The Market

Market volatility returned with a vengeance this past quarter. Strong January gains were erased by the threat of rising interest rates and inflation prospects. In February, markets bounced back only to be undone late in the quarter by the emergence of protectionist rhetoric and volatility in the technology sector. Most equity markets posted negative returns in Q1 in local currency terms. The positive Q1 showing for the global equity markets shown below was predominantly due to a weakening Canadian dollar.

The table below shows the market performance as of March 31^st, 2018 in Canadian dollar terms.

Performance

The YouFirst portfolios were essentially flat for the quarter. The YouFirst Growth and YouFirst Conservative Growth composites had returns of 0.3% and 0%, whereas the FPX Growth and FPX Balanced indices’ benchmarks were negative at -0.6% and -0.2%, respectively.

Portfolio Activity

The volatility and pullback in a couple of Canadian stocks on our watch list provided an opportunity to buy. Nutrien (NTR – TSX) is the combined entity formed from Agrium and Potash, the top two fertilizer companies in Canada. Nutrien produces and distributes over 26 million tonnes of potash, nitrogen and phosphate fertilizer products to agricultural, industrial and feed customers world-wide. Combined with their leading agriculture retail network that services over 500,000 growers, they are well positioned to meet the needs of a growing world and create value for shareholders. The fertilizer market tends to be cyclical in nature and is presently encountering a soft business environment thus the opportunity to enter a new position.

The other Canadian stock purchased was Couche-Tard Alimentation (ATD.B – TSX), the operator of Circle-K convenience stores and gasoline outlets. Some popular Circle-K brand names utilized at their gasoline outlets are Esso and Shell. Recently the stock has pulled back as it digests its latest acquisitions. Couche-Tard has a history of successfully integrating new acquisitions into their store network.

Couche-Tard is the leader in the Canadian convenience store industry. In the United States, it is the largest independent convenience store operator in terms of the number of company operated stores. In Europe, Couche-Tard is a leader in convenience store and road transportation fuel retail in the Scandinavian countries (Norway, Sweden and Denmark), in the Baltic countries (Estonia, Latvia and Lithuania), in Ireland and also has an important presence in Poland.

Couche-Tard’s network comprises about 11,270 convenience stores throughout North America, 2,730 stores in Europe and 1,900 franchised stores in other parts of the world, totalling 15,900 stores worldwide. Approximately 100,000 people are employed throughout its network and at its service offices in North America. Including employees at branded franchise stores, approximately 25,000 people work in its retail network, terminals and service offices across Europe.

To fund these purchases, in portfolios where Manulife (MFC – TSX) was an overweight position, we trimmed MFC.  

Morguard North American Residential REIT redeemed their 4.65% 30-Mar-2018 convertible debenture and issued a new one at 4.5%, maturing 31-Mar-2023 (MRG.DB.A – TSX). We added MRG.DB.A to RRSP or TFSA accounts in most portfolios. Following its Initial Public Offering in April 2012, this REIT has doubled its portfolio size to 12,558 suites at 46 multi-suite residential properties in North America. The real estate portfolio consists of 30 US residential apartment communities located in Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, North Carolina, Texas and Virginia and 16 Canadian residential apartment communities located in Alberta and Ontario.

Outlook

Our stance is the same as it was last quarter, that we are in the later innings of the market cycle so it is not the time to be taking big risks. The challenge, though, is judging exactly how much caution is merited. As Q1 quarterly earnings are announced, let’s weigh the evidence.

Three reasons to be modestly upbeat:

• Low unemployment and strong jobs and profit growth. Both Canada and the US are experiencing the lowest unemployment rates in a decade. US corporate profits are expected to grow by more than 18% and earnings growth in Canada has lowered the TSX Composite Index price-to-earnings ratio from 21 a year ago to 17.
• A positive sloping yield curve implies that a recession is not imminent. The upward sloping yield curve means it still costs more to borrow money for longer periods than for shorter periods.  Over the past 40 years, the slope has inverted whenever a recession is on the horizon.
• Inflation is still under control, rising at about 2 percent annually. This is near Central Bank targets so there doesn’t appear to be the need for rapid interest rate increases.

Three possible downsides:

• Geopolitics: A negative outcome relating to North Korea’s nuclear program, the Syrian conflict, tariff wars, NAFTA negotiations or Kinder Morgan pipeline approvals could derail the markets.
• Traditional valuation metrics point to bubbly conditions for US stocks. On the same measure, Canadian stocks appear cheaper, but not necessarily a bargain.
• Finally, there are questions about what happens when the recent wave of US tax cuts and fiscal stimulus begins to dissipate. At Capital Economics, Mr. Higgins worries that “the US economy, which is already running into capacity constraints, will slow next year as fiscal stimulus fades and tighter monetary policy bites.” He sees growth in US gross domestic product sliding from 2.8 per cent this year to only 1.5 per cent in 2020.

According to Mawer Investment Management, “We are in the later innings of the market cycle, but growth indicators in the form of GDP results and corporate profits could prove supportive enough for the equity cycle to continue for some time.”

If you have any questions or comments regarding items discussed in this newsletter please let us know.

Doug Garner, P.Eng., CFA
President, Portfolio Manager

Jane Garner, BA, EPC
VP Operations and Client Experience

Simon Chun, P.Eng., CFA Level III Candidate
Investment Analyst