May 13, 2013
Economy Sees Optimistic Spike
Optimism in the Canadian economy has spiked significantly over the last six months, says Ernst & Young's ‘Canadian Capital Confidence Barometer.’ Fifty-six per cent of Canadian executives believe the country's economy is improving, with access to capital, employment growth, and corporate earnings all showing positive gains. This is up from only 29 per cent in October. However, when it comes to growth strategies, while fewer Canadian companies expect to pursue an acquisition in the next 12 months (33 per cent, down from 44 per cent in October and 48 per cent a year ago), they're more likely to exploit technology and develop new markets and products than their U.S. and global counterparts.
Investors Lack Knowledge On Their Investments
Canadian investors are holding 13 per cent of their money in GICs and a full 11 per cent don't know what they are invested in, says an Edward Jones poll. Among Canadians who have investments, including those with registered retirement savings plans and tax free savings accounts, the majority own mutual funds (41 per cent), followed by stocks (14 per cent), and closely followed by GICs (13 per cent). "Holding as much in cash and GICs as growth investments (such as stocks) means your portfolio may not be properly balanced, which can cause you to miss out on opportunities to grow your investments," says Craig Fehr, Canadian market strategist for Edward Jones. "Cash is providing little to no return in today's environment. It's important that your investments are aligned with your long-term financial goals, not short-term emotions."
Organizations Not Prepared For Upcoming Generations
Most organizations are poorly prepared to usher in a new generation of leaders as the silver tsunami of baby boomers heads for retirement, says a survey by Odgers Berndtson. About 41 per cent of the 100 global executives surveyed say their organizations are ready for the cultural changes that will take place as current leaders are replaced by employees from Generation X and Y. "There's going to be a significant culture clash between the baby boom generation, which is leaving the stage, and the Generation X and Generation Y group that's coming onto the stage," says Carl Lovas, Canadian chair of Odgers Berndtson. Organizations will have to undergo structural changes in order to attract and keep new talent because younger generations prefer personal development, flexible hours, and work-life balance to the monetary rewards favoured by their predecessors. "You've got to be able to respond to those requirements if you're going to attract and retain the top talent," says Lovas. The changing landscape also requires managers to be more culturally diverse and to employ a style of management that's traditionally considered to be more feminine, says the report. People skills, emotional intelligence, and seeking consensus will become increasingly important for managers.
Super Data Collectors Becoming Monopolies
Super data collectors such as Google, Facebook, and Twitter are gradually developing into data monopolies, says Bo Knudsen and Lars Wincentsen, of Carnegie Asset Management. And, the more users there are to drive a positive network effect, the better their products get. However, while a few have succeeded in achieving dominant positions, the many losers that never achieved critical mass are rarely heard about. They examine investing in this sector in the article ‘Information Is Power, If Used Intelligently’ at Information Is Power
Canada Economy Expected To Grow
Canada’s economy is expected to grow between 1.7 per cent to two per cent this year, with risks skewed to the downside amid concerns regarding the housing market and domestic crude oil-price fundamentals, says Russell Investments ‘Strategists’ Outlook and Barometer’ which updates its ‘Annual Outlook for 2013.’ “A slowing housing market creates a reverse ‘wealth effect’ that could restrain household spending,” says Shailesh Kshatriya, associate director, client investment strategies, at Russell Investments Canada, who authored the ‘Canada Market Perspective’ section of the global report. “As well, market volatility related to issues such as the recent banking crisis in Cyprus will continue to cause anxiety for conservative investors.” He believes the weak domestic economy means the Bank of Canada is unlikely to raise interest rates for the rest of the year and that the central bank’s target interest rate will remain at one per cent until 2014. On the other hand, the low rates and a slightly weaker Canadian dollar may encourage investment spending and could boost the domestic manufacturing sector. As well, he believes the ongoing U.S. economic recovery could be beneficial for Canada.
Opportunities Found In Emerging Markets
There are great opportunities in both government and corporate bonds in emerging markets, says Brett Diment, head of emerging market debt at Aberdeen Asset Management. During remarks at its 30th anniversary celebration, he said emerging markets are more attractive than developed markets at this time. To start, they are not facing the debt crisis that developed countries are dealing with. This means their credit ratings will continue to diverge with continuous pressure forcing ratings down for developed countries while they rise for emerging markets. Comparing Mexico to the U.S. shows the former has lower debt and higher growth. And the factors that make emerging markets attractive also apply to companies in those countries.
