For What it's Worth; Financial Market Review for October
We are just over ¾ through 2018 and as far as most of us are concerned we have seen enough ‘stuff’ to last us an entire year (or longer)
I am going to start with how equity and bond markets are doing in general (see below). As you can see the bond market has negative returns year to date caused by interest rates moving higher due to IMPROVING economic conditions…the question is how long will economic conditions improve with interest rates moving higher.
The Canadian equity market is flat while global equity markets (particularly the United States) have positive returns, but not huge positive returns.
I will show the ‘likely’ year to date returns for portfolios comprised of equities and bonds below.
*the equity portion of the above portfolios is 50% XIU and 50% XAW
** the fixed income portion of the portfolio is the TD bond fund
As you can see by the chart above the portfolios that are often considered ‘least risky’ (full of bonds) actually have the lowest rate of returns year to date because of the rising interest rate environment.
What we MUST REMEMBER is that drops in a bond price are often temporary since the bond will have a maturity and at maturity the bond will be paid in full. The saying ‘time heals all wounds’ is very applicable in the bond world.
INTEREST RATES-BOND YIELDS
For anyone reading these e-mails or visiting my office in 2018 you will have heard me say that my only REAL concern is the next recession. I will also have said that I don’t know when it will be BUT that we are probably closer to the next recession that we are from the last one (2008-2009). Recessions are often preceded by short term interest rates moving higher than long term interest rates. This is called an inverted yield curve. I have shown the current interest rate environment for the U.S. and Canada.
So for those interested in just a view of the general landscape you can stop reading and consider yourself lucky! For those looking for a deeper look than continue on.
As you can see by the chart above short term interest rates are not higher than long term interest rates though Canada is very close to a flat yield curve and thus much closer to a inverted yield curve.
While owning shorter duration bonds (5 years and under) is the best protection from rising rates (bond price is not as sensitive) LONG BONDS are the best protection from a recession. Why you ask (?) A recession will lead to lower rates and the longer duration bonds will increase dramatically in value as interest rates fall. Building a position in long bonds is a very prudent strategy to protecting the value of your balanced portfolio.
‘STAR’ Equity & Bond pick (analyst report attached)
Invesque Inc is a real estate investment company that specializes in the acquisition of health care and senior living properties throughout North America
This is not a new pick and many clients already have exposure to this business. This business comes with a 9.3% dividend yield and the ability to grow due to its small size. Because it is a small company its equity and its bonds are less liquid and may not trade close to real value at times.
There are also 2 bonds trading at this time. One has a 4 year maturity and a 5% coupon while the other has a 5 year maturity and a 6% coupon. Both trade CURRENTLY at about a 4-6% discount to par which makes them a good value for those willing to have individual bond positions.
The following are some update on my various ‘lists’ starting with TOP 10 INCOME & GROWTH.
BCE has been in a trading range since the start of the year and is currently at the bottom of that range with the recent spike in bond yields (which is negative for this type of stock).
BCE continues to raise their dividend. Current yield is 5.75% :)
BSR Real Estate Investment Trust is trading below its IPO price but has had some recent positive momentum along with analyst coverage.
This apartment building business has a current yield of about 5.73% PLUS some potential for share price appreciation.
Cineplex has moved well of the low of 2018 and has shown recent strength as box office numbers for 2018 have been good and continue to look strong for the balance of 2018.
The distribution for this entertainment business is about 5.4%.
Dividends have steadily risen since 2011.
I have updated a position from the more aggressive OPPORTUNISTIC/TRADE list. (these positions are not suitable for all clients as the volatility level will be higher)
I continue to view CI Investment as a 20%+ trade. They are the largest non-bank (or insurance firm) investment firm in a industry where scale matters. They are aggressively buying back their own stock which reduces the dividends paid out (they have already cut the dividend) which gives them capital for further growth.
Those looking for additional information or wondering if any of the above positions are suitable for their situation please reply to this e-mail
Anyone who has not had a meeting in the last 90 days should contact the office (Gayle or myself) to arrange a phone or in office meeting.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Argosy nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may not be suitable for all investors nor eligible for sale in some jurisdictions. This research and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of Argosy.
‘historical analysis does not reflect future returns’