2018 Market Outlook Seminar - Kelowna
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In this annual Strategic Outlook seminar, we will discuss what the markets have in store for 2018, and beyond. Presenters: John Nicola, Chairman & CEO John will address several issues facing high net worth families: - How will the Liberals’ tax changes affect financial planning for Canadians? - How will inflated prices impact future returns? - Are there best practices for navigating the current environment? Rob Edel, Chief Investment Officer Rob will provide an investment roadmap for 2018: - After a record-breaking period for the S&P 500, what signs might indicate an economic downturn? - What current events could most affect the economy and investment strategy? - What should one make of bitcoin, marijuana stocks, electric vehicles, and other hot topics for the upcoming year?
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2018 Market Outlook Seminar - Kelowna
- 1. Welcome | 2018 Strategic Outlook Introduction by Brent Thompson
- 2. 2018 Strategic Outlook Rob Edel, Chief Investment Officer
- 3. Our Agenda Investment Roadmap2017 in Review Good Neighborhood Turning Bad Points of Interest Oct 19, 1987 Oct 18, 2017
- 4. 2017 in Review S&P 500 2017 S&P 500 +21.8% +1% Declines Last +5% Decline June 24-27 2016 Feb 2, 2018 404 Days Average since 1929 92 Days Feb 8, 2018 -10.1% Feb 2, 2018 404 Days (Avg since 1929 92 Days) Feb 8, 2018 -10.1% 2017 S&P 500 +21.8% 1%+ Declines Last +5% Drawdown June 24-27 2016
- 5. 2017 in Review S&P/TSX Sept 8, 2017 -0.1% Sept 8, 2017 Dec 29, 2017 +9.2% 2017 S&P/TSX +9.1% • Financials: Concern over housing and consumer debt • Energy: Western Canadian Select Crude differentials • Small Technology weight • NAFTA • No tax reform
- 6. 2017 in Review Canadian and U.S. Yield Curves Yield Curve Yield Curve Dec 31, 2017 Dec 30, 2016 Dec 31, 2017 Dec 30, 2016 0.74% 1.69% 2.04% 1.72% +95 bps +32 bps 1.19% 1.88% 2.44% 2.41% +69 bps Mar 20, 2018
- 7. Investment Road Map The Art of Forecasting – Tricks of the Trade Business Insider Jan 4, 2016
- 9. Investment Road Map Maximum sustainable output Recession rate cuts Early recovery, low inflation, low policy rates Late recovery, rate hikes, rising inflation Stagflation, High Inflation Slowing Growth Rate Cuts Rate Hikes TimeFederal reserve: +1.8%
- 10. Investment Road Map The Daily Shot – Jan 9, 2018
- 11. Investment Road Map Maximum sustainable output Federal reserve: +1.8% Rate Hikes INFLATION
- 12. Investment Road Map Barron’s – Dec 30, 2017 The Daily Shot – Jan 30, 2017 5% 10 Year3.5% 10 Year
- 16. Morgan Stanley Research – Sunday Start – What’s Next in Global Macro Dec 10, 2017 Investment Road Map U.S. Tax Reform: • Corp rate 35% to 21% • U.S. Corporations hold estimated $2.6 trillion overseas • Full expensing of business investment for five years
- 17. http://download.tomtom.com/open/manuals/LIVE/TomTom-EU-LIVE-RG-en-gb.pdf Maximum Sustainable GDP Time Investment Road Map McKinsey & Co. Productivity +2.0% vs. +0.5% +1.8%
- 18. Bad Neighborhood Trade Wars Source: Financial Times, February 2018 Trump strategy: • Use the threat of tariffs as a negotiating tool • Real target - China • Reduce trade deficit by $100 billion, but intellectual property is key • Made in China 2025 program • 10 priority sectors - Advanced IT (5G), EV, AI, Robotics, Aviation….. • China requires U.S. companies to form joint ventures & transfer IP • US believes WTO have been too soft • Designed before rise of Chinese state-backed capitalism • Other countries in the same position
- 20. Bad Neighborhood Monetary Policy Past 7 recessions Fed cuts rates +500 bps Fed Funds - 1.50% Expected Peak – 3.0% Can’t cut 500 bps
- 21. Bad Neighborhood Fiscal Policy JP Morgan Michael Cembalest “Eye on the Market – Feb 21, 2018
- 22. Bad Neighborhood Debt: Canadian Consumer WSJ – Feb 19, 2018 https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-24.pdf
- 23. Bad Neighborhood DEFLATION INFLATION Secular Stagnation Low Productivity High Debt Levels Stagflation Inflationary Expectations 40%X
- 25. Bloomberg – Feb 3, 2018 Points of Interest Bitcoin: Blockchain MIT Study: $270 - $317 million raised by ICO’s are frauds or scams Charles Kindleberger: “There is nothing so disturbing to one’s wellbeing and judgement as to see a friend get rich.” Blockchain • A secure database, or ledger, spread across multiple computers • Eliminate paperwork & speed up transactions • Used to store and transfer ownership of goods & track them through a supply chain Bitcoin • Digital Global Currency – used for everyday transactions? • Store of value? • Bitcoin Energy Consumption Index = Algeria
- 26. Points of Interest Bitcoin: Useless Etherium Token Contributions in US$’s - $276,342 Enough to buy 230 televisions!
