The Market

Topping business headlines in the latter half of the quarter was the culmination of the US-China “Phase 1” trade deal which included the cancellation of US tariffs on Chinese goods, and the associated retaliatory tariffs from the Chinese side on US automobiles, scheduled to go into effect in mid-December.  The news of the deal sent North American and Global stock markets to all-time highs on the renewed positive sentiment. 

Existing tariffs placed on US and Chinese goods, respectively, over the course of 2019 remain in place, and may be subject to what we can only assume will be called the “Phase 2 trade deal” that will likely happen in early 2020.  Based on the volatility of the markets seen in 2019 caused in part by media coverage of the trade negotiations and politicians quick on the “Twitter trigger”, we warn investors to brace for another volatile ride when further talks resume.

The table below shows the market performance as of December 31^st, 2019 in Canadian dollar terms.

Performance

For 2019, the YouFirst Growth composite at 15% had a slightly better return than the FPX Growth benchmark at 14.8% even with our conservative stance of maintaining a lower equity content than the benchmark.  The YouFirst Conservative Growth and YouFirst Balanced composites at 13.3% and 13.9%, respectively, outperformed the FPX Balanced benchmark at 12.2%.

Portfolio Activity

Valuations continue to be stretched for all sectors in North America, particularly defensive sectors such as Real Estate, Utilities, and Telecoms, as investors continue to build resiliency in their portfolios.  These sectors generally perform well in low interest rate environments and we believe that a lower-for-longer interest rate regime will continue to persist in the near-term.

For new clients who have joined this quarter, we added Fortis Inc. common equity (FTS – TSX) as a recent pullback in share price presented an attractive entry point.  Fortis has a healthy dividend yield of about 3.5% while maintaining an excellent track record of 46 years of consistent dividend growth.

For clients with limited real estate holdings in their portfolios, we introduced Brookfield Property Partners LP (BPY.UN – TSX) which is a diversified global real estate company that owns, operates and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, self-storage, student housing and manufactured housing assets.  It yields an excellent 7.2% while being attractively priced relative to its future growth potential.

As yields continue to fall, traditional bonds remain mostly unattractive for new client accounts, with yields in the mid to upper 2%.  Because of this, we prefer to hold liquid money market funds which yield 1.9% to 2.1% with minimum risk, as we don’t believe the incremental yield of corporate bonds compensates for the additional credit and interest rate risks.  We continue to monitor corporate bonds and may add positions in high quality issues if prices pull back and yields rise.

Outlook

Retrospectively, 2019 was certainly a stellar year for US markets.  Ending the year, the S&P500 returned 31%, and surpassed all time highs, while Canadian markets lagged with the S&P/TSX Composite returning 23%.  Throughout the year, several macroeconomic and geopolitical issues challenged investors with volatility in both markets.  The markets swing (sometimes violently) in the short-term, but given our disciplined approach with selecting companies and pools/funds with strong fundamentals, our portfolios have weathered the storm, carrying less equity risk than the general market.

So where do we go from here?  As widely expected by market participants, the Bank of Canada held the overnight lending rate steady at 1.75% on October 30^th.  Similarly, the US Federal Reserve left the target range for its fed fund interest rate unchanged at 1.5% to 1.75%, on December 11^th, with no plans to change rates in 2020.  More importantly, however, was the generally lackluster outlook in 2020 for the global economy by both central banks.  Equity market performance is directly related to the rate of economic growth, measured by GDP growth rates.  We expect that cooling GDP growth in North America and globally, to have a material effect on short term market performance.

We have been fortunate to have new clients join us this year, and have continued to take a conservative stance in investing new deposits.  We do not attempt to time the markets, however we have deployed cash prudently with the short-term objective of capital protection while growing assets at a reasonable risk-adjusted rate of return.

We hope everyone had a safe and happy holiday season with family and friends, old and new.  We look forward to working with you in 2020 and wish everyone a wonderful year of good health and prosperity.

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

Jane Garner, BA, EPC
VP Operations and Client Experience

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