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TriDelta Investment Counsel 2014 Forecast

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As 2013 comes to a close, we thought that it would be a good time to share our expectations for 2014 and discuss our views on the current year.  In 2013, we expected US equities to outperform Canadian equities.  Our fairly large exposure to US equities (vs. many other Canadian Investment Counsel and brokerage firms) benefitted clients.  In the Canadian market, dividend paying, low volatility stocks, such as utilities, banks, insurance companies and telecommunications significantly outperformed natural resources.  Industrials, such as Magna International and Air Canada also performed extremely well.  On fixed income, while the Canadian Bond Index (DEX Universe) had a slightly negative return, our focus on corporate bonds has enabled our clients to earn slightly positive returns during the year.

As we approach 2014, we are hopeful that the US clarity on bond tapering will give the market confidence, that Europe will finally experience GDP growth, that Abenomics will provide a further economic boost in Japan, that Canada will continue to expand and be known for innovation and growth instead of just for Rob Ford, and that we at TriDelta will continue to provide strong returns for our clients to meet their investment and financial goals.

 

2014 Predictions:

TriDelta Financial 2014 Predictions
TSX Total Return 6%
S&P 500 Total Return (in US$) 8%
DEX Canadian Bond Index Total Return 1.75%
Canadian Bank Prime Rate 3% Remain Unchanged
10 Year Gov’t of Canada Bond Yield 2.50% to 3.00% Little meaningful rate increase
Canadian Dollar vs. US$ at year end 90 cents

US Equities over Canadian Equities – While we do not expect a repeat of last year, we do expect US equities to produce medium to high single digit returns (6-9%).  Historically, the US equity market has experienced positive returns following a strong performing year like 2013.  The difference is that while 2013’s equity returns were based mainly on valuations, with Price-Earnings multiples expanding and roughly 6% earnings growth, 2014 will be mostly earnings growth as companies try to meet or beat the lofty 10% growth expectations.   We expect that the US economy should grow at a faster pace than in 2013.  We also anticipate that with 2014 being an election year, there will be little in the way of significant debt reduction agreements, removing a further concern against equity markets going higher.

Due to the extent of the recent increase, we think there could be a pullback in the near-term hence our holding of the S&P500 Inverse ETF.

Canadian Equities – We expect positive returns for the TSX in 2014 as well.  Valuations for many of the dividend payers remain quite reasonable, especially in a low interest rate environment.  We again expect the non-resource sectors, such as financials, telecommunications, transportation and industrials to outperform.  Having said this, we believe that the TSX will still likely underperform the US markets.

Sectors to Outperform – The last few years have been all about dividend paying stocks.  We think next year could see a number of cyclical companies outperform, such as Industrials hence our weighting in Goodyear Tire & Rubber US (GT) and Magna International (MG).  While the overall technology sector is trading at high multiples thanks to companies like Twitter, there are a number of bellwether technology companies, such as Cisco Systems (CSCO) that are trading at relatively low multiples, offering strong balance sheets, good dividends and cash flow.  2014 could also be the year when mining stocks finally hit bottom.  While we think there may be some excellent opportunities in the sector, we also believe that it is presently too early to invest.

World Economy to Expand Moderately – The IMF is predicting 3.6% growth for the world in 2014, a significant increase from their current forecast for 2013 of 2.9%.  Overall, a greater portion of this growth is expected to come from the developed countries.  Europe and Japan are both projected to grow by over 1% and North America by 2.5%.  Emerging markets are forecast to grow by 4.5%; China will account for a significant portion of that growth at 7.3%.

2014 will also mark the 100th anniversary of the beginning of World War I.  We need to sometimes remember that the first European Union, the European Coal and Steel Community (ECSC) in 1951 was not only founded to encourage economic growth, but as French Foreign Minister Robert Schuman stated, the ECSC was “to make war not only unthinkable, but materially impossible”.  We believe that the European economy may have turned a corner recently and with equity valuations a little lower than in North America, this may be an area we add strategically to client portfolios.

Bonds – We favour equities over bonds in 2014.  Within fixed income (bonds) we favour corporates and high yield over governments.  We expect that the US Federal Reserve will begin to taper its quantitative easing bond buying process in the Spring of 2014 or earlier; however, any acceleration of timing would not be a shock to the market,  and the process will be very gradual.  To temper any fear and confusion that tapering is not tighter monetary policy, we do not expect interest rates to rise meaningfully in 2014.  As a result, we think that interest rates on the 10 year Canadian government bonds are range bound between 2.50% to 3.0%.

Corporate bonds will continue to offer favourable returns in a low interest rate and inflation environment.  Investment grade corporate bonds in the 10-year to maturity area are offering yield premiums of around 150 basis points (bps)  vs. comparable government bonds.  High yield bonds in the  universe are typically offering yield premiums of roughly 425 bps.  There is a need to be selective in terms of credit and allocation along the yield curve to provide the highest potential return vs. risk, but in general Canadian and US issuing companies are in strong financial positions with solid balance sheets.

Currency  – The US dollar ended 2012 at a slight discount to the Canadian dollar, but has appreciated by over 7% during 2013 into December.  We expect that the US dollar will continue to appreciate as the longer term trend is turning positive, the improving economy has helped bolster the U.S. government balance sheet and net export numbers continue to improve providing less of a headwind.  This currency trend will put additional pressure on Canadian investments vs. US investments.     

Alternative Investments  –  Over the past year, we have begun supplementing alternative investments to the portfolios of certain accredited investor clients, to gain access to asset classes that cannot easily be purchased on public markets, such as mortgages, real estate, infrastructure and private credit or strategies that can cost effectively use options and leverage.  Recently we launched our first pooled fund, TriDelta High Income Balanced Fund, which employs institutional investment strategies, such as options and leveraged fixed income.  We believe that our new fund and other alternative strategies can add to client returns, while reducing volatility.

While we expect 2014 to be a positive year overall for clients, we do expect volatility to increase from its low levels this year.   As such, we will continue to review economic indicators, trends and relative value to proactively take advantage of opportunities and reduce risk when deemed appropriate.

 

This report was written by the TriDelta Investment Counsel – Investment Management Committee.

Members include: Cameron Winser, VP, Equities; Edward Jong, VP, Fixed Income; Lorne Zeiler, VP, Wealth Advisor; Ted Rechtshaffen, President and Wealth Advisor; and Anton Tucker, EVP, Wealth Advisor.

For more information – please contact Ted Rechtshaffen, President and CEO, TriDelta Financial at 416-733-3292 x221 or tedr@tridelta.ca

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