indicate that the economic strength continued into the third quarter. For the first half of the year the economy grew 2.1%. President Trump set an ambitious 3.0% growth target for 2017, to be achieved through a mix of tax cuts, deregulation and infrastructure spending. While many of these objectives have yet to be attained, the political gridlock in Washington does not seem to have hurt business or consumer confidence.

A long string of corporate takeover activity in the U.S. and a better than expected second quarter earnings season on Wall Street have pushed equity markets to lofty levels. Earnings of the companies that make up the S&P 500 index grew 11% in the second quarter, the second straight quarter of double-digit growth and the fastest two quarters of growth since 2011. More than half of S&P companies topped forecasts, (the highest percentage since the second quarter of 2010), although the average upside surprise was 4%, slightly below the long-term average of 5%. Looking forward, it will be more difficult for companies to achieve the same earnings growth in the second half of this year, as the earnings recovery in the second half of 2016 will be a higher hurdle but solid fundamentals should continue to support earnings.

There are a number of positive trends that continue to sustain the market, notably the strength of the U.S. consumer, supported by monthly job growth that this year that has averaged 175,000, wages that are indeed expected to rise as the economy nears full employment, business and consumer confidence that is at their highest levels since 2001 and household balance sheets that are the strongest since 1980. There are signs that we are in a classic late cycle expansion as we are seeing an economy with almost full employment and slowing momentum which tends to foretell a decline in corporate profit margins, but while the U.S. may well be in the mature stage of the economic cycle, there is still time and room for equity markets to run.

With major indices trading at near-record highs and equity valuations seen as stretched, many investors are worried that U.S. stocks are overdue for a correction. Because nearly everyone feels that way, it actually favours the market. Long time investor John Templeton famously stated that “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”


The international financial markets have surged as global economic growth is faster, firmer and more synchronized than it has been in years. For the first time in nearly two decades growth forecasts have been ramped up while the forecasts for inflation have been revised down. The threats of higher interest rates, geopolitical shocks and increasing valuation pressure are not likely to unhinge stocks in the near future and pain is likely only to be felt by those sitting on the sidelines.

After years of unprecedented stimulus, the upswing is finally starting to spread across all the nations in Europe. The recovery is stronger, broader and proving to be resilient to external shocks, especially after the past few misfired rebounds. Confidence in the economy rose to the highest level in a decade, as the overall unemployment rate dropped to its lowest level since 2009. Supported by ultra-low interest rates and other measures designed to boost activity, inflationary pressures remain minimal. France has had its strongest continuous expansion since 2011 and the Netherlands posted its fastest growth since the end of 2007. Italy, which has lagged its peers in recent history, is starting to shake off its reputation as the sick man of Europe. Even Spain’s economy keeps powering ahead. On the other hand, the U.K. is growing at half the rate of its soon to be separated neighbors and that seems to be the biggest problem. The messy business of splitting from Europe is taking a toll on the Pound, raising the
cost of imports, pushing up inflation and generally squeezing consumers’ pocketbooks.

Japan’s economy grew for the sixth consecutive quarter, as cautious consumers are starting to loosen up spending more and offering hope that domestic demand will be strong enough to continue to re-inflate the economy that has been sluggish for years. Private consumption, which accounts for almost 60% of the economy, rose at its fastest pace in more than three years. Japan’s inflation rate remains very low, enabling the central bank to sustain its current fiscal policies despite record low unemployment and rising wages which will be vital as the country’s population shrinks and ages.

China’s economic growth marginally beat expectations but future growth will likely be weaker. As the country grapples with the challenges of containing financial risks stemming from years of credit fueled stimulus, risks are increasing. There have been significant inroads in reducing the riskier aspects of the shadow banking system; unfortunately it has created a dangerous trajectory. So much so there have been several recent downgrades to China’s long term sovereign credit rating. This is still a big problem, one with which the soon-to-be reshuffled leadership will have to wrestle with.