May 6, 2013
Luxury Home Sales Up Across Country
The advent of the traditional spring market is serving to narrow the year-over-year gap for luxury home sales in most major Canadian centres, despite more muted activity in January and February, says the RE/MAX ‘Upper End Report.’ Eight out of the 16 residential housing markets examined were on par or ahead of year-ago levels, as of March 31, while records were set for first-quarter sales in six markets. The strongest appreciation occurred in Calgary, AB, where the number of luxury homes sold was up close to 50 per cent, compared to the same period in 2012. For the second consecutive year, Greater Toronto, ON, secured the top spot for the greatest number of upper-end sales in the first quarter.
Questrade Launches Trading Service
Questrade has launched Margin Power, a trading service that helps investors boost buying power by linking assets held in a TFSA to a margin account. Investors are regaining their confidence in the market and increasingly moving back into equities and this vehicle offers a way to maximize their access to market potential. "Tax-free savings accounts are the most popular new account type in Canada. They are a great vehicle to build a tax-free portfolio. But the limitation is clear: investor's assets are locked down," says Edward Kholodenko, president and CEO of Questrade. This service “delivers a simple solution: a margin account connected to a TFSA that can leverage your TFSA's assets. This transforms the margin account into a more powerful trading tool, and clients can take advantage of market opportunities that would otherwise not be possible." Any Questrade client with a margin and a TFSA account can opt into the service.
Powered Flight Test For Spaceship Brings Dream Closer
A spaceship bankrolled by British tycoon Richard Branson has made its first powered flight in a test that moves Virgin Galactic toward its goal of flying into space later this year. Going on this sub-orbital space flight has been designed so that (aside from the cost) most people can take the flight without intensive training or physical risks. Customers travel to New Mexico’s ‘Spaceport America’ for the flight. While the program has not been finalized as yet, future astronauts can expect three to four days of training and preparation prior to the flight. Multiple porthole windows on SS2 give passengers views of up to 1,200 kilometres in any direction. After about 20 minutes of gliding, SS2 will be back on the ground. To date, more than 500 aspiring space tourists (including 11 Canadians) have paid $200,000 or put down deposits awaiting their chance to go into space. In Canada, the Vision 2000 Travel Group has three of the handful of Canadians accredited to sell these flights.
Money Brings Happiness
No matter how much money someone already had, more money increased their well-being, says a study by economists Betsey Stevenson and Justin Wolfers. And it says there is no limit on how happy money can make us. This runs contrary to an oft-cited 1974 study that claimed increased income did not mean increased well-being. The new study says new and more comprehensive data allowed them to debunk the earlier claim.
Mercedes-Benz Nanaimo Relocates
Three Point Motors, a Mercedes-Benz Canada dealership in Nanaimo, BC, has relocated. The 14,000 square foot facility is now located in the commercial heart of Nanaimo and boasts a 6,000 square foot open concept showroom and a 2,200 square foot drive-through drop-off and pick-up area.
Investment Climate Highly Interventionist
Today’s investment climate is policy driven and highly interventionist, says Eric Bushell, CIO of Signature Global Advisors. Speaking at the ‘CI Investments’ 2013 Spring Roadshow,’ he called financial markets an “eco system” where what happens in one filters through into others and now it has gone global. As a result, the next shock is more likely to come from an external source so investors have to think about global activities. In the past five years of this interventionist climate, he said markets have shut down and authorities have responded to try to bring funds back into those sectors. Each time the authorities are brought in, however, manipulation of the system becomes more the norm. While this has propped up stability, it is also underwriting the next financial bubbles. This means markets need to throw the crutches down and exit this interventionist environment sometime in the next few years, he said.
EHT Exemption Rises
The amount of annual Ontario payroll that is exempt from the 1.95 per cent Employer Health Tax EHT will be increased from $400,000 to $450,000 as of January 1, 2014, and will be adjusted every five years using the Ontario Consumer Price Index. This was announced in the 2013 Ontario Budget, ‘A Prosperous and Fair Ontario,’ says a Towers Watson ‘Client Advisory.’ However, the exemption will be eliminated for large private sector employers, including groups of associated employers, with annual Ontario payrolls of more than $5 million. As a result, more than 5,000 large employers would each pay up to $7,800 more per year. Registered charities would continue to be exempt. The net result of these changes is that the cost of the additional EHT relief provided to smaller employers would be largely offset by additional EHT paid by larger employers.
