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Equity markets rebounded in the second quarter and are now posting single to low double digit declines for the year. The recovery, however, has not been uniform. New economy companies with rapid growth but little to no earnings have seen the lion’s share of the gains. As discussed, we worry a bubble is forming in certain areas of the equity market as some of the largest companies in Canada and the US are priced at what can only be described as extreme valuations.
We are using the narrowness of the market to scale back on positions where we believe the valuations have become too rich. Both Microsoft and Abbott Labs reached new all-time highs during the quarter and trade solidly above 30x earnings. We trimmed our positions in both companies at ten times our initial cost on Microsoft and three times on Abbott Labs. We also initiated a position in Manulife Financial, which is currently trading at 7x earnings with a dividend yield of 6.6%. It replaces an investment held in Enbridge rate reset preferred shares with a similar yield but with better potential of share price appreciation.
The traditional fixed income market is proving to be one of the most frustrating places to “invest”. While bonds provide stability to the portfolio, with yield’s near or below zero, the expected return is almost nil. We continue to recommend clients keep five years of income needs in fixed income as well as enough liquidity to meet any embedded tax liability.
In the tax section, we highlight certain strategies which could be relevant for our clients. Notably, with the prescribe rate back at 1%, using spousal loans and family trusts for income splitting strategies can make sense once again. We also provide a new table with contribution limits for registered plans and links to more in depth explanations.
1. Review asset mix and investment policy for any adjustments given changing personal circumstances.
2. Review portfolios for tax loss harvesting by switching between direct securities and ETFs within the same sector.
3. Make all appropriate registered contributions as soon as funds are available. See page 26 for the individual limits.
4. Review if the spousal loan or family trust structure is beneficial to your situation.
The calculation of performance data set forth herein has been prepared by the author as of the date hereof and is subject to change without notice. The author makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete. However, BMO Nesbitt Burns Inc. ("BMO NBI”) makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to BMO NBI or its affiliates that is not reflected herein. This report is prepared solely for information purposes. Please note that past performance is not necessarily an indicator of future performance. The indicated rates of return are gross of fees or commissions. Individual results of clients' portfolios may differ from that of the model portfolio as fees may differ, and performance of specific accounts is based on specific account investiture. The noted model portfolio portfolio may not be appropriate for all investors
11 Sources: Bank of Canada, Bloomberg, BMO Capital Markets