Emerging Markets have continued their resurgence despite timid investor uptake. They have benefited from stable commodity prices, improving economic growth and balance sheet repairs since the bout of interest rate anxiety in mid-2013. The future is not without risk, including the outlook for Chinese politics, and a heavy electoral calendar next year from Mexico to Venezuela. Yet on a relative basis Emerging Markets will likely outperform most other markets over the next few years.

International stocks are having a very good year gaining over 20.4% (all returns are in U.S. dollar terms) so far and 5.5% on the quarter. They are being paced by the Emerging Markets, many of which are touching all-time highs after gaining 25.5% year-to-date; and 7.0% for the quarter. Not to be outdone, European stocks have gained 19.9% for the year and 6.0% on the quarter; while Asian stocks markets have climbed a respectable 16.2% for the year and 4.1% on the quarter. After many years of weak or mediocre results this performance is very welcome and hopefully will continue in the future, although not likely at such impressive rates.

Q4 2017


The world is entering a period of synchronized economic expansion that has a long way to run, albeit with less scope for upside surprises. Markets will likely not continue to be as stable as last year, but there are a few signs of leverage building in the financial system which could trigger significant economic risk. Earnings will likely continue to be on an upward trend, although the growth rate could wane. With global savings still plentiful, only small increases in long term bond yields are expected.
Yield curves have been flattening but this is a normal late cycle phenomenon. Insatiable global demand for income has held down long-term yields across the world. The flattening has been mostly
driven by rising short term rates as central banks start to take away the cookie jar. During 2018, investors should brace for the biggest tightening of monetary policy in more than a decade as the global economy heads into its strongest period since 2011. It is going to be challenging for central banks to continue pulling back without rocking asset markets.
The Canadian economy is running at close to its full potential though we need to consider the stalemate in NAFTA talks, large minimum wage increases and new mortgage rules as risks. Oil prices have rebounded to reach their highest levels since mid-2015 providing some much needed additional stimulus for the economy. This strength in oil prices will offset the likely rate hikes in 2018 as the Bank of Canada takes a cautious stance on monetary policy despite two interest rate hikes already.
The strength in oil prices also had the added benefit of propelling the Canadian dollar higher as it gained 6.3% for the year.
The U.S. economy continues to grow at a very brisk pace and the recent tax cuts could boost near term growth even more. The labour market has continued to strengthen to its best level since 2001 and economic activity has been rising at a solid rate despite hurricane related disruptions. What will likely slow the economy eventually are increases in interest rates by the U.S. Federal Reserve, beyond those that have occurred already, in an effort to prevent a potentially raging economic expansion
from developing.
International economies are humming along with only small clouds on the horizon. After a decade of crises almost tore Europe apart, the region has emerged more in sync than ever. The European Central Bank’s stimulus brought the monetary union back from the brink and should continue to keep interest rates at their historic lows to further power the economies ahead for a sixth year. The Japanese expansion has now stretched into seven consecutive quarters for the first time in 29 years. Britain’s
economy is slowing as a jump in inflation is pinching spending by consumers. China is undertaking significant economic reforms which could cause a slowdown in growth and trigger temporary credit crunches.
Stock markets around the world ended the year on a high note, propelling equities to record highs almost everywhere. Emerging markets once again led the way with a significant quarterly return, 7.7% (all figures in Canadian dollar terms) and 19.5% for the year. International stocks were paced by Asia and were up collectively 4.9% for the quarter and 19.0% for the year. U.S. stocks were close behind, gaining 7.3% for the quarter and 15.5% for the year. Unfortunately, Canadian stocks were once again amongst the laggards, only climbing 4.5% for the quarter and a reserved 9.1% for the
year. Bonds were most definitely the weakest asset class, gaining a paltry 2.0% for the quarter and 2.5% for the year.
While the length of the current cycle is quite extended, investors should be focused on the synchronized nature of global growth. Certainly, valuations are elevated, but the underlying fundamentals are showing no signs of recession. Perhaps returns may not be as generous going forward, but that does not mean the markets will not go up. There are going to be periods of volatility, but those should be viewed as buying opportunities, especially with the economy and earnings growth expected.