- 27. Points of Interest Marijuana 1 Year Cannabis Stock Performance Barron’s – Mar 30, 2018 Canopy CEO Bruce LintonROB Magazine – Nov 12, 2017 Barely existed 3 years ago Now dozens of companies ~$30 billion market cap
- 28. Points of Interest Marijuana Globe & Mail – Feb 8, 2018Globe & Mail – Feb 8, 2018 Barron’s Mar 30, 2018 60 Private and public companies Health Canada granted 89 licenses Feb 1 – 244 more in review stage Oregon/Colorado – wholesale $0.50 - $2.00 Commodity business Low barriers to entry No sustainable advantage Canada • Deloitte: After legalization • $4.9-$8.7 billion market • Low=rum, High=wine • Price: $10/gram initially Constellation Brands • U.S. $50 billion Market • Global: $200 billion in 15 years • Wine: $60 billion • Tobacco: $75 billion
- 29. Points of Interest Active vs. Passive Investing Strategas – Technical Strategy & Analysis October, 2017 Strategas 3,202 active equity mutual funds • Flat since 2002 • 2009-2017 $1.09 trillion in outflows ETFs • 2003: 100 • 2009-2017 $1.7 trillion in inflows • 44% of equity AUM ETFs or passive mutual funds Strategas Technical Analysis Research – May 16, 2017
- 30. Points of Interest Active vs. Passive Investing Strategas Technical Analysis Research – May 16, 2017 Low interest rates mean more bad companies are able to survive
- 31. WSJ – Feb 13, 2018 Long time horizon $1 Billion in Dry Powder Manager Selection Points of Interest Active vs. Passive Investing: Private Equity
- 32. Summary • Next recession at least 12 months away • Conditions more challenging during next recession • Risk asset still attractive in this environment • Watch for sign of end of the cycle – lower risk exposure • Avoid investment fads • Active management to outperform • We have reached our destinationBusiness Insider – Feb 7, 2018
- 33. 2018 Strategic Outlook John Nicola, Chairman & CEO
- 34. Where are markets going?
- 35. Many Happy Returns (1870-2015)
- 37. What is the Rest? Life insurance, corporate bonds, mortgages, private debt Private equity, commercial real estate, farmland
- 38. Asset Class Returns 1870-2015 (NBER) 1.3% 2.5% 6.7% 7.0% T-Bills Bonds Real estate Equities Real Returns
- 39. What asset allocation would achieve a real return of 4% after fees over 30 years ? 1.3% 2.5% 6.7% 7.0% T-Bills Bonds Real Estate Equities Real Returns T-Bills 15% Bonds 25% Equities 30% Real Estate 30% Asset Allocation
- 40. Asset Class Returns 1870-2015 (NBER) 4.6% 6.1% 11.1% 10.8% 3.3% 8.9% 10.7% 22.8% T-Bills Bonds Real Estate Equities Nominal Return Volatility Same Return Liquidity and behaviour
- 42. Expected Results for Bonds After Fees Expected Return 4.9% 10 yr. Govt. 2.8% A+ Corporate 3.8% Bonds Before Fees
- 43. Ain’t No Mountain High Enough
- 44. Cape Shiller 10-Year PE (peaks) 1929 1936 1966 2000 2008 2018
- 45. -6.7% -0.5% -2.0% -5.0% -3.5% -3.7% 1929 1937 1966 2000 2008 Average 5-Year S&P500 After CAPE Peak & Inflation
- 46. 0.2% -0.8% -2.2% -0.9% 2.3% -0.3% 4.0% 1929 1937 1966 2000 2008 Average Goal No real return for five years 5 Year 60/40 Balanced After Inflation and Fees After CAPE Peak
- 47. Asset Allocation CDN/US CDN /Foreign( Private and Public) Bonds Mortgages Private Debt Hedge Funds Precious Metals Real Estate 20% Equity 38%Fixed Income 36% Alternative 6%
- 48. -2.1% -0.1% -1.1% 4.0% 5.1% 3.1% 4.1% 4.0% 2000 2008 Average Goal 60/40 vs. Core Net of Inflation and Fees 5 Years After CAPE Peak
- 49. Less Risk and More Return 13% more over 20 years and 30% less risk 7.2%/year 6.7%/year
- 50. -2.1% 2.1% 7.7% 13.3% Jan 2000 - Jan 2005 Jan 2008 - Jan 2013 S&P 500 Total return Put Write Index plus Interest 10.4%/yr more Annualized Return
- 52. Harbour Towers Hotel & Suites Acquired: October 2015 Purchase Price: $23.0 M Hotel Rooms: 196 Pre-Acquisition • NOI – $1.5M • NOI Yield – 6.5% • Occupancy – 62% • ADR* – $130 Post-Acquisition (2016) • NOI – $2.0M • NOI Yield – 8.7% • Occupancy – 70% • ADR* – $148 *Average Daily Rate Acquisition, Victoria
- 53. Harbour Towers – Value Creation Multi-Family Rental Conversion 219 New Rental Units Projected Cost: ~$56.4 M Projected Value: ~$67 M Return on Cost: ~19% Projected IRR: ~17% BEFORE AFTER
