Personal Finance

Prolonged Trade Tensions

Global financial markets took a pause in May and experienced a pullback after a very strong start to the year as U.S.-China trade tensions came back to the forefront. With no resolution to the trade conflict and more tariffs being invoked by each country, concerns regarding the tariffs’ negative impact on global economic growth was brought back to the surface. Global markets retreated between 3%-7% for the month of May, but have since bounced back in June. Given the extent of the rally from the December 2018 lows, it is healthy for the markets to take a breather and digest the gains year to date. In the short term, markets are likely to be bound in a trading range by two opposing forces.

On the one hand, global central banks remain accommodative with their monetary policies, giving markets a safety net. Recall that lower interest rates are favourable for businesses (lower cost of borrowing) and consumer spending (more disposable income). With the recent softening of macroeconomic data, the chance of a rate cut has increased considerably. The market is now projecting the probability of a U.S. rate cut at 86% by July 2019 and 99% by December 2019, while a rate cut in Canada sits at a 55% likelihood by year end*. Furthermore, the European Central Bank (ECB) recently left rates unchanged and signalled that the earliest date for a rate increase would be mid-2020 instead of 2019. Lastly, China has also increased stimulus efforts to combat its slowing economy. In short, supportive central banks are a tailwind for the markets.

On the other hand, trade tensions and tariffs, if prolonged, are a drag on economic growth and corporate earnings and will reduce investor optimism and risk appetite over time. As mentioned, we have already seen softening of macroeconomic data recently. President Trump and President Xi are expected to meet at the upcoming G20 Summit on June 28-29th in Osaka, Japan. This gives both sides an opportunity to advance trade negotiations, but lack of progress would contribute to negative sentiment for the markets. Our sense is that this trade tug of war will be prolonged due to the reasons below.

It’s becoming increasingly apparent that the U.S.-China trade conflict is not about the past, it’s about the future. It goes beyond traditional issues of trade imbalances and is a strategic positioning by each side for future technological dominance that will shape the power of each country for decades to come. Trade imbalances of the past are relatively easy to fix, but sharing technological prowess into the future is a much more complex issue. From the U.S.’s perspective, the headline policy is to reduce trade deficits, but the strategy (i.e. real intent) is to limit technology development by China.

This mainly stems from an initiative launched by China in May 2015 known as Made in China 2025. It is a ten-year strategic plan to upgrade China from being a “factory” to an advanced industrialized economy, driven by technological innovation and focusing on quality over quantity. It targets ten advanced-technology manufacturing industries, namely: (1) advanced information technology; (2) robotics and automated machine tools; (3) aircraft and aircraft components; (4) maritime vessels and marine engineering equipment; (5) advanced rail equipment; (6) new energy vehicles; (7) electrical generation and transmission equipment; (8) agricultural machinery and equipment; (9) new materials; and (10) pharmaceuticals and advanced medical devices. The Chinese government has pledged subsidies equaling to $300 billion U.S. dollars (USD) to domestic firms to achieve its plan. In essence, the Made in China 2025 initiative competes with the Made in America paradigm in terms of technology and innovation.

In response, the U.S. launched an investigation in August 2017 into China’s trade practices under Section 301 of the U.S. Trade Act of 1974. Section 301 is a principal enforcement tool that can be used to address a variety of unfair acts, policies, and practices by U.S. trading partners. Requests made by the U.S. to China include reducing the bilateral trade imbalance by $200 billion USD over two years, strengthening China’s intellectual property (IP) laws, improving market access into China for U.S. companies, halting China’s government subsidies for the Made in China 2025 initiative and so on. The U.S. is flexing its muscles in the trade negotiations through the systematic increase of tariffs and the component export ban to Chinese telecommunications firm Huawei, which is one of China’s most valuable companies. For now, high-tech Chinese firms are still largely dependent on U.S. firms as part of their supply chain, so the export ban could be detrimental to Huawei. China has also increased its tariffs, but has less retaliation tools than the U.S.

At this time, it appears that China is willing to buy more U.S. goods and services to reduce the trade imbalance, but there is less clarity on negotiation progress on the technology front. The meeting between the U.S. and China at the upcoming G20 Summit will be pivotal for this trade tug of war.

