Welcome to 2020!
At the beginning of the new year, we take time to reflect on the past year and anticipate the ever-changing global landscape ahead of us. In a year that started in the wake of a ~20% correction with fearful investor sentiment, media outlets proclaiming the next bear market was upon us and a full on trade war between the United States and multiple nations, the correct mindset was to be “Be greedy, when others are fearful.” (Our discretionary accounts benefited
from this mindset by having an increased exposure to the stock market.)
And whether you felt the effects or not, it turns out the Canadian dollar was the best-performing major currency of 2019!
The strong Canadian dollar, however, should struggle to maintain its top performance as the Bank of Canada may try to stall a significant rise as well as the uncertainty as the search begins for a new governor, as Stephen Poloz steps down in June.
In December, there was somewhat of a breakthrough with the US/China Trade war as President Trump and Chinese officials came to an agreement that includes an increase in purchases of US agriculture products as well as new intellectual property protections in return for a reduction in tariffs. Keyword here being “reduction”, as the US will be maintaining 25% tariffs on about $250 billion of Chinese imports.
Prior to this, the US Federal Reserve came out with a more upbeat view on the economy and signaled it would keep interest rates steady through the 2020 year. This comes as the first pause after 3 cuts since July.
Both events we believe signal higher inflation which may be currently overlooked. In early November, we added to our inflation protected asset allocation. For the most part this was an increase in our gold exposure, which historically is a great hedge against inflation as well as market volatility. On December 11th, US economic data was released showing that inflation had increased to its highest level since November 2018. North of the border this was more of the same as Canada’s core inflation hit a 10-year high!
The main objective of central banks is to keep inflation in check by using interest rates increases and decreases. In this case to slow a rise in inflation, a central bank would have to increase rates to slow the economy down. This anticipation of rising rates was felt across the utility and real estate sectors with significant downward pressure over the last couple of weeks as the companies in these sectors use quite a bit of leverage (debt) for operations. When their debt costs go up, it decreases their profit margins.
All the best for 2020!
-The Creed Team