Saturday, April 19th12.2°C
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David Allard

Valuation fears grip markets

The Big Picture

Valuation fears grip markets

Growing concerns about the level of stock market valuations sparked a risk-off trade in global markets this week. Investors are worried that many companies’ high share prices aren’t justified in the face of increasingly muted expectations outlooks for earnings. Disappointing economic news out of China Thursday didn’t help as the latest export figures point to further slowing in the world’s number two economy. Exports declined 6.6% last month following a drop in February – the first back-to-back falls since 2009. Chinese trade figures also showed an 11% drop in imports providing another source of concern. News out of the US was, on the other hand, largely positive with jobless claims for last week coming in at the lowest level in seven years and falling more than expected. In Washington, the IMF slightly trimmed its global growth forecast to 3.6% in 2014 and 3.9% in 2015. In the same report, the IMF pegged Canada’s growth to slow to 2.3% this year and 2.4% next; still good enough for third among G7 countries trailing only the UK and US. Finally, after the biggest sovereign debt restructuring in history, Greece returned to the bond markets this week looking to raise three billion euros. That turned out to be an easy task as the five year issue with a yield of just under 5% was oversubscribed.

 

Markets

Stocks turn lower

North American stock markets turned lower late in the week. The NASDAQ and its heavy complement of tech and biotech stocks led the way downward for the four-day period falling 73 pts. to finish at 4,054. The Dow was off 242 pts. to finish at 16,170, the S&P 500 shed 32 pts. to settle at 1,833 and the TSX gave back 85 pts. to end at 14,308.

 

Our Recommendations

Valuation remains a barrier to significant share price appreciation

Equities - Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Despite declines in both the TSX and S&P500 indices over the past week, we continue to see valuation as a barrier to significant equity gains in the near term. We continue to expect positive returns for North American equity markets in 2014, and maintain our cautious stance on interest rate sensitive sectors. In the news, the railways made headlines this week as CN’s CEO spoke out against the Canadian government’s imposition of minimum grain shipment targets in March while we also saw a pickup in M&A activity in the Canadian energy sector.

Fixed Income - Andy Mystic, Director, Portfolio Advisory Group wrote “Very little has changed, in our overall view, on the back of this morning’s non-farm payrolls data. Although the US economy will likely continue to show momentum as we enter H214, this morning’s employment data did little to support a breach of the US ten year’s key technical resistance level. As a result, we see ten year Treasury yields remaining range bound in the near term. There does remain the risk that steady growth and momentum does lead to an uneven normalization of yields in the back half of the year. We continue to view name selection as a key aspect of outperformance as the economic backdrop improves and issuers are inclined to take on greater risk. We continue to believe that corporate and provincial paper should outperform straight government paper in the near term. The Canadian yield curve is likely to remain well bid as inflation worries remain muted and the BoC continues to retain a dovish bias. As a result, value inside the three year part of the Canadian curve remains centered on GICs. Canadian credit has seen a bit of shift toward exposures in the five to seven year part of the curve. We see the value of some modest term extension but, given the upward bias and influence of the US term structure, we remain cautious.”

 

All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.



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US Fed assures on interest rates

The Big Picture

US Fed assures on interest rates

The week got off to a good start with supportive comments from Fed chief Janet Yellen who assured the markets that low interest rates were here to stay. Yellen’s comments come on the heels of a Fed policy meeting over two weeks ago at which officials discussed the trajectory of interest rate increases. That discussion led many market participants to believe rates may be rising sooner rather than later – something Yellen went out of her way to discount. Tuesday saw a snapback in ISM manufacturing data for March after cold weather hurt the numbers the previous two months. The non-manufacturing ISM report released Thursday also turned higher. Meantime, a Thursday jobless claims report showed the number of people filing for benefits last week rising to 326,000; the expected number was 320,000. In Europe, the ECB made it clear Thursday it would be open to further economic stimulus – including unconventional stimulus – to try to combat lower inflation in the Eurozone. Interest rates across the Eurozone stand at .25% and inflation fell to .5% last month; more than a four-year low. The economic release with the greatest potential to move markets is the US non-farm jobs report due out this morning (April 4). Consensus estimates have the unemployment rate falling to 6.6% from 6.7%. Finally, first-quarter earnings season reporting gets underway south of the border next week.

