McCreath Group - September 2016 Client Newsletter

James McCreath - Sep 13, 2016

Hello to all:

Below is the McCreath Group’s first-ever client newsletter, Semper Anticus, which means “always forward” in Latin. For the collective 150 years our eight team members have spent working in the investment industry, we continually strive to put clients in a better financial and personal situation. In best positioning clients, we’re constantly anticipating where trends, markets and money flows are going. Quite simply, we always have to look forward.
Our commitment to clients is to provide superior wealth planning on a timely basis while exceeding their expectations for service, portfolio management, trust and integrity. As Scott often likes to say, “Whether you’re a barber, dentist, teacher or lawyer, everyone needs assistance setting sail for retirement.”

In order to assist with in this retirement goal, the McCreath Group specializes in working with clients to develop practical, tax-efficient, long-term financial strategies to prepare for retirement by:

  • Being value investors

  • Focusing on investments with cash flow

  • Implementing a buy and hold strategy with regular portfolio reviews

  • Considering bonds and preferred shares as key asset classes in appropriate portfolios

We expect our newsletter to be evolutionary, so should you have any feedback or ideas you wish to see us explore, please let us know. We’ll endeavour to present you with our own thoughts along with curated content from other people or sources with information and ideas of interest to our clients.
We’ve noticed investors are less patient in today’s volatile markets, so we hope this newsletter is another touchpoint to help alleviate topics or concerns we’re hearing from clients and the multitude of other resources we tap to develop client portfolios. For example, in the last three months, we’ve had to interpret events surrounding oil price undulations, US Federal Reserve interest rate decisions, Brexit, terrorist attacks in France, the US presidential election, etc.. Throughout all of these events, our message to clients is patience, as investing is a long-term process.
Should you ever have any concerns or questions about your investments we’re always here to help, so please email or call any time. And most importantly, thank you for being clients … Alison, Ashley, Rob, Lila, Steve, Brendon, James and Scott  
Included in this edition are articles on:

  • The McCreath Group Market Overview

  • The impact of the US Presidential election on markets

  • What leading CEOs read this summer and book suggestions from the McCreath Group

  • Accessing your BMO Nesbitt Burns account online

The McCreath Group Market Overview
As formulated from multiple sources including BMO Nesbitt Burns’ Portfolio Advisory Team
With the S&P 500 and S&P/TSX Composite near record highs, the key question is where to go from here? In our opinion, the path of least resistance is likely higher since: (1) bullish sentiment remains very subdued (a good contrary indicator) (2) economic momentum is improving in North America (3) very easy monetary policy and low interest rates globally. Markets do not go straight up. Our team believes that weakness in stocks from here should be used as a buying opportunity for high quality U.S. and Canadian stocks.
Equity markets continue to be volatile. Despite this they have been moving higher in 2016. Markets are climbing a wall of worry and this is not unusual. On a global basis the news and headlines continue to affect investor sentiment. In this environment it is an opportunity for portfolio managers to identify great companies at attractive valuations.
Major Themes that are Impacting Markets

  1. A slowdown in China’s growth and the government’s attempts to orchestrate a soft landing. This situation is material to Canada because of China’s demand for our commodities, from oil to lumber to grains. This is critical to Western Canada’s prosperity. Although China's GDP growth rate is slowing, its nominal GDP has more than doubled in the last eight years. Western countries would be envious of this level of nominal GDP growth.

  2. Slow growth in the United States (2-3%). It has been a very slow recovery from 2008, but the U.S. economy is growing. New home sales, car sales, unemployment, and consumer debt have all being improving. We are now at the point where the U.S. Federal Reserve will likely start to increase interest rates. This is positive for equity markets and markets have started to discount this. Small, gradual interest rate increases are a very clear indicator of a growing economy – this is positive for Canada and the world. An increase in rates will also help our insurance, banking, energy, and industrial holdings in the portfolio.

  3. The price of oil has been a major global theme. The swift decline in price had a significant impact on portfolios. Energy holdings have lifted off the bottom, but we still have a ways to go. We see the price of oil continuing to move up, with the $50 mark being a milestone. The increasing world demand for oil, the decline in production, the cancellation of close to $400 billion of projects, and the ongoing corporate bankruptcies, coupled with the tremendous decline in the number of rigs drilling point to the oil market rebalancing and higher prices.

  4. Aside from the three factors above, markets have had to deal with Europe’s painful delay in returning to growth, Russian aggressiveness, the refugee crisis, Middle East turmoil and ISIS, a tumultuous U.S. presidential election, the fallout from Brexit, Japan’s stalled economy, Brazil’s corruption and inflation, and Venezuela’s civil unrest and potential for financial default.