2017 saw strong global economic momentum across the board albeit on the backdrop of unfavourable geopolitics and natural disasters. These negative events were largely ignored by financial markets as volatility for most of the year fell to unprecedented historical levels amid renewed consumer confidence, improving earnings and persistent support for easy financial conditions.
The Canadian economy started the year with above average growth versus its global peers but took a breather after the first half. Yearend data suggests that the pause was short lived and that the economy is still on pace to post about 3% annual GDP growth – the best in six years. However this did not translate into a stellar year in the equity markets as it did in 2016.
After a flat first half to the year, the Toronto Stock Exchange (TSX) surged back with strong gains in the second half to close the year at an all-time high of 16,209 points, well above the 14,951 low in August. This was largely due to a rebound in Health Care, IT and almost every other sector. In total return terms, the index was resilient with a decent 9.1% return despite the weak start. Still that was not enough to make 2017 a blockbuster year for Canadian markets.
The strong GDP growth in 2017 and the outstanding momentum of the TSX versus its global peers during the second half of the year seems to indicate that Canadian markets are poised to be among the global leaders. One advantage of the TSX is its relative discount to other markets,especially relative to the U.S Although the TSX rallied to a record high, its relative earning yield valuation versus the U.S. S&P 500 index leaves the TSX at its widest discount since the financial crisis. Future TSX earnings will depend largely upon the global economy, as well as commodity prices, and if the recent rally at current levels persists the TSX will be positively impacted.
Despite a solid footing, the Canadian economy will face ongoing challenges. On one front the household debt-to-disposable income ratio remains a critical issue. That ratio keeps creeping up despite government efforts to curb it. The other major uncertainty is the potential change to the NAFTA agreement. So far the negotiations seem to have stalled but there is too much at stake to completely abolish it. Although the U.S. has some leverage in the renegotiations, its partnership with Canada has not been overly detrimental, as its trade deficit relative to Canada is small.Thus, NAFTA or not, there is some optimism that both countries will come to an agreement that will benefit both of our economies.


The Canadian FTSE TMX Universe Bond Index gained 2.0% in the fourth quarter of 2017 and was up 2.5% for the year. Over the course of 2017, the Bank of Canada raised rates in July and September in response to an impressive economic run that began in late 2016. The hikes took back the two rate cuts introduced in 2015 to help cushion and stimulate the economy from the collapse in oil prices. In the U.S., the Federal Reserve increased its benchmark interest rate in December. It was the third hike in 2017 and pushed the target range to 1.25% to 1.5%. The recent increase was the fifth rise since the U.S. began raising rates in December of 2015.
The Bank of Canada has left its benchmark rate at 1% for two straight policy announcements after the strengthening economy prompted it to raise rates twice in the summer. In announcing its latest decision, the bank pointed to several recent positives that could support higher rates in the coming months. They included encouraging job and wage growth, sturdy business investment and the resilience of consumer spending despite higher borrowing costs and Canadians’ heavy debt loads. The bank said inflation, a key factor in its rate decisions, has been slightly higher than anticipated and could stay that way in the short term because of temporary factors like stronger gasoline prices. Core inflation, which measures underlying inflation by omitting volatilei tems like gas, has continued to inch upwards.
The Bank of Canada’s Governor Stephen Poloz has been challenged by trying to increase interest rates as the economy runs up against capacity constraints while avoiding another economic downturn. In a December speech he noted that he was encouraged by this year’s strong performance and said that “we are growing increasingly confident that the economy will need less monetary stimulus over time.” At the same time the governor said that, “we will continue to be cautious in our upcoming policy decisions” which investors are taking to mean three more rate increases are likely in 2018.
If confirmed by the U.S. Senate, President Trump’s nominee to succeed Chairwoman Janet Yellen will be Fed Governor Jerome Powell. He will become the new Fed chair when Ms. Yellen’s four year term expires on February 3rd. Mr. Powell is viewed as a good replacement as he has voted in favour of every Fed policy decision since 2012. He will be taking office as the U.S. economy is poised for a solid rebound after a disappointing start to 2017. Gross domestic product grew at more than a 3% annualized pace in both the second and third quarters and is on track to expand in the fourth quarter by 2.9%, according to the Atlanta Fed’s tracking estimate.


