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Market Watch: Global Update

02/17/17

Big Picture

By Andrew Trimble

 

Global growth gains momentum 

It was an eventful week filled with encouraging news about global economic growth. In the U.S., data released Wednesday showed better-than-expected retail sales for January, firming inflation and factory production rising. Taken together, the data points extend an upward trend in real economic activity south of the border. Coincidentally, the prints came in the same week Fed Chairwoman Janet Yellen indicated the bank’s willingness to raise interest rates due to the progression in jobs gains and inflation. The chances of a Fed rate hike in March have now doubled to 1 in 4 according to futures tracked by CME Group. Turning to China, consumer prices increased 2.5% in January from a year earlier, the fastest pace in two years. The Producer Price Index also notched a five-year high as factory prices jumped 6.9% versus a 5.5% rise a year ago. The releases point to stirring inflation in the world’s second largest economy which gives the PBOC some wiggle room when it comes to stimulus measures. Elsewhere, the European Union on Monday raised economic forecasts for 2017 predicting growth across the bloc despite political risks and uncertainties. The EU estimates the 19-country single currency union will grow 1.6% this year, an increase from 1.5%. If current, longer-term projections hold through 2018 it will mark the first time since 2008 that all member states have recorded increases in GDP. When it came to the U.K., growth is expected to rise to 1.5% for 2017 versus a previous estimate of 1.0%. Finally, the European Parliament green-lighted the Canada-European trade pact Wednesday with it now moving to European national Parliaments and the Canadian House of Commons for final approvals. Looking ahead, U.S. and Canadian stock markets are closed Monday, February 20.  

 

Markets

Stocks march higher

Major North American stock benchmarks extended their record-closing streaks this week although some – the S&P 500 and Nasdaq – lost steam over the course of Thursday’s session. For the four days covered in this report, the Dow added 350 pts. to close at 20,619, the S&P 500 moved ahead 31pts. to settle at 2,347 and the Nasdaq rose 80 pts. to end at 5,814. The TSX finished 135 pts. higher to close at 15,864 Thursday, a record high for the fifth day in a row. 

 

Equities/Strategy

Reloading on equities on material pullbacks

Strategy: Year-to-date major stock indices have ground out healthy gains amidst generally tight trading ranges and low volatility (S&P500: +4.8%, TSX: +3.8%, MSCI EAFE: +4.5%). In fact, the equity implied volatility index (better known as VIX) hit a near-10 year low on February 1st at 9.97.  The quiet that has fallen over markets stands in stark contrast to the growing uncertainty and unpredictability in the stance of the new U.S. administration on key policy issues such as geopolitical alliances, import tariffs, immigration, tax cuts, infrastructure spending, etc. In particular, political momentum seems to have waned recently as the President’s popularity suffers from recent controversial actions and comments which are weighing on tax reform prospects (a key to market expectations for stronger earnings growth this year and next). As well, investors are contending with rising geopolitical risks in Europe with nationalists, hoping to follow Britain out of the EU, leading in polls heading into elections in the Netherlands (March) and France (April). Rising headline risks combined with profit-taking pressures may leave the market vulnerable to near-term disappointment to U.S. policy or geopolitical developments. However, given economic data trends remain positive, with recession risks relatively muted over the coming year, we would view any material pullback (5%-10%) in equity markets as another opportunity to reload on equities and cyclical exposures for those who had missed out earlier.

Investment Fees and Costs

02/07/17

The investment fees and costs you pay will depend on the types of investments you make and how you purchase them. The costs will have some impact on your returns, so it is important to understand how much you are paying and what for. You can then decide whether the service is worth the cost.

Most fees and costs relating to investments fall into five categories:  costs to buy an investment;  costs when you sell an investment;  investment management fees;  financial advisor fees;  administration fees for registered plans.  Not all types of costs apply to all investments. In some cases, costs such as sales commissions are included in the price you are quoted to buy the investment. This is generally the case for bonds.

Costs to buy an investment

If you buy investments such as stocks and exchange-traded funds, you will usually pay a trading fee every time you make a purchase. For this reason, it is better to limit the frequency of your purchases. Brokerages and investment firms set their own fees, so the amount will depend on the company you use.