Low Returns Continuing For Medium Term
Investors can expect low, single digit returns over the medium term on government bonds, says Les Grober, managing director at TD Asset Management. Speaking at its ‘Sharing of Knowledge Learning Series,’ he said the current thesis about interest rates is they will be ‘lower for longer.’ This applies to both economic growth and interest rates. In terms of economic growth recovery, he said it takes the economy a long time to recover and get back to previous trend lines. Three and a half years into this recovery and the economy has yet to return to its previous levels of growth. He also said future returns for government bonds will be lower and, on a real basis, may be negative. However, yields on government bonds have been trending down since 1980 when record highs were reached. Investors may need to reconsider the role of fixed income in their portfolios. Instead of government bonds, they need to focus on quality corporate bonds. And the fixed income allocation will be more for portfolio stability and safety as opposed to growing wealth and preserving real purchasing power investors.
Too Much Debt Big Problem Today
The big problem today is there is too much debt, especially government debt, says Robin Gullason, of the Harbour Group. Speaking at its second quarter conference call, he said government does have a few ways to deal with the debt. It can try to grow its way out, but at current economic growth levels that does not seem likely. It can also launch austerity programs. However, cutting back on government spending can slow growth. Governments of countries such as the U.S. are unlikely to default on their debt, he said, so the likely scenario is that they will try to inflate it away. The hope is that if inflation rises and the economy continues to grow at its current rate, government debt will be reduced. This is good news for the Canadian economy as by the time governments inflate their way out of debt, commodities, the backbone of the Canadian economy, will have once again gained favour. Canada’s recent economic doldrums are because commodities, which enabled the economy to grow during the financial crisis, have fallen into disfavour. For this reason, he said they are recommending that investors maintain their current allocations to commodities as they will be too expensive to reacquire once they return to favour.
Foreign Equities Record Exceptional Returns
The month of April once again saw exceptional returns for foreign equity funds sold in Canada, says preliminary data from Morningstar Canada. However, domestic equity funds found themselves in negative territory. Thirty-three of its 42 indices had positive results for the month, including increases of more than two per cent for eight of the 23 equity fund categories. The top-performing fund index in April was the one that measures the aggregate performance of funds in the Japanese equity category; it posted a 7.8 per cent increase for the month, extending its winning streak to six consecutive months. Also among the top performers were the fund indices that track the Asia Pacific equity, global small/mid cap equity, international equity, and European equity categories. "Mixed economic data globally, including positive real GDP growth for the first quarter in the United States and a disappointing decline in Chinese manufacturing, contributed to a volatile month that concluded with most of the major markets showing improvement," says Achilleas Taxildaris, a Morningstar fund analyst.
Environment Favourable To Active Management
The favourable active management environment that was evident for most of 2012 has extended into 2013 with 79 per cent of large cap Canadian equity investment managers beating the S&P/TSX Composite Index in the first quarter of 2013, says the ‘Russell Canadian Active Manager Report.’ That compares to 81 per cent in the fourth quarter of 2012, which was the highest in 8½ years. The median large cap manager return was 4.7 per cent in the first quarter of 2013 compared to the benchmark S&P/TSX Composite return of 3.3 per cent. “This sounds like a repeat of what we said a year ago at this time, but the environment was excellent for active managers in the first quarter of 2013,” says Kathleen Wylie, head of Canadian equity research at Russell Investments. “In fact, taking into account the fourth quarter of 2012, the back-to-back percentage of investment managers outperforming the benchmark was the highest since the middle of 2001 ‒ even better than what we saw last year.”
Private Equity Industry Launches Data Standard
Several major private equity firms have formed a new global industry alliance called the AltExchange Alliance. The AltExchange Alliance now has the private equity industry's first comprehensive standard for data formats. The common format defined by this new standard will transform the way general partners, limited partners, fund of funds, and fund administrators share, aggregate, and analyze data. The data standard uses tailored XML taxonomies, an open standard, and spans many relevant elements including portfolio company financials, investor organizations and contacts, fund information, cash flows, capital accounts, and more. The data standard has a corresponding validation platform. Firms using the standard can submit a data file to the validation engine for certification prior to distributing or consuming it.