The Standard & Poor’s 500 index climbed 6.6% in U.S. dollar terms over the fourth quarter and in Canadian dollar terms the index has gained 7.3%. For 2017 as a whole the U.S. equity benchmark gained a stellar 21.8% in U.S. dollar terms and was ahead a very respectable 15.5% in Canadian dollars. Going into 2017, the global investment community was concerned with the surprise win by Donald Trump but the U.S. stock market climbed steadily from one high to another over the course of the year amidst an unusual level of calm. Even the “tech heavy” Nasdaq Composite Index, that some thought would do poorly under President Trump, has surged 28.2% during 2017.
The most significant piece of legislature under the guidance of the Trump administration has been tax reform and while investors like the idea of corporate tax cuts because the companies in which they invest could become even more profitable, it is unlikely the tax changes are as important as some think as many companies had been taking advantage of deductions to keep their already low rates low. Republicans talk of sparking economic growth rates in the 4% range but models run by non-partisan forecasters, such as the Wharton business school at the University
of Pennsylvania, predict only a modest increase over the short term. That is due to the fact that few companies actually pay the top rate. Once deductions and other legal loopholes are factored in the effective corporate rate is not very far off the 20% promised in the legislation.
Also, virtually all the objective analysis of the Republican plans suggest that the tax cuts will widen the budget gap and add to the fiscal deficit. The Wharton budget model predicts that the added debt will eventually reduce economic growth as money that might have been spent on productive investment ends up instead in government bonds.
The more plausible explanation for the stock market’s success in 2017 had less to do with President Trump’s policies and more to do with the Federal Reserve and its soon to depart chair, Janet Yellen. It took longer than anyone thought it would but the Fed’s post-crisis policy of putting maximum downward pressure on interest rates is finally paying off. The U.S. unemployment rate was at 4.1% in October, which is near its lowest level ever. Companies are broadly profitable and the world’s biggest economies are growing in sync for the first time in a decade. The ultralow interest rate policies of the Fed and other central banks have meant that there is a lot of money sloshing around and that has bid up the price of financial assets worldwide.
Some investors are concerned about the longevity of the current economic expansion and the age of the bull market which celebrated its eighth birthday in March of 2017. Bull markets do not die of old age but fall from economic excesses and the excesses that have heralded the demise of previous bull markets, namely overspending, overborrowing and overconfidence, have so far remained contained. Of course there is always the possibility of a recession in the next year or so due to an unexpected geopolitical shock or policy mistake. Excessive euphoria is more of a near term concern as sentiment indicators are suggesting too much optimism among investors.
A recent Bank of America survey showed that for the first time in six years a record high 48% of market participants are expecting above trend growth and below trend inflation. At the same time though there is not a huge flow of funds into stocks that often hints at a major peak.
The S&P 500 is trading near its all-time high and hasn’t seen a 5% pullback since the Brexit referendum in late June 2016. This extended period of tranquility may portend that the market is due for a near term pullback but the long term outlook remains favourable.


