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2015 is year to play defense; We’re optimistic that crude oil will end the year higher.2015 JANUARY 23 HERES WHAT WE ARE THINKING
Central bankers from around the world took action this week to combat weakening growth in their home countries. In the most anticipated move, the European Central Bank introduced additional stimulus Thursday in the form of a euro zone bond-buying program. Starting in March, the ECB will purchase US$69 billion worth of government and private sector bonds as well as debt from other institutions until September 2016. The ECB also lowered the interest rate it charges banks for four-year loans by 0.10%. Both moves are aimed at reviving the euro zone’s flagging recovery and falling consumer prices. Less anticipated was the action of the Bank of Canada the day before. The BoC reduced its key lending rate by a quarter percentage point Wednesday taking the overnight rate to 0.75% from 1.0%. The interest rate move was the first since the Great Recession when the rate was lowered to 1.0%. Bank of Canada Governor Stephen Poloz said the reduction was ‘insurance’ to help protect the Canadian economy from the impact of lower oil prices which are expected to reduce GDP from 2.4% this year to 2.1%. Meantime, the Peoples Bank of China made US$8 billion available to commercial banks for short-term lending Thursday. While it’s a relatively modest cash injection it’s big on symbolism as analysts say it could signal the start of something bigger in light of the GDP disappointment earlier in the week. China announced a slowing in growth to 7.4% in 2014; the lowest level in 25 years. Finally, word came late Thursday that the King of Saudi Arabia had died leading to uncertainty as the Kingdom enters a period of transition. Looking ahead, Greece’s future in the euro zone may hinge on the outcome of an election Sunday. If the current Prime Minister loses to the anti-austerity Syriza party it could lead Greece out of the euro zone.
Canada’s interest rate cut helped spark the biggest rally on the TSX this year with the benchmark index jumping 443 pts. over the four-day period to close at 14,752. In the US, the Dow added 285 pts. to finish at 17,796, the S&P 500 advanced 39 pts. to end at 2,058 and the Nasdaq rose 100 pts. to settle at 4,734.
2015 is year to play defense; we’re optimistic that crude oil will end the year higher
Equity: Himalaya Jain, Director, Portfolio Advisory Group wrote: “Our 2015 return expectations for equities have moderated. While we continue to favour the US equity market over Canada, the current valuation of the S&P500 is less compelling than in recent years. Furthermore, the outsized gains Canadian investors have earned holding US equities due to currency tailwinds could also be coming to an end now that CAD is approaching USD$0.80. Our 7%-10% return expectation for the S&P500 should come primarily from earnings growth as the current forward P/E ratio of 16.5x has little or no room for further expansion. The Bank of Canada’s surprise interest rate cut confirms our concerns of a slowing Canadian economy and supports our relatively modest 4%-6% return expectation for the S&P/TSX Composite for 2015. Should the timing and pace of recovery in crude oil prices occur sooner than expected our return expectations will prove conservative. The persistence of low short- and long-term bond yields should sustain pressure on bank and lifeco performance this year. The impact of significant budget cuts by North American energy producers has started to appear in the form of reduced drilling rig activity, supporting our optimism for North American oil production to moderate by Q3 and begin declining by year end. We don’t expect OPEC to cut production in the near-term.”