• David Cockfield & Arthur Salzer

Update and Outlook



This past year was good for investment returns. Low inflation made the double digit returns that

much more impressive. Both fixed income and equity investors did well but a word of caution is appropriate. We rarely see two outstanding return years back to back. There is general agreement that equity markets are generously priced. Fixed income investors benefited from rising bond prices, rather than income, for a significant part of their returns. With bonds now yielding very low historical coupons and indications they are tied to negative yields has ended, capital gains from fixed income portfolios are likely a thing of the past.


Unfortunately, 2020 did not begin with a clean slate. High profile problems that were disruptive in 2019 remain with us in 2020. Trade wars, Brexit, and political battles are familiar problems that continue into the new decade.


The trade war between the U.S. and China continues. The negotiation now appears to be a long and drawn out process. After considerable discussion, Phase 1 was recently signed with several phases yet to come. At the time of writing this article full details are lacking but some are

available. The U.S. has put off further tariffs on a new list of Chinese goods, while cutting tariffs

already in place by one half. China on its part has promised to purchase a significant amount of U.S. farm goods. Chinese companies will no longer demand U.S. technology transfers be a part of any deal to operate in China. It is hard to see Phase 1 as a major win for the U.S. They have reduced tariffs and the Chinese need U.S. farm goods. How the U.S. can protect its technology is open to question once it is used in China. Needles to say, months of trade negotiations remain ahead and it is still not clear what damage the existing tariffs may have caused.


After much uncertainty, the election of a Conservative Government in the U.K. ensures that Brexit will happen. The E.U. bureaucrats cannot be generous in their negotiations with the U.K. or their jobs will be in danger and there will likely be economic disruption and hard feelings as the process moves forward. Both Northern Ireland and Scotland are talking separation – a prospect

that is even more economically damaging. It seems that Europe will be a source of uncertainty in 2020.


Politics, a major distraction in the U.S. in 2019 will likely be an even worse distraction in 2020. The democrats moving ahead to impeach the President, despite a Senate against impeachment, could paralyze the U.S. Government. We are facing nine months of bitter campaigning with lots of negative commentary casting a cloud over investor sentiment.


Other political hotspots to watch include the Middle East, where U.S. and Iran are clashing in Iraq, and North Korea, set to test new long-range nuclear capable missiles.


Against this backdrop, how are North American economies doing? Rising concerns of a recession occurring in 2020 were supported by a short-term negative yield curve occurring in

the U.S. Short term yields rising above longer term maturity yields has been an accurate predictor of upcoming recessions. However, in this most recent reversal of the yield curve, the

reversal was short lived and presently the U.S. yield curve is a more normal positive pattern. Concerns about a recession in 2020 have thus faded.


While the U.S. manufacturing sector has been under pressure, it is no longer as important a factor in the U.S. economy as it once was. The U.S. unemployment level at 3.6% is at a 50-year low. Unfilled jobs remain high and there is rising pressure for wage increases. We view this as a positive sign for the average American after decades of declining purchasing power. In this environment, U.S. consumers are optimistic and are still in good financial shape. Housing prospects are good, particularly with the Fed holding interest rates low. Overall GDP growth in the U.S. should be at least in the 2% range in 2020 – so no indication there will be a recession in the U.S. in 2020.


In Canada, overall growth remains subdued at 1 ½% range, influenced by the weakness in Canada’s energy sector due to damaging policies of our Federal government. As long as the U.S. economy chugs along then the Canadian economy, particularly in Ontario and Quebec will be OK. The new NAFTA agreement seems assured, which removes a major trade uncertainty. The new NAFTA could well generate some benefit for Canada by removing some of the incentive to move

auto production to Mexico. Canada’s housing sector remains a source of economic growth. Canada’s open immigration policies have been a real help in keeping housing demand high

particularly in Ontario.


Fixed income markets will likely move sideways so returns will be dominated by coupon rates in the 2% to 3% range. Equity markets will have to contend with relatively flat corporate earnings growth. On the positive side there is significant investable liquidity in investors’ hands. Low returns from fixed income investments make equity dividend rates attractive.


Alternative investments such as real estate, private debt and equity, hedge funds and commodities such as bitcoin, when combined with traditional investments in public markets which are usually accessed through cost-effective ETFs, can provide a portfolio with greater diversification and stronger returns for the risk taken, as compared to traditional stock-and-bond-only portfolios.


Looking forward into this next decade, we remain cautiously optimistic while we continue to focus on finding opportunities to generate above average returns while balancing these against

potential risks. At Northland Wealth we believe that a well-diversified approach to managing a family’s wealth should provide the greatest return for the risks taken.

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