The global economic expansion is gaining momentum as the stimulus from monetary policy continues to reverberate. The U.S. economy has been pulling the world along with it for a while but now the world is starting to pull its own weight. Most central banks are keeping interest rates at rock bottom levels and are anticipated to hold rigidly to this script in 2018.
Europe has enjoyed its strongest and most sustained period of growth since a short lived bounce back following the global financial crisis. The Eurozone gained momentum in 2017 after sidestepping some potential risks with populist, Euro-skeptic parties losing elections in major economies such as France. Worries over Greece’s future in the single currency bloc have abated while the current tensions in Spain over Catalonia’s bid for independence do not yet appear to be shaking confidence. The robust growth has helped unemployment fall consistently over the past year to
its lowest rate since January 2009. Inflation remains weak and consumer spending continues to be strong. The European Central Bank is sticking to its pledge to keep money pouring into the economy for as long as needed.
Britain’s economy has slowed sharply this year, falling behind a recovering Eurozone, and it is expected to lose more ground in 2018 as the effects of the Brexit vote are felt by consumers and companies. Inflationary pressures are likely to continue to build after hitting a five year high dueto the fall in the value of the pound, while unemployment fell to its lowest rate since the 1970s. All of which caused the Bank of England to raise interest rates for the first time in more than tenyears, although it is expected to only raise them gradually over the next few years.
Japan’s economy has expanded for seven consecutive quarters making this the first time it has gone that long without a contraction in eleven years. Unemployment is at a multi-decade low and corporations are experiencing near record profits. Prospects for workers look brighter as a tight labor market is beginning to push wages higher. Consumer prices and income are showing modest gains. Japan still faces deep structural problems. Its population is aging and dwindling but investors appear to be looking at the bright side as Japan’s main stock index rose to its highest
level in almost 26 years.
The environment for emerging markets was great in 2017 as a period of  strong growth, low inflation and economic reforms were key factors in allowing them to end years of underperformance versus their developed peers. High yields and buoyant growth prospects enabled emerging markets to rise despite the U.S.’s protectionist rhetoric and a swathe of geopolitical brush fires. They face several key challenges going forward such as maintaining domestic stability amid reformsand reducing financial leverage without upsetting financial stability.
Stock markets have been lifted by robust global growth and expanding corporate profits as the world finally appears to be shrugging off years of crises and sluggish growth. In addition, corporate profits in all major regions increased by more than 10% over 2017 which further amped up performance. International markets as a whole were up 4.3% for the quarter and 25.6% for the year (all figures in U.S. dollar terms). European stocks rose 2.5% for the quarter and 15.8% for the year. Asian stocks climbed 9.0% for the quarter and 19.5% for the year, while emerging markets
led the way, up 7.7% for the quarter and 27.9% for 2017.
The economic and earnings backdrop is still quite positive for equities but we need to be mindful of risks to financial stability. In general, the stars should continue to align from a macroeconomic perspective with global growth expected to be steady and inflation subdued. Full valuations could be a potential drag and there is always the possibility of corrections however the markets still look well positioned for future increases.

Don’t Sell In May; Settle In

Stock investors often hear about “sell in May and go away” around this time of year. It implies that investors should sell their stocks in early May and buy them back in late October at a lower price. Since 1968 the S&P/TSX Index has risen an average of 8.0% (including dividends) from November to April but added only 1.5% from May to October. Interestingly enough, the “sell in May and go away” phenomenon appears to be universal across international stock markets.

Investors should be cautious about trying to trade around this phenomenon though. First, you would have to get two decisions right: the sell and the buy, which is extremely difficult. Second, the negative months in Canada were not that bad in absolute terms, so buying back the stock often cost you more. And finally, there have been multiple periods with good returns during the summer months (less than half of these months had negative returns).

Besides this phenomenon should be taken with a grain of salt, since most of the weakness was triggered by unpredictable events such as: Brexit last year; the Chinese equity market meltdown in 2015; the OPEC triggered oil price collapse in 2014; the world financial market selloff in 2008; and so on. All these were summer and early fall events.

In fact the really only bad month is September which, as seen in this chart, has posted an average decline of 0.38%. Only two other months, June and October, show any average loss. September is the worst month as the market fell more than 54% of the time, while over the same 49 year period stocks have only declined 42% of the time. October, feared as the crash month, shows an average loss of 0.11%, but it is the most volatile month. At the head of the pack was December with an average gain of 2.42% which was far better than the famed January effect.

Theories for September’s weakness are abundant: there is less money flowing into investments in the latter half of the year as bonuses and tax refunds came in early and frequently go into RRSPs; investors begin to pay more attention to investments after a summer off; and psychologically, when the leaves turn, vacations end and the days get shorter, there is a tendency for impatient investors to get rid of shares they had been thinking about selling. Then again it could be no more complicated than the fact that there are only 12 months in the year and there has to be a best and a worst one. Some month had to be September.

History shows investors could be better off rotating, rather than retreating. Investing in cyclical sectors (Consumer Discretionary, Energy, Health Care, Industrials, IT & Materials) from November to April and then gravitating toward defensive groups (Consumer Staples, Financials, Telecom & Utilities) from May to October could be rewarding. As the data to the left shows, the defensive stocks held up better between May and October, but only Utilities did better.

