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Market Watch Weekly - March 21, 2014

Erik Dekker - Mar 21, 2014
This week the global capital markets had to reconcile quite a bit of data leading to relatively busy week in terms of volatility.

This week the global capital markets had to reconcile quite a bit of data leading to relatively busy week in terms of volatility. However, in terms of market prices we are essentially at the same levels we have been all month. Daily volatility aside, we are generally positive on the longer term direction of the capital markets, both in Canada and globally.

The big news this week in Canada was the resignation of Finance Minister Jim Flaherty as he is returning to the private sector after 8 years. Without getting into a political debate, we feel that Jim Flaherty did a relatively good job handling our country’s fiscal policies. Like him or dislike him, given that Canada went through arguably the worst global financial crisis since the 1930’s without experiencing a serious recession, unlike most other developed nations, we think he did an overall good job.

The global capital markets reacted to his resignation relatively well however we did see the Canadian dollar experience some pressure for a day or so. Considering that Joe Oliver was very quickly named as the new Finance Minister, there was little uncertainty in the marketplace and we expect to see our dollar’s longer term value driven by the Bank of Canada Governor Stephen Poloz.

The Canadian dollar currently sits at just over 89 cents and our expectation is that we will see our dollar remain below the 90 cent level for the near term. Many of the market strategists that we have spoken with over the past few months see our “loonie” remaining in a narrow range of 88 to 90 cents for the first half of this year.

During Jim Flaherty’s tenure as Finance Minister the Canadian Dollar appreciated approximately 3% against the US Dollar, reaching an all-time high in 2008. The Canadian benchmark Standard & Poor’s TSX Composite also out-performed the S&P 500 in the U.S., in Canadian Dollar total return terms. So while many investors only remember the October 31st, 2006 Income Trust taxation decision, longer term Canadian investors have had a good fiscal environment in which to invest over the past 8 years.

Elsewhere in Canada we saw a surprise resignation by Alberta Premier Alison Redford. We do not see this is as having significant impact on the energy sector within Canada’s capital markets. We remain positively positioned within that sector and do not feel that any change in the Premier will affect the policies governing the cost and revenue structure for companies operating within the Province of Alberta. Given that the PC party has been in power in Alberta for over 40 years, we do not foresee any changes that would affect investors at the present time.

The news that really moved the markets up and down this week was the Federal Reserve announcing that they are leaving the overnight interest rate unchanged and that they will continue to taper the purchase of Treasuries and Mortgage backed Securities by another $10 billion per month. No change on that front, however the unexpected announcement that the U.S. Federal Reserve could begin to raise interest rates as soon as six months after the tapering ends did shock the markets somewhat. Whereas most people had expected the Fed to remain on hold with raising interest rates through the entire 2015 year, Fed Chair Janet Yellen surprised most by saying that interest rates could begin rising as early as mid-2015 and could rise higher through 2016 than previously expected.

So despite the announcement of a new Finance Minister in Canada and the prospect of rising interest rates in the U.S, we do not plan to alter our investment strategy in the short term. Longer term we certainly see some headwinds from the ownwership of longer-dated fixed income and feel that equities will continue to be driven by company earnings as well as national and larger regional economic health and expansion.

We will be speaking with many of you on how to adjust our ownership of fixed income assets in order to better handle these expected headwinds as interest rates begin to rise. It is our opinion, along with our Canadian and U.S. strategists, that the North American equity markets remain attractive for investment.

Lastly, the other big news of the week is the beginning of the annual NCAA College Basketball tournament. For those of you in pools, the first few days of the tournament never fail to disappoint when it comes to upsets and exciting finishes that either make or break your office pool. This year is no different.

So for those of you watching the tournament, enjoy the fun and excitement, and for those of you (typically our spouses) where it is less looked forward to, it will all be over April 4th.

Have a great weekend.

Thank you for your trust.

As always, we welcome any feedback.

The Dekker Hewett Group