*Source: Bloomberg

Ethan Dang, CFA, MBA is a Portfolio Manager at McIver Capital Management at Canaccord Genuity.

CLICK HERE to receive the McIver Capital High Net Worth Newsletter direct to your Inbox or to request account or client information from the Mcilver Capital Management team.

A Very Uncomfortable Question

As you know, the MoneyTalks team are full on supporters of Special Olympics. Some will say I’m a pain in the ass about it. Thankfully many others appreciate hearing about the opportunity to help out.

I know that I can go on and on about the importance of helping individuals with intellectual disabilities and their families so I promise I will be brief and ask only one question. If someone you know had a child with Down Syndrome, autism or Fragile X …maybe a niece, nephew or grandchild – would you be more interested? Would you take a couple of minutes and bid on a silent auction item or donate or get the business you work for to sponsor?

My bet is yes, which is why is why I invite people to take a minute and think about these families and individuals. The difference you can make in their lives is huge. Obviously, I think that they deserve our help – many of our MoneyTalks listeners, clients and analysts agree.  I hope you do too.

And in addition to an easy online donation option – there is a fantastic opportunity to bid on some really cool stuff! You can donate and/or bid at the Special Olympics auction by going to newmontgoldcorp.com – bidding ends on Thursday at 7:30pm.

Top Brokers Name 3 TSX Shares to Sell Today

Analysts downgraded three TSX stocks in the past couple of days that are worth noting. Here’s a little bit about each one of them… CLICK for complete article

Help with Special Olympics

I promise not to keep hounding you but I also appreciate that sometimes life gets too hectic and things get overlooked.  And this is simply too important.

I’ve asked for your help with Special Olympics in the past – but this year is different.  Not just because we have added another 450 plus children and adults with intellectual disabilities, but also because we have seen two major sponsors move to the United States.  And that leaves a significant hole in Special Olympics ability to deliver a range of programs. From Active Start – for little ones as young as two years old – to our healthy athlete program that fills the gap for people with intellectual disabilities in our healthcare system.

Healthcare by the way is a big story unto itself.  Most people assume that people with Down Syndrome, Microcephaly and other intellectual disabilities get the same level of healthcare as the rest of the public. Unfortunately, they’re mistaken.

Let me give you one quick example.  In the last medical screening we did at the provincial games we found that 25% of our athletes have eye sight problems, 36% needed follow up dental care and 77% had foot and leg problems that required further medical attention.

I am sure that ignoring the unique problems associated with the diagnosis of people with intellectual disabilities is not done on purpose but it has happened nonetheless and Special Olympics goes a long way to rectify this massive inequity.

I’m not going to keep going on. Besides my writing’s simply not good enough to do justice to how deserving these athletes and their families are of our support.  As a parent and grandparent I couldn’t be more happy to help and I hope you will too.

As the Chair of the Newmont Goldcorp Invitational Golf Tournament I’m asking individuals and business to purchase $1500 Tee Sponsorships (which include your signage on a hole and are 100% business expense deductable) or sponsor our “Adopt an Athlete” program (and it’s a fully tax deductible.)  But that’s not all – we also need quality Auction Items for our online auction.

If you or someone you know can help please let us know. Nothing but good will come from it. Please feel free to contact Mark Longhurst in my office for more information and details. He can be reached at mark@mikesmoneytalks.ca or 604.505.3341.

Thanks for your time,

Mike

Are You Prepared For The Melt-Down?

A recession is coming, that much we should all be able to agree on. Sure, we can debate the exact timing, but the reality is the global economy is going to have a significant melt-down soon.  And when the economy falls into a recession the stock markets go down with it. It may be starting today, or start next week, or not until next year, but make no mistake, it is coming.

Not only are we sure it is coming, we are convinced that the next recession will be much deeper and far more caustic than previous recessions. We say this because the next recession will be truly global. We believe that the coming recession will make the 2007–2009 period seem like a cake walk…..CLICK for complete article

March Madness

Global financial markets had a tremendous start to the year and continue to hold up well in March. Positive drivers for the markets have been the U.S. Federal Reserve’s pivot to a more accommodating stance, indications of a potential U.S.-China trade deal, corporate stock buybacks and so on. On the other hand, slowing global growth, rising recession fears, and Brexit uncertainty continue to hang on the wall of worries for investors. We will revisit these concerns below.