For “no load” mutual funds, there is no fee to purchase units.

Other mutual funds charge “front-end load” fees when you buy them. The fees are generally a percentage of your purchase price.

 Costs when you sell an investment

With some mutual funds, instead of paying a fee when you buy the investment (“front-end load” fee), you pay a fee when you sell. This is known as a “back-end load” fee.

The fee is generally a percentage of your selling price. It is normally highest in the first year after purchase and gradually decreases for every year you hold the investment. If you hold the investment long enough (often for several years), the fund dealer might agree to waive the fee. Think carefully before agreeing to buy funds with back-end load fees because the fees come out of the selling price of the investment and can be as much as seven percent if you want to sell in the first year.

 Investment management fees

Investment funds, including mutual funds and segregated funds, charge a fee for managing the fund. The fees are called the Management Expense Ratio (MER) and may include an ongoing commission paid to advisors who sell the fund to their clients. The MER is paid regardless of whether the fund makes money. It is deducted before calculating the investor’s return.

Advisor fees (how advisors are paid)

Advisors are paid in different ways, depending on the type of service they provide. For example, an advisor helping you put together a financial plan might be paid an hourly fee, whereas an advisor making trades on your behalf might be paid per trade.

If you plan on using the services of an advisor, it’s important to know exactly what kind of services the advisor provides and the cost as well as how the advisor is paid.

While most advisors strive to give good advice, advisors who are paid by commission have an incentive to encourage you to invest where they will earn the highest commission. Those who are on salary, on the other hand, may have an incentive to promote what their employers offer. Ask for information on your investing options and fees before you purchase any investment product.

Administration fees for registered plans

When a bank, brokerage firm or other financial institution sells a registered product such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), the Income Tax Act requires the product to have a trustee.

Investors generally have to pay an administration fee (also known as a “trustee fee”) for the services the trustee provides—for example, filing the necessary documents with the Canada Revenue Agency. In certain cases, if the overall value of a portfolio is above a certain amount, the company that holds your plan may waive the fee.

 

Source: Financial Consumer Agency of Canada

Client Relationship Model

02/07/17

ScotiaMcLeod®, a division of Scotia Capital Inc.

In recent years, a number of countries, including England, Australia and the United States, have changed the regulatory framework that governs their financial institutions. Included have been changes to formalize client communications and create greater transparency in fees. In part, these changes were the outcome of the global financial crisis of 2008-2009 – and while institutions in Canada faired relatively well, we will be implementing similar reforms here at home. Some changes have already been made with the remainder being phased in over a three year period.

Building upon existing requirements that help to ensure fair and honest dealing with clients, the Investment Industry Regulatory Organization of Canada (IIROC) has introduced the Client Relationship Model (CRM). At its core are three key principles designed to enhance investor protection and strengthen the client-advisor relationship:

Transparency regarding the relationship between the client, service provider and firm (e.g. information on account types, services provided, transaction and account fees);

Transparency surrounding performance of the account;

Disclosure of any conflicts of interest.

Additional information on CRM, including its history, can be found on the IIROC website (www.iiroc.ca), link on page bottom

What will this mean for you?

Because the fundamental principles of CRM are a core part of the way we have always tried to serve our valued clients, many of the changes may not be perceived. While in other cases the changes may be apparent, but will not fundamentally change the advisor and client relationship at ScotiaMcLeod. How this affects you will depend upon your specific situation, include your account types and the securities that you hold.

Significant changes have already occurred in the areas of understanding your risk profile and investment suitability. In some cases, paper work and documentation requirements have increased, but in general the challenges in implementing the new regulations are operational in nature that are borne by the institution.

Your advisor is the best point of contact to explain how CRM relates to you and your specific portfolios and accounts. As the components of CRM are implemented over the next three years, additional information will be provided in person and in writing.

We are proud of the depth of expertise and wealth management service we provide. Furthermore, we expect the core principles of CRM will be a benefit to investors and will enhance the ongoing relationship between clients, advisors and ScotiaMcLeod.

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