Reading too much into past trends can be a mistake however. The September market downturn is ultimately just a sort of emotional malaise. It is interesting to note that September’s negative seasonal bias is much less pronounced in years when the market is up year-to-date, as is the case this year.


This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

Going Independent

Transitioning to a Financial Planning Model

This document is for advisors who are contemplating an independent business model for greater professional freedom, deeper client relationships and the financial rewards of owning a business.  It is organized into the following sections: Why Advisors Go Independent; The Economics of Independence; Putting Together a Plan; and Choosing a Platform.


Why Advisors Go Independent


Personal Freedom – Many advisors understand that their success flows from their own skills and abilities, not the resources and reputation of their dealer. For these advisors, independence offers the freedom to control, and retain more earnings and build equity in a business that could eventually be worth millions.


A Client Centric Service – Having built a book over many years you are now in a position to focus on your best relationships and perhaps attract new clients by providing unbiased, trustworthy advice, together with a compensation structure which is in sync with customer needs.


Clients Losing Trust in Institutions – Clients are choosing independent advisors more frequently because they believe they are more objective. Clients may be happy with their advisors but mistrustful of large dealers or the industry as a whole. Independence eliminates concerns of a parent company that could potential be associated with a scandal, tainting the image of the service. Clients who were once attracted by the name of a major dealer are now recoiling because of the negative publicity.


Conflict of Interest Resolution – Although the pressure to sell proprietary products has abated at many firms, some advisors acknowledge “subtle encouragement” to offer specific products.  Independent advisors aren’t under pressure to sell in-house products and have greater freedom to discuss the services and strategies which are in the best interest of their clients.


Compliance Restraints – Advisors are finding it harder to do business due to increasing regulation as a result of the financial crisis, dot com bust, scandals, frauds and firm failures.  Financial planners are able to look at the big picture on behalf of their clients while outsourcing compliance responsibilities to other providers to shoulder the majority of the burden.  


Independence Can Be Lucrative – Many advisors have already moved toward a fee based platform by running their own firm within the payout structure of a larger institution but they could be leaving money on the table. Advisors who transfer this same business model to an independent platform can, depending on how they manage expenses, have the opportunity to significantly increase their income.

Independent advisors are also building equity in their business. A successful independent advisory firm may exceed 25% operating profit margin after fairly compensating the owners and meeting overhead expenses. The profitability of independent firms creates a transferable cash flow stream. The industry press has reported numerous acquisitions at valuations from 1.5 to 3 times annual revenues or between 6 and 10 times earnings. An advisor with $1 million in annual fees could, by taking the business independent, create an asset worth between $1.5 and $3 million, a portion of which may be tax free in Canada.


The Industry Is Embracing the Fee Based Model – The fee based model provides a predictable revenue stream to the advisor, who continues to serve the account throughout the year and across market cycles, which in turn aligns interests with the client. When fees are based on assets under management, the advisor has an incentive to increase revenues by growing client assets. Independent advisors enjoy greater flexibility in setting client fees which helps them to become more competitive and manage their practices more effectively.


Advisors Want to Control Their Professional Future – Of all the reasons advisors choose to go independent, autonomy is perhaps the biggest lure. Independent advisors who have an entrepreneurial spirit want greater independence. The independent advisor model gives them the Theyfreedom to create their own value proposition.


The Economics of Independence

The transition to an independent platform is highly dependent upon having sufficient resources and a detailed transition plan. There are organizations that can simplify the process but the initial step must be to understand the economics of independence for your circumstances.

Independent advisors typically retain 100% of their revenue but at the same time assume the expenses of their own office. A detailed plan is required to ensure that after paying rent, utilities, insurance, software, marketing, administrative salaries and other business expenses you end up with a profitable firm. Results vary primarily by expense management and your client profile. Advisors that serve smaller household accounts tend to be less profitable than their peers. When turning independent, advisors must always remember that in addition to serving clients they are also running a business.