- 55. Transportation as a Service (TaaS) • By 2030, 95% of all Passenger Miles will be by Automated Electric Vehicles (AEVs) • This will add about $5600 per family in discretionary spending (10% of income or $1 trillion) • There will be minimal production of Internal Combustion Engines (ICEs) or individual ownership of cars. • IO cars will be 40% of the fleet, but 5% of passenger miles • AEVs will have a lifetime mileage capacity between 500,000 and 1 million miles
- 56. Transportation as a Service (TaaS) • TaaS will be 4 to 10 times cheaper than traditional owner driving • Pre-TaaS companies (Uber and Lyft) drove 500,000 passengers per day in NYC in 2016 • By 2030 passenger cars in the US will drop from 237 million to 44 million • 70% fewer cars manufactured annually • 50% more passenger miles in total at a cost of $400 billion vs. $1.5 trillion today
- 57. Transportation as a Service (TaaS) • Oil demand would drop to 70 million BPD from what is predicted by the IEA at 110 million BPD • Price of oil could drop to $25 and make 50% or more of North American Oil uncommercial but still leave us energy independent • Keystone and Dakota Access Pipeline would be stranded • Energy requirements would drop by 80% and emissions by 90% • Huge impact on oil industry, autos/trucks, auto insurance • Big geopolitical outcomes (impact on Canada?)
- 58. 39% Mid East 15% Russia 1% US 5% Canada Oil Dependency Cheaper oil Who needs oil?
- 60. 60% drop in 4 years (average = $35/barrel) It is now about technology
- 61. Renewable Energy
- 62. 6x
- 63. This needs this What will get in the way?
- 66. Tax Reform 2017 What’s Being Plucked? • Income splitting of dividends from private corporations • Increase tax on passive corporate income that could reach 71% when paid out as dividends • Pipeline planning that converts dividends to capital gains is prevented How is the Goose Doing Now? • Income splitting allowed over age 65 with a spouse • Otherwise no, unless labour or financial contribution • Passive rules stay the same except reduction in SBD if passive income over $50,000/year; more expensive to recover RDTOH in some cases • Integrated tax on passive income can be as high as 54.4% in BC
- 67. Tax Reform 2018 Before Tax Reform • Dividend compensation if SBD • Income split using dividends and trust • Accumulate passive assets in CCPC and recover RDTOH when dividends paid • SBD not impacted by passive assets After Tax Reform • Salary RRSP/IPP better • Over 65 on with spouse otherwise labour or capital • CCPC still better but try and minimize taxable passive income • Start losing SBD at $50,000 of passive income. 100% gone at $150,000. Does it make much difference?
- 68. Cdn Equities 25% Foreign Equities 15% Real Estate 35% Life Insurance 10% Pref. Shares 5% Private Equity 5% Alternatives 5% Asset Allocation for Taxable Private Corporation
- 69. Historical Tax Analysis 11.5% 9.7%10.1% 5.0% 4.6% 5.4% 5.9% 9.3% Annual Returns 53.0% 41.0% 17.0% 0.0% 75.0% 20.0% 5.0% 30.0% % Taxable 15.2%
- 70. Bonds 15% Mortgages 30% High Yield Bonds 15% Global Bonds 15% Private Debt 25% Asset Allocation for Registered Plans and Foundations Interest Bearing Tax deferred in registered accts.
- 72. Future Tax Analysis 7.0% 7.0% 7.0% 5.0% 4.0% 8.0% 7.0% 7.0% Annual Returns 53.0% 41.0% 17.0% 0.0% 75.0% 20.0% 5.0% 30.0% % Taxable 15%
- 73. 24% less Tax 16% higher return
- 74. Saving Corporately $100,000 pre-tax income $88,000 $73,000 $12,000 $27,000 12% Business Tax 27% Business Tax Tax Saving 20% more to save
- 75. Assumptions • Save for 30 years • 6% after tax return • Take out income at retirement as dividends $7,300,000 $6,100,000 Assets in 30 years SBD General Rate 20% more saved
- 76. $227,000 $213,000 Spendable Income Wealth Accumulation Corporately $7,300,000 $6,100,000 Assets in 30 years SBD General Rate 6.5% less $290,000/yr. $250,000/yr. 20% more saved
- 77. Planning Factors • Corporate assets • Age • Business Income • Spending needs Planning needs to be customized and will change over time.
- 78. Planning Options Tax Efficient Asset Allocation IPP vs. RRSP Over Age 50 Prescribed Rate Loans Insurance With or Without Leverage
- 79. To Sum it Up Good Neighborhood Turning Bad Treading Water? Disruptive Technologies Managing Tax Reform
- 80. THANK YOU