Baring Updates Equities
Baring Asset Management’s multi-asset team has upgraded equities, adopting the highest risk profile it has held in several years to take advantage of the differing growth dynamics in global equity markets. The team believes that equities look like the most attractive asset class in part due to the poor returns available on alternatives such as government bonds that provide only a meager coupon and cash returns that are derisory. With investment grade bonds at minimal spreads compared to governments, only junk bonds seem to have any potential left and, even there, spreads are getting slim by historic standards. The implied risk premium of equities looks high compared to bonds and earnings expectations are very low after last year’s slowdown. Most importantly though, it says, is the fact that policy settings globally are resolutely in favour of promoting risk taking which should favour equities.
April 29, 2013
No Spending Changes For Wealthy Households
The country’s wealthiest households – which account for nearly half of all consumer spending ‒ have no intention of cutting back on household spending this year, says a study by the American Affluence Research Center. Of this 10 per cent of households, more than half do not plan to reduce or defer their expenditures in eight major categories (such as autos, homes, and home improvements) and 17 products and services (such as vacation travel, entertainment activities, home good durables, apparel, and fine jewelry) over the next year. “Seventy per cent of them seem to be fairly positive about having the same or higher net worth and 60 per cent expect their income to be the same or higher during the next 12 months,” says Ron Kurtz, a representative of the American Affluence Research Center. “As a result, most are apparently not feeling pressure to reduce or defer expenditures.”
Asian Retirees Asset Rich, Income Poor
Households in Hong Kong, Japan, Singapore, South Korea, and Taiwan have relatively high levels of accumulated wealth and more efficiently mobilizing these assets could significantly supplement other sources of retirement income, says ‘Asset rich, income poor? Key components of retirement income security for aging Asia,’ a report by Manulife Asset Management. The report examines the economies of these five countries which are in the advanced stages of their demographic dividends and have accumulated considerable levels of household wealth. While these levels of wealth suggest that constituent households should be able to retire with a high degree of income security, evidence indicates that many are actually entering retirement asset rich, but income poor. Michael Dommermuth, president of international asset management, Manulife Asset Management Asia, says "While the market tends to focus on the accumulation phase of preparing for retirement, we believe that it is just as important to be mindful of the de-cumulation phase. Our analysis reveals that all five economies have relatively bright prospects for improving retirement income security within the structures of existing policies, programs and practices. For example, generally high levels of household wealth can be more efficiently mobilized by diverting cash holdings into equity, fixed income, or asset allocation products, many of which are income generating."
Investors Shifting To Private Equity
High net worth investors are continuing to shift assets into private equity, says a report from TIGER 21, the learning group for HNW investors. Highlights from the report, which measured investment exposure at the end of the first quarter of 2013, include continued growth in private equity allocations and a decrease in real estate with most other categories remaining flat. Private equity allocation increased to 22 per cent, a rise of three percentage points from the fourth quarter of 2012 and up 13 percentage points from a low of nine per cent as recent as fourth quarter of 2010. "Private equity investments have always been a favorite of our members – who largely come from entrepreneurial backgrounds where they were actively involved in running companies," says Michael Sonnenfeldt, founder and chairman of TIGER 21. "We believe the findings indicate that members are going back to ‘what they know best' and are more focused than they were before 2008 on ‘keeping things simple’," he says.
Opportunities Grow In Resource Optimization
Investors should consider strategic long-term allocations in resource optimization opportunities, says Simon Gottelier, senior portfolio manager at Impax Asset Management. Speaking on ‘Investing Globally in Solutions to Resource Scarcity’ at a BNP Paribas Investment Partners Resource session, he said there are several long-term trends ‒ ranging from economic growth in emerging markets to the impact of climate change on water supplies ‒ driving demand for products and services that optimize the delivery and use of resources globally. Much of the demand is coming from emerging markets such as China and India. Growth is these countries is putting tremendous strain on resources, especially as they become more and more wealthy and demand more resources. This demand is driving up prices for resources. Resource optimization is a key solution for resource demand, but so far investors have focused on resource supply and resource optimization is an under allocated opportunity. It is no longer just about renewable energy only as companies are responding with innovative solutions in energy efficiency, alternative energy, resource recovery, and food and agricultural markets. And the universe of these companies is growing. There are new 2,400 companies operating in this area, compared to just 250 in 1999. The universe is very diverse with cyclical, defensive, and special situation opportunities.
