Monthly World Markets Report

Q4 OUTLOOK: A NEW TRADE DEAL REACHED

It happened at the eleventh hour. After months of aggressive negotiations, a new trade agreement between the U.S., Canada, and Mexico was reached on September 30, 2018, mere hours ahead of a deadline. Despite the dramatic negotiations, we were of the view that a good deal would be reached, in part, thanks to the tremendous efforts of Prime Minister Justin Trudeau and Minister of Foreign Affairs Chrystia Freeland. Certainly, trade tensions have weighed on Canadian equities; after the first three quarters of 2018, the U.S. S&P 500 Index has rallied 10.2% on a total return basis, while the S&P/TSX Composite Index has edged higher by a more modest 1.9%. Threats of economic sanctions by the U.S. towards Canada and other trading partners made investors more reluctant to invest in these countries in fear that any products produced in these countries and exported to the U.S. would be hit with significant tariffs. Given that we now have a new trade deal in place, how should we position our portfolios from a sector perspective?
 

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Preferred Share Update

Market Recap and Commentary

The Canadian Preferred Share market has had a lackluster second quarter and was not exempt from the recent volatility we have seen across asset classes. We have continued to see good performance from the rate reset/floating rate preferred share market as the Canadian 5-year bond yield inched higher from 2.00% to 2.21%. The recent performance of the rate-reset/floating preferred market is of no surprise to us since these securities have negative duration in a rising-rate environment.
With two rate hikes, one in January and the second in July 2018 preferreds have not performed as they should. Bank of Canada Governor Stephen Poloz is doubtful to be in a hurry. There remains a long list of reasons for caution, starting with the real possibility of Canada getting into a trade war with its biggest
trading partner. CIBC chief economist Avery Shenfeld, said “There is no preset calendar to higher rates and how fast they come will depend on how well the
economy does.”
Holders of preferred shares need to be patient and hold the course. Rates will continue to rise in late Q4/2018 or Q1/2019. A portfolio that is overweight in fixed-reset preferreds and a well-balanced fixed income bond selection should result in good returns. The market may have to face some headwinds in 2018 with fluctuating interest rates along with an expected decline in new issues from 2017 levels which should help to keep prices and demand
strong.

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Budget 2017/18: Same Numbers, More Details

It’s a somewhat less exciting budget, but mostly because the government scooped itself by laying out all the big numbers last year. With Canada’s economy sparking back to life in recent quarters, near-term deficit projections have eased off, but the targets for the debt-to-GDP ratio in the medium term only allowed for modest new elbow room for spending.

 

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The Case for Tax-Free Investing

Whether you choose an RRSP or TFSA, most Canadians would be well served by simply making a contribution to either plan. That’s because, no matter which plan you choose, you have the ability to earn tax-free investment income for life – an opportunity that no one should pass up.

While Canadians often ponder whether it would be better, given limited resources, to contribute to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), it’s important not to lose track of the major benefit of each plan – the tax-free growth.

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