Given the extent of the rally from the Dec 24, 2018 lows, it would in fact be healthy for the markets to take a breather here and digest the gains year to date without reaching levels of madness. From a charting perspective for the S&P 500 (bellwether index), the area of 2800 to 2820 is of most interest and importance. This range serves as a key area of battle between buyers and sellers. Recent attempts to break above or below this range have only seen prices get pulled back into it shortly after. We could see prices consolidate and trade sideways here for a bit longer. At the same time, this area is important because a sustained break above or below this range could move the S&P 500 higher to challenge its previous all-time high at 2940 or lower to retest the 2650 level. In short, we are at an inflection point, reflecting the mix of positive and negative macroeconomic factors.

Let’s briefly revisit the key concerns and see how they have developed.

Concern #1: Slowing Global Economic Growth

  • Update: 2019 Forecasted Real GDP Growth*: U.S. = 2.4% (was 2.5%); CA = 1.5% (was 1.9%); EU = 1.2% (was 1.5%); Japan = 0.7% (was 1%); China = 6.2% (unchanged); India = 7.2% (unchanged); World = 3.4% (was 3.5%)
  • Takeaway: Forecasted economic growth has moderated for certain countries and regions, such as Canada and Europe, but the world’s two largest economies, U.S. and China, which make up about 60% of world GDP are still growing at a solid pace. Hence, our eyes should be on the U.S. and China to monitor any signs of significant slowing.

Concern #2: Fear of Global Recession

  • Update: 2019 Recession Probabilities for major economies*: U.S. = 25%; CA = 20%; EU = 20%; Japan = 40%; China = 15%; India = 0%
  • Yield curve inversion, which occurs when short-term interest rates exceed long-term interest rates, has been a reliable precursor to recessions. When the yield curve inverts, financial conditions tighten because it’s not profitable for banks to borrow money under short-term rates and lend out under long-term rates. Over time, this leads to more friction in the financial system and slower economic growth.
  • Takeaway: The recent concern surrounding recession is based on the fact that the U.S. 3-month to 10-year yield curve has inverted. This makes great news headlines. However, the U.S. 2-year to 10-year yield curve, which is more widely tracked by market practitioners, has yet to invert. Furthermore, banks don’t stop lending overnight, financial conditions tighten over time. Many years of empirical data shows that even after the U.S. 2-year to 10-year yield curve inverts, the median gain for the S&P 500 is 21% in 19 months before a recession hits.

Concern #3: Tighter Monetary Policy (central banks hiking interest rates)

  • Update: The U.S. Federal Reserve remains dovish, signalling no U.S. interest rate hikes in 2019. The same goes for Canada, Japan and the Euro Zone, where no rate hikes are expected this year. On the contrary, the market is now projecting a higher likelihood of a rate cut in all the countries and regions above for the rest of this year.
  • Takeaway: This is the least of the key concerns at the moment. Accommodative central banks are a tailwind for the markets. Slower rate hikes are favourable for businesses (lower cost of borrowing) and consumer spending (more disposable income).

Concern #4: Heightened Trade Uncertainty (U.S. vs. China trade war)

  • Update: The meeting between President Trump and President Xi has been delayed at least until April. If President Trump wants to win the next U.S. election in 2020, he is likely to release pressure on the trade conflict to maintain confidence in the U.S. economy. China has a GDP growth target of 6% to 6.5% for 2019. It needs a trade deal to help reach that growth target.
  • Takeaway: Trade uncertainty remains a pending issue, but it’s in the best interest of both sides to reach a trade deal. Hence, trade conflict is likely a transient issue when viewed through the lens of politics and game theory.

*Source: Bloomberg

Ethan Dang, CFA, MBA is a Portfolio Manager at McIver Capital Management at Canaccord Genuity.

CLICK HERE to receive the McIver Capital High Net Worth Newsletter direct to your Inbox or to request account or client information from the Mcilver Capital Management team.