• David Cockfield

Looking Good


What a difference a quarter makes. As we entered the fourth quarter of 2013 the U.S. Government suffered a politically generated shutdown that placed 800,000 federal employees on indefinite furlough. There was talk that the U.S. could default on its debt which would have thrown world financial markets into chaos. The deadlock continued until mid October when an Appropriations Act, accepted by both parties, was signed by the President and government workers went back to work. The American public was highly critical of all federal politicians and this in turn has led to a more conciliatory attitude by both parties. A Federal budget, the first in several years, has since been passed by Congress. This means that the debt ceiling increase scheduled for February 7, 2014 should not be the problem it has been in the past. Quite suddenly the black clouds of political uncertainty have been removed from financial market prospects.

Another element of uncertainty is the timing of the removal of the Federal Reserve $85 billion monthly bond and mortgage buying program which has also ceased to be a fear factor for markets. The Federal Reserve began the process of eliminating the program by reducing monthly purchases by $10 billion while assuring markets interest rates will remain low. Equity markets worldwide responded positively and that upward momentum continues at the time of this writing.

While the removal of these uncertain ties has improved the psychology of financial markets - what about the fundamentals? In the U.S. the third quarter GDP was revised upwards to 4.1% from 3.6%. The U.S. housing market continued to improve with Building Permits and New Home Starts positive. U.S. Industrial production in November increased at a rate not seen since November of 2012 and the index of leading indicators as a whole remains positive. Consumer confidence remains on an upward trend despite the political blood-letting and the unemployment rate continues to decline. Inflation rates remain under control at under 2% and given the Federal Reserve promise to keep interest rates low inflation should not pose a problem for some time to come.

In Europe a slow recovery continues but the U.K. in particular has experienced a surge in growth partly fueled by an improving housing market. Germany continues to march ahead with manufacturing expanding. Progress is also being made in the European Union in creating a single institution that will have the power and resources to oversee and backstop the banking sector in times of crisis. This is a major step forward in making the E.U.’s financial system more manageable and secure.

In Canada the continuing U.S. revival will help us maintain our slow but steady economic recovery. Aided by a bumper Canadian grain and soybean crop and a weak Canadian dollar the Canadian Economy should be able to offset some of the effects of weak commodity prices. In general with a stable housing market and low interest rates Canada should be able to show economic growth rates in the 2% to 2 1/2 % range. Inflation is very low – below the range desired by the Bank of Canada and should stay low - a positive for the housing market.

Looking ahead, with the prospects for economic growth in North America, Europe and China looking up, world growth should also improve. While interest rates are likely to drift upwards, the rise in rates will be moderate. With returns in fixed income markets limited, equity markets should continue to move upwards. Given that U.S. equity markets posted exceptional returns in 2013, many individual U.S. stocks are trading at levels already reflecting some of the growth anticipated in 2014. U.S. equity returns in the high single digits are more likely in the coming year.Canadian equity markets, even though still dominated by commodity stocks, should do better in 2014. Unfortunately a steadily weakening Canadian dollar may well reduce returns in comparison to the U.S. for Canadian investors.Hopefully a year of steady but unexciting growth, plus political stability in Europe and the U.S., will result in less volatile markets.

At the core, Northland Wealth continues focus on building cash-flow generating portfolios that consist of dividend paying equities. Where appropriate, we access for clients the leading institutional alternative asset managers and opportunities that are normally only available to large and sophisticated investors such as university endowment (Harvard & Yale) and pension funds (CPPIB, OMERS, Teachers). Investments in these areas may include mortgages, income-producing real estate, private equity and absolute return strategies such as hedge funds. While not essential, use of alternative asset strategies can provide a more consistent and potentially higher overall return profile although they tend to be less liquid than public market investments. Ultimately, the objective of investing in alternative assets is to better the odds of meeting our clients’ financial goals with fewer sleepless nights.


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