Retirement May Grow More Expensive
"Retirement is expensive and could become even more expensive in the future with improved longevity and uncertain future global economic growth," says Jean-Claude Ménard, OSFI’s chief actuary. Speaking to the B.C. Public Sector Pension Conference on ‘Setting Assumptions for Funding Actuarial Valuations,’ he said in preparing actuarial reports for funding purposes, the Office of the Chief Actuary uses its best estimates to develop economic and demographic assumptions. However, there is an inherent uncertainty in estimating the cost of pension plans and actuaries do not have a crystal ball to see the future. As such, it is generally understood that experience gains and losses, as well as changes in economic and demographic environments, could result in plan costs that are different from projected, he said.
Canadians Optimistic About Market
Canadian investors are optimistic about the market and their ability to meet their financial goals, but a majority believe they can achieve their investment goals without holding stocks, says Franklin Templeton’s ‘2013 Global Investor Sentiment Survey.’ Canadian and American investors share a sense of optimism about the markets. In Canada, 60 per cent of investors believe their domestic stock market will rise in value this year as do 65 per cent of Americans. An overwhelming majority (81 per cent) of investors in both countries expressed optimism about reaching their financial goals. Yet, by comparison, only 69 per cent of European investors share the same optimism. However, this confident outlook is not yet translating into confident investing for Canadians. Half of Canadian investors indicated that they will be adopting a more conservative investment strategy in 2013, compared to less than one quarter (22 per cent) who will get more aggressive. U.S. investors are more evenly divided, with 39 per cent indicating they will invest more conservatively and 31 per cent planning to invest more aggressively. It also shows Canadian and U.S. investors have more confidence in their domestic markets than in either developed or emerging markets. Canadians allocated 71 per cent of their investments to their home markets and Americans allocated 78 per cent of their investments domestically last year, the highest levels of domestic investment in any surveyed region.
Identifying Risks A Struggle
Risk leaders are struggling to identify and manage the major risks facing their organizations, says the biannual Aon ‘Global Risk Management Survey.’ The survey suggests there has been a significant decline in risk readiness among many of the survey respondents. On average, reported readiness for the top 10 risks dropped a material seven per cent (from 66 to 59 percent) from the 2011 survey and reported loss of income increased 14 per cent. "One possible explanation of the decline in risk readiness could be that the prolonged economic recovery has strained organizations' resources, thus hampering the abilities to mitigate many of these risks," says Stephen Cross, chairman of Aon Global Risk Consulting. "Our survey revealed that, despite diverse geographies, companies across the globe shared surprisingly similar views on the risks we are facing today – whether or not they feel prepared." The top three risks identified are economic slowdown/slow recovery, regulatory/legislative changes, and increasing competition.
SME Owners Lacking Confidence
The confidence of small business owners continued to decline in April, says the Canadian Federation of Independent Business (CFIB). The ‘Business Barometer Index’ fell half a point to 62.4. "After a promising January and February, more business owners appear to be disappointed with their firms' performance so far this spring," says Ted Mallett, CFIB's chief economist and vice-president. "These latest results are back in line with what we saw in the last months of 2012 when the economy was exhibiting only lacklustre growth." The pattern across the country has been quite uneven, he says.
Succession Planning Lost In Day-To-Day Business
The importance of succession planning for small and mid-sized Alberta businesses gets lost in day-to-day concerns such as cash flow, inventory, and HR challenges and that’s dangerous, says Wellington Holbrook, executive vice-president, business and agriculture, at ATB Financial. “Owners who don't pay attention to succession planning run the risk of one day closing down their business when, if planned correctly, they could sell it," he adds. More than four in 10 (42 per cent) of Alberta small and mid-sized business owners are 55 years of age and older. Forty-five per cent have been in business more than 20 years, 30 per cent are self-described as in the 'mature or winding down' stage, and more than one-third are concerned with succession planning. Only seven per cent had a formal written succession plan and almost six in 10 (58 per cent) had no succession plan at all.
Private Wealth News Archive 2011
Private Wealth News Archive 2010