More evidence of slowing economic growth outside the United States drove the market narrative this week. On Thursday, the China Flash HSBC /Markit manufacturing purchasing managers’ index showed factory output contracted for the first time in six months. Meantime in Europe, the private sector of its biggest economy – Germany – grew at the slowest rate in 16 months while France witnessed the fastest drop in new business in over a year. The disappointing growth data out of Europe and China came on the heels of Japan’s admission Monday that it officially fell into recession. Its real GDP fell 1.6% on an annualized basis in Q3 following a 7.3% decline in Q2. The back-to-back quarterly contractions meet one definition of recession which some view as a setback to the policies of Prime Minister Shinzo Abe. His ambitious economic agenda – Abenomics – is squarely focused on reviving Japan after two decades of stagnation. To that end, Abe said on Tuesday he would call an early election to seek a fresh mandate for his economic policies and postpone an unpopular sales tax rise. It was an April 1 sales tax increase from 5% to 8% that sparked the deep, second-quarter contraction in GDP which is why Abe wants to delay a further rise in the sales tax rate to 10%. Turning to the US, economic data continued to point to a growing US economy as weekly jobless claims came in below 300,000 – a key gauge – for the tenth week in a row. And on Wednesday, Fed minutes hinted at increasing confidence regarding the economy. In Canada, officials voiced disappointment after the Keystone XL pipeline failed to make it through the US Senate and the Canadian government offered – for the third time this year – a 50-year-bond maturing in 2064.
Stocks move ahead
North American stocks advanced through Thursday with the Dow and S&P 500 reaching new record highs. For the four days covered in this report, the Dow rose 85 pts. to close at 17,719, the S&P 500 added 13 pts. to end at 2,052 and the Nasdaq gained 13 pts. to finish at 4,701. The TSX put in the strongest showing to Thursday close and now stands at multi-month highs after adding 232 pts. to end at 15,075.
We continue to favour US equities; Upcoming OPEC meeting may not be the panacea some may be hoping for
Fixed Income: Andrew Mystic, Director, Portfolio Advisory Group wrote: “Broader global issues continue to hold rates down with weaker growth and deflationary concerns in Europe and Japan as well as seemingly slower growth momentum in China. Adding to the bid tone are continued geo-political risks (e.g. Ukraine, Iran). Although the FOMC’s December meeting could potentially act as a short term catalyst to spike rates, broader global macro issues will likely continue to dominate the positive tone coming out of the US. With credit now having stabilized but lagging the improved tone seen in the US, we do see some modest value in some BBB sectors – most notably in REITs and Retail.”
As 2014 begins to wind down, now is a great time to reflect on year-end tax planning opportunities that will need to be implemented prior to December 31st. The article highlights some popular tax planning items that you should be aware of this year: Tax Loss Selling, Tax Instalments, Withdrawing from TFSA, Donating Public Securities with Gains, RRSP Contributions, Income Splitting Loans, Deferral of Income, Purchasing Capital Assets, Family Income Splitting and Child Fitness Tax Credits.
It was an uneventful week for North American markets as there were few economic releases or market-moving events for traders to digest. The one noteworthy release south of the border was jobless claims Thursday. The US Labor Department said claims rose by 12,000 to 290,000 last week, which was above the 281,000 expected. Despite the small uptick the report marked the ninth straight time jobless claims have come in under 300,000; the longest stretch since 2000. Another positive came earlier in the week when China confirmed Monday it would open the Shanghai stock market to foreign investors November 17. The move throws open the door to a number of industrial sectors and companies whose shares were previously restricted from foreign ownership. In the UK, Bank of England Governor Mark Carney reduced growth and inflation projections for the country while the exact opposite was announced in Canada Wednesday. Finance Minister Joe Oliver upgraded growth targets for this year and next while announcing a budget surplus in its annual fall economic statement. The surplus positions Canada as one of the few national governments in the Western world to enjoy a positive fiscal position. Later today (Nov. 14), traders will get a read on retail sales in October and a preliminary gauge of consumer sentiment in November.
North American stocks march higher
The tone of the market remained favourable through Thursday with the Dow notching another record close. For the four days covered in this report, the Dow added 79 pts. to close at 17,652, the S&P 500 moved ahead 8 pts. to finish at 2,039 and the Nasdaq advanced 48 pts. to end at 4,680. The TSX also had a positive week as it finished 88 pts. higher to close Thursday at 14,778.
We continue to favour U.S. equities; Upcoming OPEC meeting may not be the panacea some may be hoping for
Equities: Himalaya Jain, Director, Portfolio Advisory Group wrote: “Despite the market turmoil of recent weeks, the S&P/TSX Composite Index is up 8.4% YTD and within the 7%-10% range we expected for 2014. The TSX managed to stay in front of the S&P500 (up 10.4% YTD) for much of 2014 but relinquished the lead in recent weeks as weak commodity prices hobbled the TSX. Given our current outlook that commodities could remain range bound, we are sticking with our mid-September asset allocation shift which reflected a modest preference for US equities over Canadian ones. As described below, we expect US corporate earnings to grow at a faster pace than in Canada next year, and all else held equal, should contribute to US equity outperformance. Furthermore, the persistence of low bond yields will likely weigh on net interest margins for banks, which represent 23% of the TSX but only 6% of the S&P500. While we continue to stay invested in high-quality Canadian equities, we think it’s still not too late to increase exposure to the US Sectors we favour include Technology, Industrials, Healthcare, and Consumer Discretionary. We are maintaining a market-weight position in the Energy sector, but continue to recommend high-grading portfolios into defensive holdings. We remain underweight Materials.”
Markets around the globe were much more volatile in the third quarter than they had been in the first half of 2014 as investors weighed stronger U.S. economic numbers, weak economic figures across Europe, slowing Chinese growth figures, and increased geopolitical tensions around the globe. Heading into the final three months of the year, global markets will likely continue to focus on the geopolitical concerns across the globe as they heavily impact consumer sentiment and investor decisions.
Here are some of the highlights of what our Autumn 2014 Investment Portfolio Quarterly (IPQ) offers:
* The Scotiabank GBM Portfolio Strategy Team provides their Autumn 2014 Strategy Update report
* Scotiabank Economist Derek Holt discusses forecasting potential GDP growth in the U.S.
* Himalaya Jain illustrates his view on the energy market and explains the recent drop in oil prices
* Tina Di Vito outlines the issues and importance of succession planning
* In conclusion, Warren Hastings, Caroline Escott, and Anthony Salvatore provide their quarterly review and commentary on the performance of the Guided Portfolios
We hope you all enjoy the Autumn 2014 version of the IPQ and recommend you contact us with regard to any ideas presented here which interest you, or to review your investment portfolio.