Market Watch Weekly - April 24, 2015

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This week we saw our Minister of Finance, Joe Oliver, table the Federal Budget for the 2015 – 2016 year. This year’s budget is forecast to be balanced, and as any pre-election budget would go, there was something for everyone. In reviewing the various commentaries on the budget, we found the comments from Scotiabank’s economic department to be quite good and have paraphrased them below.

 

The Government’s balanced budget forecast was well known in the market prior to its release, thus there was minimal immediate impact on our capital markets. This year’s budget focuses on fulfilling many of the previously announced commitments and steps forward on several emerging priorities such as transit.  One of the center pieces was the substantial tax relief package provided to families and small businesses, which is expected to provide approximately $5 billion annually. Achieving the forecast surpluses over the next few years should be broadly supportive, recognizing the benefits in competitiveness and flexibility that they offer to our economy.

 

Entering a post-deficit era, the Budget reviews a broad range of policy issues, such as immigration, interprovincial trade barriers and apprenticeships to better position the Canadian economy for the second half of this decade.  While policy debate will certainly take time, it should allow for great movement of both capital goods as well as labour, which should help better position the Canadian economy over the coming years. This potential easing of policy restrictions should be welcome news for a great number of industries, such as BC’s wine industry which currently faces a considerable regulatory overhang when shipping their products outside of the province.

 

This budget also features several spending initiatives designed to benefit just about every Canadian. The government is creating a new Public Transit Fund that provides an additional $750 million over two years starting in 2018 and will increase to $1 Billion annually thereafter. The spending initiative that really helps individuals was the announced bolstering of the Tax Free Savings Account contribution limits to $10,000 per year from the current $5,500. Granted, not everyone can save this new limit per year, but it is cumulative, thus allowing for increased savings in future years should your ability to save increase. Retirees also received the ability to reduce the mandated withdrawal amount from their Registered Retirement Income Funds (RIFs). It was recognized that we are living longer and that increased flexibility towards the management of your RIF’s income was important.

 

To illustrate just how beneficial the TFSA can become for a young Canadian, my daughter who is now 20 will be in a position to put aside approximately $450,000, receiving tax free growth up until she reaches 65.  This is in addition to any RSP savings that may be accumulated over that same period. This reflects the governments’ objective laid out in Budget 2008, which was that in two decades 90% of Canadian would be able to hold virtually all their financial assets in tax-sheltered vehicles.

 

A CRA spokesperson confirmed to Advisor.ca that Canadian’s can start taking advantage of the increased $10,000 contribution limit for the TFSAs immediately.

 

The projected surpluses accelerate the downward trend in our accumulated deficit relative to GDP, which is expected to be the lowest among the G7 countries. The IMF is also forecasting that Canada’s debt relative to GDP will also fall to approximately 85% by next year. These are positive’s from the standpoint that over time this will leave us in a much better place when it comes to managing our debt and providing for future generations.

 

While you’ve all probably seen plenty of media coverage, we thought you would appreciate an overview our strategic partners at Davidson & Company put together in the form of a concise budget update video. We encourage you to watch and call us if you have any questions.

 

Click here to view the video.

 

In the Markets, North American equities rebounded nicely this week with the Nasdaq hitting a fresh new high yesterday (5,056), closing above the March 2000 peak (5,049).  But, unlike in 2000, the index is trading at a much lower PE ratio multiple (22.3 vs. 72.2 back then).  So far, company earnings, while topping analysts’ estimates, remain disappointing on revenues and economic statistic releases also mostly came in below expectations.  But investors seem focused on central banks, which are unlikely to turn the screw anytime soon.  Indeed, the Peoples Bank of China (PBoC) cut its reserve requirement ratio (RRR) by 100bps to 18.5% on Sunday, sparking a rally in global equity markets.  The reflation cycle in China is far from complete given that the Chinese economy slowed down to 7% YoY in Q1, a six-year low. In fact, a Europe-like Long Term Refinancing Operation (LTRO) in China could be the next step to cushion the economy against a hard landing. Notably, the first state-owned Chinese company (Baoding Tianwei Group) defaulted on an onshore bond. From our point of view, Chinese authorities will do whatever it takes to avoid a cascade of defaults. Notably, the LTRO program in Europe proved effective in halting the contagion from the periphery to the core of the Eurozone, lowering lending rates and allowing for cheaper financing. We suspect PBoC officials could adopt a similar strategy to help local governments.

 

The Canadian Dollar was on a tear this week, up nearly one cent. Bank of Canada governor Poloz mentioned earlier this week that he expects the economy to recover in Q2 and that the policy outlook is firmly data dependent. But crude oil is the most likely culprit behind this week's C$ strength, remaining above the $55/bbl mark despite another inventory build (+5.3MMbbl).

 

We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.

 

As always, we welcome your feedback.

 

Have a great weekend.

 

The Dekker Hewett Group

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