• David Cockfield; Arthur Salzer

Be Prepared


The past year has seen significant changes to the political landscape of the world. These changes may potentially have a transformative impact on economic growth and investment returns.

In the US political power has shifted to the Republican Party, with the President, House of Representatives and Senate now Republican. Initially opposed by Republican insiders, President Trump has proved unable to rally the party to put into law any of the big key policy proposals. Health Care legislation is back on the drawing board after being opposed by libertarian elements within the Republican Party itself. These delays have, for the most part, placed key stimulative proposals such as tax cuts and infrastructure investment on the back burner.

Unfortunately this atmosphere of muted progress and uncertainty in Washington will likely continue for the foreseeable future. This means that eagerly anticipated stimulative government legislation will not happen until late in 2017 or even in 2018. In the meantime US economic growth will proceed at a similar slow pace as experienced in the first quarter of +1.4% This is well below the forecasts earlier in the year of closer to +3.0%.

In Canada the worst of the oil price decline shock appears to be behind us. The economies of Alberta and Saskatchewan have stabilized as the energy industry has mostly completed its adjustment to lower oil prices. Aided by a generally lower Canadian dollar and increased export volumes there were fewer energy company casualties than expected. On the other hand, Ontario and British Columbia have experienced good economic growth, to crown Canada recently as the fastest growing G7 economy. Canadian exports and imports both hit record highs in May, reflecting continued economic strength. While Canada has the advantage of a calm political atmosphere, two issues are of particular future concern. Moves by the authorities to calm the overheated housing markets in Toronto and Vancouver are still in progress. While it is still early to judge fully, it appears that these new policies seem to have put a damper on these markets. Our trade with the US, so significant to our economy, is under negotiation. The softwood lumber dispute now unfolding was widely anticipated. However negotiations have expanded to include our dairy industry and NAFTA itself. The outcome of these negotiations has the potential to have a major negative impact on the Canadian economy. The recent increase by the Bank of Canada in the Canadian bank rate has sent the Canadian dollar sharply higher. While the 25 basis point increase to a rate of .75 basis points, in itself is of little economic importance, the recent and quick rise in the Canadian dollar will hurt Canadian exporters.

In Europe there has been a dramatic improvement in the political landscape. Over the past few years in Europe there has been growth in nationalistic anti-EU sentiment. The UK voted for Brexit, while nationalist politicians gained ground in Germany and France. Recent elections in Germany has seen Merkel’s pro-EU political party win decisively. Merkel seems now secure to win the upcoming German national elections. In France, Macron, a strong supporter of the EU, has won the presidency, created his own party and gained national power. In the UK Prime Minister May has had her negotiating position to leave the EU weakened by her unexpected recent election loss. Europe’s economic progress has also improved - this improvement is expected to continue into 2018.

To sum up, the US will likely continue to struggle politically and have difficulty getting their stimulative legislation into action and so will continue to experience slow growth. Canada will also grow slowly hampered by trade uncertainties. Europe will show improving and stable growth. There are few indications that inflation will suddenly accelerate. In this environment potential returns from investments will be subdued. Interest rates have some tendency to rise, but only gradually from a very low base. Equity markets seem close to fully priced, given slow growth projections.

With price earnings multiple increases and interest rate declines behind us the expectation of large capital gains look muted. Looking forward we believe expected returns for many asset classes should be toned down from what we have seen in the past couple of decades. We continue to favour investment strategies that emphasize strong cash flow rather than capital gains – these may be in private debt, real estate, secondary private equity and select credit hedge fund strategies.

#ArthurSalzer

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