• David Cockfield & Arthur Salzer


Opening on a positive note we see the overall economic outlook as being very good. Both Canada and the U.S. have solid economic growth with low inflation and high levels of employment. Even the Eurozone is showing better growth, as have most of the emerging economies. There is virtually no talk of any impending recessions. The main risks facing investors and economies are political. The U.K. negotiations with the European Union on Brexit are proving very difficult. Merkel, while successfully re-elected in Germany, is facing stronger opposition from the far right. Canada and Mexico are involved in tough negotiations with the U.S. on a new North American Free Trade Agreement (NAFTA).

Canada in 2017 has experienced some of the best economic growth in a decade, placing Canada ahead of the other G7 nations. Expectations for GDP growth in 2017 are close to 3%, with 2018 also looking positive. Housing continues to be a major contributor to growth. However, rising oil prices plus greater efficiencies has also improved oil industry prospects and helped Alberta and Saskatchewan economies. Despite two Bank of Canada rate increases, interest rates remain historically low.Government rule changes and tightening mortgage issuing rules has potentially cooled a developing bubble in housing prices in Vancouver and the Greater Toronto areas. The threat of impending tax changes proposed by the Liberal Government has created considerable concern amongst family businesses and many professionals. Hopefully the Government will see their proposed changes as ill-advised and counter productive and hold off pending further reviews.

The U.S. has suffered two hurricanes that will likely reduce their GDP by one half of one per cent. However the reconstruction required will add to future growth. Housing construction remains a major source of growth. The significant shortfall in housing creation in the years immediately after 2008 has yet to be offset. Shortages in the skilled building trades have held back the construction needed to meet present demands. New homes for sale after completion are at an all time low, ensuring future construction levels will remain high. With inflation still at low levels the Federal Reserve will likely be gradual in implementing future rate increases thus keeping interest rates historically low. With few excesses in the U.S. economy and some prospect for further income tax cuts, 2018 should see continued strong growth in the U.S.

For some time equity markets have seen U.S. markets outperform Canadian markets by a wide margin. The TSX has a large commodity content, as has the Canadian economy. Commodities as a group were hard hit by the Great Financial Crisis of 2008. There are today some indications that the down cycle in commodity prices is coming to an end. Metal prices have been trending upward, helped by the renewed growth in the world economies. For Canada, higher oil prices are a crucial part of any meaningful recovery in commodities. Recently Brent oil prices - the international oil price, has been eight dollars higher than West Texas Intermediate (WTI) - the North American standard oil price. Historically, Brent traded below WTI but the prolific Shale oil production in the U.S. has kept North American prices lower. However, U.S. producers are now able to export and the price differential will likely disappear. An oil price in the mid fifties or higher would lead to a significant revival in oil patch profits, equities and the TSX.

NAFTA will be a major news item in the immediate future. While there is some concern that under the bluster of President Trump the negotiations are designed to fail, it is Canada that has brought some highly contentious and politically-charged demands to the table. In general, the benefits of free-trade out weigh the costs to all parties, and we hope that calmer heads on all sides will prevail during these negotiations.

With a very upbeat economic back drop and some positive political outcomes, we expect financial markets to provide reasonably good returns to investors in the final quarter of 2017. Interest rates will increase but at a moderate rate. In equity markets we expect the TSX to close the gap over the coming years in relation to the U.S. equity markets.

Our investment strategies strive for the benefits of diversification across both traditional and alternative asset classes with an emphasis on strategies which display lower than average volatility. We are beginning to favour Canadian equities with its emphasis on resources along with income producing real estate and private debt with hedging back to the Canadian dollar where possible.

#DavidCockfield #ArthurSalzer


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