Despite all of these factors, which all asset managers have to deal with, we are optimistic in our forward outlook. Oil will recover, global growth will be led by the United States, and China is still growing their economy at 5-6%. As always, security selection remains paramount in these markets.
Thoughts on the U.S. Presidential Election
Stéphane Rochon, CFA, BMO Nesbitt Burns Equity Strategist
Conclusion: With Hillary Clinton and Donald Trump the official standard bearers for their respective parties, many clients are wondering what the potential impact of a Democrat or Republican victory may be on the markets. We want to remind our readers that the impact of politics on markets is often vastly overestimated in our view. It is the business cycle which truly drives stocks but we concede that there may be some short term volatility and sector impact (positive and negative) associated with the election. Our view is the general confusion and uncertainty around Donald Trump’s message would lead to a negative market reaction should he win the Presidency (the market does not like uncertainty!).
Incumbent Party Wins/Loses
As our research partners NDR note “The strength of the economy has been a big determinant of whether the incumbent party has won or lost, or as Bill Clinton’s famous 1992 campaign slogan states, “it’s the economy, stupid!” The economy has been in a recession five times on Election Day. Four times the incumbent party lost. The exception was 1948, when the economy entered a recession during the month of the election. Truman’s win was also perhaps the biggest upset since 1900.
When the economy has not been in a recession, the odds of the incumbent party retaining control of the White House has jumped to 71%. Of the seven cases when the incumbent party has lost when the economy was not in a recession, four had recessions within eight months of Election Day (1912, 1952, 1980, and 2000).” Given that the BMO Private Client strategy sees a very small probability of recession over the next 12 months, history is on Clinton’s side on this one.
Historical Market Performance
Based on our calculations, the market performance has been far superior under a Democrat administration since 1929. Specifically, when a Democrat controls the White House the S&P 500 has achieved average annualized returns of 10.2% vs. 1.1% when a Republican was in charge. The reasons for this are unclear although the fact that Republicans presided over the Great Depression (Hoover) and Financial Crisis (W. Bush) while Democrats were in power for the strong subsequent recoveries certainly played a role.
As noted by BMO Economics, Trump is also taking a much harder line on foreign trade than Clinton. While the former Secretary of State dislikes the TPP in its current form (suggesting she may accept it if changes are made), Trump is not only opposed to the deal, but has talked about renegotiating NAFTA and exiting the WTO. This would mark a major step toward trade protectionism. Indeed, his proposed 45% tariff on Chinese goods (unless China floats the renminbi) and 35% tariff on many Mexican goods (to punish American companies that relocate jobs south of the border) could have material consequences if they lead to higher inflation and retaliatory action. A potential trade war would disrupt global supply chains (many of which are integrated within North America), raise business costs and increase uncertainty. As China and Mexico account for 30% of U.S. imports (Canada 15%), the proposed tariffs could raise U.S. import prices by roughly 10%, squeezing spending power and pressuring interest rates. And, with China and Mexico buying a fifth of U.S. exports (Canada 19%), retaliatory tariffs wouldn’t be helpful. As such, one wonders whether these are more talking points than proposed policies.
Nevertheless, for both candidates, victory alone is not a recipe for putting policies into practice. While some proposals can be initiated by executive order, many, if not most, require congressional approval. Typically, an administration has the best chance of legislative success when the President’s party holds a majority in both the Senate and House of Representatives. Currently, the Republicans control both chambers, making it very difficult for the Obama Administration (and for Congress given Obama’s veto power) to get things done.
What leading CEOs read this summer
From McKinsey and Company, here’s a link to books a number of notable executives read this summer:
From books the McCreath Group read this summer, we recommend:

  • Shoe Dog by Phil Knight … a memoir by the creator of Nike

  • When Breath Becomes Air by Paul Kalanithi and Abraham Verghese … a memoir from an idealistic young neurosurgeon attempts to answer the question “What makes a life worth living?”

  • Red Notice by Bill Browder … A true story of high finance, murder, and one man’s fight for justice

  • Dear Calgary: Letters to the Next Generation of Leaders by the Calgary Chamber … A city is only as strong as its human capital, and Calgary has been blessed with some of the country's greatest leaders. To preserve this remarkable legacy, the Calgary Chamber asked 69 prominent Calgarians to write letters in which they share their advice and experience with the city's next generation of leaders.

Accessing your BMO Nesbitt Burns account online
From our client survey in the spring, a number of people indicated that didn’t use Gateway or were unfamiliar with the full breadth of features available to view your investment account online.

  • You can log onto Gateway at

  • Should you want access to your account online (or you need a password refresh), please call or email one of our team members

  • We can also provide you with a tutorial over the phone of how to best use the Web site

  • Through the site you can:

    • Review your account holdings

    • Access account statements and opt out of receiving paper statements by mail

    • Review account performance

    • Access to all of BMO Nesbitt Burns research

Thank you for being clients ... and please contact us any time with questons, concerns or feedback ... The McCreath Group