Stocks in December ended 2017 on a relatively modest note. The year was strong for equity markets in general as economic growth and tax cuts drove US equities to new highs, while sentiment for Canadian stocks was largely driven by the continued “bounce” in oil. As we mentioned in our September 2016 Investment Update,
While we are bearish on commodities and oil prices in the long-term, we remain bullish on oil prices heading into 2017 as Saudi Aramco, the world’s most valuable company, plans a $2 trillion IPO in 2018. Not surprisingly, the Organization of the Petroleum Exporting Countries (OPEC) on September 28, 2016 managed to agree to its first production output cut in eight years as Saudi Arabia’s interest in higher oil prices to support its Saudi Aramco IPO valuation is apparent.
Canada plateauing in 2018, bearish for late-2018
While our bullish forecast for oil in 2017 materialized and boosted Canadian sentiment, there are a few major factors that lead us to believe that 2018 may begin to see some weakness for Canada:
- Oil prices will likely peak in late 2018. Our view has been that Saudi Arabia was focused on controlling global oil output heading into its Saudi Aramco IPO. Saudi Aramco appears set to complete its IPO in late-2018. As such, we believe OPEC (led by Saudi Arabia) will be less diligent about maintaining quotas as its IPO is completed, and oil prices will continue its long-term correction below US$50 as we exit 2018, noting that oil prices are still over 50% below its 2008 peak.
- Lower property prices the new normal? Higher prices on Toronto and Vancouver real estate has been the norm over the last 15-20 years. As a result, many Canadians have their investment portfolios overextended on real estate that has the potential to be a lingering liability to our banking system. Real estate is not a liquid asset (compared to stocks that are highly liquid) and the new mortgage rules that took effect on January 1, 2018, in addition to higher borrowing costs are serious headwinds that have shifted the Toronto and Vancouver real estate markets to a buyer’s market where prices may head lower in the short-term.
- Trade battles with the US are intensifying. Since the Trump administration took office, there have been numerous trade duties charged by the US against Canada including softwood lumber, aircraft and more recently paper. In fact, Canada just launched an official trade complaint with the US over unfair trade practices. This puts a large degree of uncertainty around NAFTA negotiations that were scheduled to conclude in March, although recent overtones from the US administration appear willing to extend that deadline.
Value stocks are beginning to outperform growth stocks
Among large-cap stocks, the spread between value and growth is now larger than at any point over the past six decades, with one exception – the top of the dot-com bubble.
Thus far in January, we are seeing value stocks outperform growth and signs of this trend continuing are apparent as the current bull market reaches its exuberance phase. Noting in the chart below from Barron’s, value stocks outperform significantly late in bull markets and continue to outperform as corrections and bear markets occur. For example, coming out of the tech bubble in 2000, value stocks outperformed growth stocks by over 20% annually thru 2005.
Investment Performance Update
An overview of the performance of our actively-managed products is as follows:
- The AFINA Optima10 was up +0.9% in December, up +3.3% in 2017, and was up +23.9% in 2016. Our current cash and equivalent weighting is 33.5% in this portfolio.
- The AFINA Affinity was up 0.3% in December, +up 2.1% in 2017, and was up +20.6% in 2016. Our current cash and equivalent weighting is 62% in this portfolio.
As of December 31, 2017. All figures are net of fees and other expenses. Past performance is not indicative of future results. Refer to https://www.afinacapital.com/legal/ for full details and disclosures.
(1) The benchmark represents a 50% weighting of the S&P 500 Total Return Index in Canadian dollars and a 50% weighting of the S&P/TSX Composite Total Return Index in Canadian dollars.