In this Issue:
Understanding Your Annual Report

We attended Blackrock’s Canadian Investment Summit “Navigating a Shifting Investment Climate” in Toronto in June. The conference brought together an all-star lineup of Blackrock’s senior advisors and investment strategists to discuss challenges Canadian investors are facing, including the rise of populism, the end of easy monetary policy and their impact on global financial markets. Speakers included:

George Osborne: Former Chancellor of the UK Exchequer under David

Cameron, and Senior Advisor, Blackrock Investment Institute

Tom Donilon: Former National Security Advisor to President Obama and

Senior Director, Blackrock Investment Institute

Rick Rieder: Blackrock’s Chief Investment Officer, Global Fixed Income

Mark Wiseman: Blackrock’s Global Head of Active Equity and Chairman of Alternatives,  and former President& CEO of the Canadian Pension Plan

A prevalent theme was the effect technology continues to have on the global economy. New technology has a deflationary effect on an economy, because productivity improvements from this new technology result in more being produced with less, and that “less” is labour! As a result, the last 30 years have not been good from an income growth standpoint for high school or college degree graduates in the United States. The income gap between labour and capital earners is predicted to continue to widen.

The general consensus is that globally low interest rates aren’t going away anytime soon, due to the combination of a) the deflationary effect of technology, b) the increased demand for fixed income products by pension funds having to deal with the increased life expectancy of their pensioners and c) how highly dependent government balance sheets are to low interest rates. Although stocks do not currently look cheap on a traditional price-to-earnings-ratio basis, the panel felt stocks continue to be the best value on a relative basis. We are probably three years away from the earnings peak of this cycle. Interest rates will continue to remain low and, from a price-to-free-cash-flow valuation standpoint, stocks continue to look attractive.

No Canadian investment conference would be complete without some discussion on real estate. When looking at any asset, it is important to understand the valuation risks of that asset. According to Mr. Wiseman’s research analysis, real estate has the valuation parameters of an 18 year bond. As interest rates fall, real estate valuations rise. And if interest rates rise, the value of the real estate will decline, and to the same degree as an 18 year bond. With interest rates at very low levels, a small increase in rates can have a surprisingly large negative effect on the value of any long term bond. As an example, if the current the bond yield of 1.85% for Canadian Government 18 year bonds were to rise 2% to 3.85%, the effect on the price of that bond would be a decline in value of 26% from current levels. Their concern is that average real estate investors are not aware of the exposure they have to interest rates.