 

Markets

Stocks rally on Fed comments

Yellen’s comments helped underpin a near week-long rally that helped the Dow hit an all-time intraday high Thursday as did the S&P 500 – its eleventh this year. For the four-day period covered in this report the Dow jumped 249 pts. to end at 16,572, the S&P 500 gained 31pts. to close at 1,888 pts. and the Nasdaq added 82 pts. to settle at 4,237. The TSX also had a good week rising 142 pts. to end Thursday at 14,402; getting closer to its all-time high of 15,073 set June 2008.

 

Our Recommendations

Spring thaw brings bounce back in economic data, but markets likely to move side-ways in near-term

Equities - Himalaya Jain, Director, Portfolio Advisory Group wrote “Back in February, we were perplexed at the parallel upward moves in equities, gold, and bonds. We suggested that the loss of momentum in economic data was being interpreted differently by investors, but that the spring thaw would reveal which asset class had made the right interpretation. With the pace of economic data starting to show an uptick it appears recent equity gains have been justified, while gold and bonds have started to under-perform (again). While we expect Canadian and US equity markets to end the year higher than current levels, we continue to cite valuation as a barrier to significant gains in the near-term. Furthermore, seasonality, hawkish tone from the Fed, and geopolitical concerns reinforce our expectation that equity markets could remain range bound. Should economic data start to regain momentum, we expect financial, industrial, and energy sectors to outperform while interest rate sensitive sectors such as utilities, telecom, and REITs could under-perform. We continue to recommend holding higher levels of cash or cash equivalents and investors should seek to deploy on any meaningful pullbacks.”

Preferreds - Tara Quinn, Director, Portfolio Advisory Group wrote “It seems as if every week, holders of preferred shares receive a redemption notice for their existing 2014 rate resets which carry a high dividend rate (6.25%) and a wide reset spread (+4.00%). While these notices are expected, the search for replacement ideas has become very difficult as there is a limited number of bank preferred shares outstanding and the strong demand has pushed prices of certain securities to expensive levels. With all the redemptions/re-investment and benchmark yields lower quarter over quarter it was not surprising to see strong first quarter performance for the preferred share market (+2.70%). Looking ahead, further price appreciation may be limited but will be dictated more on supply/demand than relative yields. For those investors still holding non-bank perpetuals – now might be a good time to lighten up exposure following the recovery from December’s tax loss lows.”

 

Questions or comments? [email protected] www.yourlifeyourplan.ca

All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. 



The big picture

Positive US economic data fails to impress

The trend to more upbeat US economic data continued this week but it wasn’t enough to carry markets higher. The most recent encouraging sign was durable goods orders which rose, a better-than-expected, 2.2% in February from a month earlier. That was the largest increase since November 2013 and blew past estimates of a .8% rise. US consumer confidence also smartly rose to 82.3; well above expectations of 78.9. And on Thursday the number of people filing for jobless benefits fell to a four-month low while Q4 GDP growth was raised to 2.6% from 2.4%. Sentiment had been dented earlier in the week after two purchasing manager’s indexes disappointed. The first – a PMI measuring manufacturing activity in China – contracted for the third consecutive month slipping to 48.1 in March compared to 48.5 in February. In Europe, the PMI fell to 53.2 in March compared to 53.3 in February. The silver lining to both PMI drops came from central bankers in both countries which separately hinted that they may take steps to stimulate economic growth. Meantime, concerns continue to linger over Ukraine as the US and EU agreed Wednesday to prepare possibly tougher sanctions against Russia following its annexation of Crimea. Earlier in the week, the G7 suspended Russia’s participation in the G8 and cancelled plans to meet as ‘8’ in Sochi later this year. Finally, the IMF announced an US$18 billion loan to help the financially impaired Ukraine with other donors – Japan and the EU – already pledging assistance.

 

Markets

Stocks hesitant ahead of quarter end

Stocks have had a tough time advancing of late and with only two trading days left in the quarter it appears Canada may exit the period as the leader. From the start of the year to close Thursday, the Dow has slipped 1.88%, the S&P 500 is up.04%, the Nasdaq is off .61% and the TSX has run up 4.09%. For the four-days covered in this report, the Dow fell 38 pts. to end at 16,264, the S&P 500 shed 17 pts. to finish at 1,849, the Nasdaq dropped 125 pts. to finish at 4,151and the TSX gave back 157 pts. to end Thursday at 14,178.

