Recent conversations have highlighted an interesting juxtaposition between how our clients are feeling about the financial markets and their portfolios, responding to the media’s rather somber outlook regarding various headwinds for the Canadian economy, vis-a-vis how well the capital markets have actually been treating their portfolios in the early stages of 2015.
The Canadian economy has had its fair share of negative economic news over the last few months:
- the high profile departure of Target, with resulting layoffs
- the unexpected collapse of global oil prices and its negative effect on the Canadian economy (especially Alberta) and the Canadian dollar
- the well-publicized concerns of the Bank of Canada’s Governor about the historically high level of personal family debt in Canada and the relative overvaluation of Canadian residential real estate
Clearly all of these issues will provide challenges for the Canadian economy going forward in 2015…. and yet, most portfolios were up 5% in the month of January!
The good news is that your portfolio does not watch the nightly News. The unex- pected lowering of the Bank of Canada’s overnight rate caused Canadian bond yields to fall, which had a positive effect on the valuation of the existing bonds in your portfolio. The Canadian dollar has had a rather dramatic drop over the last few months, which has had a significantly positive impact on the value of all of your US dollar denominated assets (whether in cash, bonds or equities). And even your Canadian equities as a whole have performed very well in the opening stages of 2015, with the exception, of course, of oil and gas stocks.
What has been unusual of late is that all of your asset classes of fixed income, Canadian equities and foreign equities, have been rising in tandem. Usually, when the portfolios experience an increase in value, such as we have had in January, it is because one asset class is out-performing the others, resulting in a rebalancing call to bring your portfolio back into line with the asset allocation plan. With all asset classes rising together, we did not get a call to rebalance the portfolios overall. Within the equity portfolios, however, we are seeing sector adjustment calls to add to the resources sector and sell off other sectors, typically health and technology. On the back page, you will see our annual sector report.
We have no idea how long we will enjoy filling up our gas tanks at these lower pric- es or how long the oil & gas sector will be under pressure from these lower com- modity prices. We do however like to buy resource companies when the outlook for their commodities is bleak.