An advisor’s outlook on independence may also be influenced via forgivable loans from their dealer which were taken on as a signing bonus.  Focusing on such loans may be shortsighted because with independence, the financial rewards come from building your own business. Clients are generally considered to belong to the dealer but under the independent model your clients are truly the foundation for building equity. When you are ready to retire, the business can be sold for a multiple of revenues or income.

Then there is the risk of moving from a firm where the payout seems consistent to an independent model where expense management becomes a significant concern. Becoming independent also involves a number of other issues beyond the fundamental economics.


Putting Together a Plan

Initially, you should evaluate your existing clients to:

  • determine which clients are a good fit for the independent business model
  • the likelihood that they will move with you
  • the timing of asset transfers
  • the subsequent implications for cash flow

You will also need to craft a very compelling value proposition to clearly explain why you are making the move and the benefits of continuing the relationship.

Once you have identified potential clients and their portfolios you will need to:

  • Thoroughly understand the terms of any non-compete and confidentiality agreements that you have with your dealer
  • Assess the implications of changing from a commission based to a fee based business, including how to handle trailer fees
  • Consider the clients’ portfolios that may hold proprietary investment products of the dealer and the tax or expense implications of liquidating them
  • Become familiar with the types of assets that can be easily transferred from one financial institution to another

Once your potential asset base has been determined you can start on your business plan:

  • Service model – the types of services you want to provide at the start, and as you grow
  • Target market – determine the ideal client profile, including age, geography, minimum account size, and investment needs
  • Your strengths – a list of the your competitive differentiators and value added capabilities
  • Location – the site for the new business, and whether the firm will share, lease, or own the premises
  • Timeline – key steps and dates for getting started and for managing the firm on an ongoing basis
  • Revenue projections – first year revenue and profit targets, including sources of revenues and projected cash flow – knowing that not all of the clients will necessarily be part of the practice on day one, and fees are typically paid quarterly in arrears
  • Budget – a first year budget for major expenses
  • Insurance – ensure proper coverage

With a fundamental plan sketched out, you can add more detail at the next stage which includes the assessment of other service providers.

  • Strategic planning – create a business plan and think through the strategic considerations of the change
  • Technology and client reporting – seek out turnkey portfolio data management and client performance reporting
  • Business set-up – create a workplace that will welcome clients and motivate employees
  • Marketing – design a sound marketing strategy that broadcasts the value of the services to the target audience


Choosing a Platform

As you can see there are many steps involved in becoming independent but it is possible to find support from outside firms. Unfortunately, too many advisors spend too much time inefficiently trying to do everything from asset allocation to writing investment policy statements, performance reporting, investment selection, customer service and day-to-day business operations. It’s little wonder they feel exhausted at the end of the day.

Many functions can and should be delegated. The value-added services that you should consider outsourcing include:

  • Client management and compliance– CRM technology, client profiling, KYC requirements, investment policy statements and asset allocation
  • Investment management – manager due diligence, research, rebalancing, overlay portfolio management and access to institutional managers
  • Account administration – account opening paperwork, setting up accounts, monitoring transfers and overseeing the ongoing administration of accounts
  • Performance monitoring – data aggregation, reconciliation and performance reporting
  • Operations – billing, compliance tools and online account access
  • Market and manager analysis – manager reviews, quantitative evaluations and performance comparisons
  • Training and education support – newsletters, industry insight and product support

The platform you choose should allow you to remove the burden of cumbersome, complicated back office responsibilities and gain access to a one stop shop of investment services and professionals. It should reduce the resources you allocate to in-house asset management, where it is increasingly difficult to gain a competitive edge relative to the big, specialized players and it should maximize your capacity to provide the highest level of personal service possible to clients.

In the final planning stage, you should evaluate potential platform providers.  Here are some questions you should ask when conducting this crucial assessment:

  • Product value – Does the platform’s product solution create real value for my firm and my clients? Does the platform provide incentives to sell certain products? What is the platform’s breadth of manager/investment selection?
  • Service value – Does the platform provide education on business building issues? Does the platform offer technical support on a range of topics that may be of interest to clients? What is the platform’s reporting capacities?
  • Personnel value – Besides helping advisors with the day-to-day running of their firm, how well does the platform help advisors think strategically, grow their business and increase their income?
  • Image value – How experienced is the platform’s management team and what are their areas of expertise? What are the platform’s investment philosophy and process like?
  • Time costs – How rapidly can the relationship begin and how soon will it make a difference? What are the platform’s service quality and responsiveness like?