 

Our Recommendations

Continue to recommend above-average cash levels

Equities - Himalaya Jain, Director, Portfolio Advisory Group wrote “Historical data suggests that equity markets perform very well in the 12 months leading up to the first Fed rate hike. However, as we suggested in last week’s Here’s What We’re Thinking, historical equity market return data leading up to the first Fed rate hike may not be applicable in the current scenario because the start of tapering (Dec 2013) could be viewed as the commencement of Fed tightening, and the period of out-sized equity market performance prior to the first rate hike may already be behind us. At this point, while we remain constructive on equities, our 2014 return expectations are relatively modest (7-10%). Given elevated geopolitical tensions we recommend holding above average levels of cash and cash alternatives with an aim of deploying on instances of weakness.”

Preferreds - Tara Quinn, Director, Portfolio Advisory Group wrote “The preferred share market continues to creep higher albeit on lower than average volumes as investors are being more cautious on purchase prices in order to avoid negative yields (to worst). While we still favour bank perpetual preferred shares, we encourage investors to be aware of the potential for early call dates and to choose entry prices carefully. In the rate reset sector, the difference in yields between investment grade securities and non‐investment grade securities still persists as investors have become more focused on the credit of the underlying company. Creating a ladder of rate reset securities is a good approach to be exposed to various interest rate environments.”


 

Questions or comments? Email us at [email protected]
 

All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.



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Weekly market strategy

Big Picture

All eyes on Crimean referendum

The crisis in Ukraine took center stage this week ahead of Sunday’s referendum to determine if Crimea will secede from the country and join Russia. The US has said it will not recognize the breakup of the country and has threatened a wide range of economic sanctions against Russia if it comes to pass. Germany also warned Russia Thursday over Ukraine saying the Kremlin’s actions could lead to diplomatic and economic retaliation from Europe. Another worry weighing on the market was flagging Chinese growth after industrial output and retail sales numbers missed estimates Thursday. Those misses come on the heels of last weekend’s weak export number which came in 18% lower y-o-y for February. The news was more upbeat closer to home as US jobless claims dropped to the lowest level since November falling 9,000 to 315,000. The median forecasts called for an increase to 330,000. Retail sales for the world’s largest economy also rose in February by 0.3%, following a 0.6% drop in January. Meantime, the EU released a common framework with which to assess the assets of 128 of Europe’s largest banks. The framework is just one part of a larger effort by the single-currency union to unwind bad banks, determine who picks up the tab and establish a supervisor for all euro banks. The ultimate goal is to break the link between banks and governments and restore credibility to the region’s banking sector. In Canada, the Harper government signed off on a free-trade agreement with South Korea eliminating duties on 98% of all goods.

 

Markets

Stocks step back

Stocks stepped back for the four-day period covered in this report with the Dow losing 344 pts. to finish at 16,108, the S&P 500 slipping 32 pts. to end at 1,846 and the Nasdaq shedding 76 pts. to settle at 4,260. The TSX outperformed major US indexes losing 49 pts. to end at 14,245 as traders bought up safe haven gold stocks.

 

Our Recommendations

It’s all about the banks this week

Equities

Himalaya Jain, Director, Portfolio Advisory Group wrote “Concerns about Chinese growth and geopolitical issues relating to Ukraine have resulted in reduced risk appetite. Recent US economic data has been encouraging and suggests segments of the economy are bouncing back from severe winter conditions, confirming that weather was the primary culprit behind softer data in January and February. With the S&P500 trading at 15.3x forward earnings, we expect the equity market to continue trading sideways in the near-term. In Canada, we view most equities as fairly valued at present, suggesting the need for investors to be more selective when seeking new investment opportunities. We continue to recommend carrying higher than average cash balances as equity markets are not as compelling as they were in 2013. Commodity markets have diverged in recent weeks, as China-related commodities like copper have slumped, while gold has rallied due to tensions between Ukraine and Russia. Although we are constructive on the outlook for the European economy, we are concerned that tensions regarding Ukraine/Russia could lead to further near-term under-performance in this region’s equity markets.”

 

All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.



Read more Navigating Your Wealth articles

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

After two decades in the financial services industry, Jeff's experience as an advisor and branch manager define his approach to providing customized financial planning, estate planning, and managed income solutions. Key to this approach is a thorough understanding of the unique challenges and goals that exist in every client's life. He is a partner in Navigation Wealth Management.

Jeff holds the Certified Financial Planning and Chartered Investment Manager designations. He lives in Kelowna with his wife Tanya, and their two (almost adult) enterprising children.

 

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca




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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.



These articles are for information purposes only. It is recommended that individuals consult with a financial advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.


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