Thursday, July 12, 2018

3Q Outlook


There isn't much that you haven't already heard about trade war waged by  the new administration in White House. Our job is to protect and grow capital the best we can. Sometimes this requires contrarian thinking and sometimes we have to follow the money.

For nearly a decade now, the right strategy has been to invest in dividend paying stocks and preferred shares. That has come in question as rates rise making yields less attractive than before. In Canada not much else is happening. Our worry here is trade and tariff. the old Trudeau wanted Canada to diversify. Nearly fifty years later we continue to depend on commodities. And they are dependent on world commerce, any threat of trouble in China makes our stuff less profitable. 

Longer term I am not negative about trade issues. World has relied too much on the US. China and India should develop into self sufficient economies not just factories to the world or a source of software engineers. But that will take years. Changes on stock markets come faster. Fortunately this is happening while north american economies are doing well. Employment is high so are the profits. Fear that has crept in to the market psyche is that this won't last long. Some even talk of a recession in a year. 

However, recession signals (credit spreads deterioration, spike in jobless claims and/or short bond yields climbing further) to the point where asset mix model’s preference tilts toward Bonds versus Equities are not there yet.

Choices are to wait it out, or hide in money market, prefs and short bonds.
We like waiting out with prudence. And prudence is to find sectors and instruments that serve well at the end of economic recovery. It turns out our portfolios are so structured without much interference.

The markets are doing virtually nothing, Canada TSX did 1.9%. US SP 500 2.7% and bonds 0.6% in the first half of this year. Your US currency did give you an extra 5% in C$ but only if you convert it back. That game is fraught with peril. So we stay cautious.