Keep in mind that the platform should provide a level of service you cannot find elsewhere. If the platform is employee owned, it can empathize with small business owners. Additionally, they should offer a state of the art platform that allows the advisor to stand out from a service perspective.

Advisors need to counter growing threat of robo-advisors

As new research shows robo-advisors are gaining traction among clients, advisors should find ways to use these tools as well as provide the unique services that set them apart.

As robo-advisors present a growing threat to traditional financial services firms, financial advisors should find ways of using these tools in their practices and focus their efforts on services that cannot be replaced by technology, according to several investment industry insiders who spoke at the Independent Financial Brokers of Canada’s (IFB) Spring Summit in Torontoon Thursday.

“[Robo-advice] is going to become more and more prevalent,” said Chris Ambridge, president and chief investment officer at Provisus Wealth Management Ltd. and president of Transcend Private Client Corp., an online platform and a subsidiary of Provisus, both based in Toronto.

Ambridge pointed to recent statistics from Strategic Insight showing that assets under management at Canadian robo-advisors jumped by 44.6% to $1.07 billion at the end of the first quarter (Q1) of 2017 from $743 million in the fourth quarter (Q4) of 2016. During that same period, the number of accounts surged by 56.1% to 46,149 from 29,572, while the number of clients rose by 55.2% to 33,757 from 21,752.

The size of those accounts, however, is shrinking. At the end of Q1, the average account size was $23,274, down from $25,126 in Q4 2016.

Nevertheless, research suggests that a growing number of clients are choosing robo-advisors over traditional advisors. Ambridge presented the results of a recent survey showing that 30% of investors believe robo-advisors do a better job than human advisors, and 72% of clients under the age of 40 said they are comfortable working with virtual advisor.

But it’s not only millennials who are making the switch. The average age of a robo-advisor client is 44, Ambridge said: “You would think it’s all millennial people who are just starting off, but it’s not.”

In addition, the survey shows that of the affluent clients who had switched firms in past two years, 45% went to a robo-advisor.

The shift to robo-advisors is being driven in part by consumers’ growing preference to transact digitally, but also by a lack of trust in the financial services sector, Ambridge said. In fact, 70% of the clients surveyed said they question the trustworthiness of financial services professionals.

“Trust in financial services is not at an all-time high,” he said. “In fact, it’s pretty low, quite frankly.”

For advisors, this means that taking the time to build solid relationships and earn clients’ trust is more important than ever, Ambridge said.

Instead of viewing robo-advisors as a threat, advisors should focus on the factors that differentiate them from those online services, countered Ron Fox, chairman and CEO of Toronto-based Glidepath Portfolio Services Inc.

“The human financial advisor is not going anywhere,” he said. “Technology cannot replace you, because the reasons why people value your service have nothing to do with technology.”

Specifically, technology could never replace the empathy and reassurance that clients get from their advisors Fox said. However, he noted that advisors can use technology to improve the services they provide.

“Technology is facilitating customized and enhanced levels of service that weren’t accessible to most in the past,” said Fox.

Specifically, advisors should utilize technological tools to help with tasks that can be done more quickly and more affordably by computers, such as asset allocation and systematic portfolio rebalancing, Ambridge said.

“Don’t spend a lot of time on things that computers can do better,” he said. “All you’re doing is wasting your time.”

That allows advisors to focus on the value-added personalized advice that computers cannot offer, such as comprehensive financial planning, tax planning and helping clients build a legacy, he said. Advisors should also strive to offer a variety of different asset classes and products to differentiate their offerings from those available online.

Embracing technology to automate some of the administrative tasks that previously consumed advisors’ time and resources can also help advisors be more profitable, added Robert Frances, chairman and CEO of Montreal-based Peak Financial Group.

By Megan Harman | June 01, 2017 15:20