investment portfolio quarterly - winter 2014
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Investment Portfolio Quarterly
Insightful PerspectivesWinter 2014
Contents Page Executive Summary
Q4/13 Quarterly Comments 1 Portfolio Strategy
Normalization Year 3
U.S. Economic Outlook: Enter the Bear Flattener 11
Top 10 Canadian and U.S. Stocks Picks for 2014 18
Emerging Markets: One Step Forward, Two Steps Back? 34
Canadian Core 38
Canadian Income Plus 42
U.S. Core 45
North American Core 50
Core-Plus Fixed Income 54
Portfolio Advisory Group
Winter 2014 1
Executive Summary Q4/13 Quarterly Comments Shane Jones Chief Investment Officer & Co-Head, Portfolio Advisory Group
The fourth quarter of 2013 was an excellent quarter in equity markets although markets are typically strong as we head into the year-end period, this one was very strong. Mr. Bernanke finally put the pin in and started the highly anticipated tapering of QE3 with a reduction in bond purchases from $85 billion per month to $75 billion per month. At the present time it is expected that the Federal Reserve will reduce at $10 billion per meeting which are every 6 weeks and this will then bring the quantitative easing to an end in the latter part of 2014. However, economic conditions will drive these decisions so any further tapering will be data dependent. Economic statistics picked up pace in the fourth quarter with job creation better than expected and an increase in Gross Domestic Output, these stronger than expected numbers were critical in the Federal Reserve decisions although inflation does remain subdued. After many quarters of low volume trading we actually saw a decent increase in market volumes which were a catalyst for the better tone in the markets as Fund Managers positioned their portfolios to be overweight equities and underweight bonds as the equity markets continued to produce outstanding results. Bond Markets also put in a decent performance for the quarter considering the market environment as markets remained volatile around the potential for the aforementioned tapering of QE3. 10 Year US Treasury Bonds appear to be capped at around the 3% level at the present time and remain in a very tight trading range of 2.8% to 3.0%. As we enter the 1st quarter of the New Year we finally have a long awaited budget agreement however the parties still have to agree on the debt ceiling issue which comes up for debate in February and could cause further disruption in the markets.
Looking at North American Equity markets both Canada and the US performed very well with Total Returns of 7.28% and 10.33% respectively. As mentioned volumes improved dramatically throughout the quarter with equities being purchased at a healthy pace pushing US stock valuations to very high levels. When looking at the breakdown of sectors on the S&P500 that gained or lost in the quarter the gains were paced by an almost 40% return in the Oil and Gas refinery stocks followed by a 30% gain in Aluminum stocks. On the opposite end we saw big losses for Gold stocks of -18% as the precious metal continued to lose faith with investors. Looking at the same statistics for Canada and using the 10 sectors Industrials, Healthcare and Financials led the groups with gains of 15.8%, 13.8% and 9.1% respectively, in fact all sub-sectors produced positive performance with the exception of Materials which was dragged lower by the continuing poor performance of Gold stocks. In North American fixed income markets the focus remained on the Federal Reserve and their tapering of QE3 policy (when, why and how much), this kept markets uncertain and we saw yields trade in a tight range between 2.75% and 3%. Tapering did start in December and the announcement of further tapering is expected in late January. However, any further tapering of bond purchases will become very data dependent and the Federal Reserve will be looking for better economic statistics in the coming months such as lower unemployment and GDP growth to signal that the US economy is on track for a full recovery. We do not expect any changes to official interest rates in North America in 2014.
In Europe, equity markets performed very well as signs of a recovery are beginning to take shape across the EuroZone with the exception of France whose high tax rates are beginning to really hurt economic growth. We are starting to slow but sure gains in Spain and Italy while Germany and the Benelux countries continue to perform well from an economic standpoint. The UK is also seeing stronger than expected economic growth but most of the gains appear to be in the Southern regions of the country which has a very close proximity to the recovering European markets. The DAX in Germany gained 11.1%, the CAC in France added 3.7% while the FTSE in the UK added 4.4%. Ireland has emerged from its IMF/European austerity controls and the hope is that Portugal will emerge from under the same measures in the next few years as the economic recovery there takes shape. European markets are poised to perform well in 2014 and its an area of focus for many investors including ourselves.
Investment Portfolio Quarterly
As we look at Asia markets we see very different performance in the 2 major markets as Japan performed extremely well gaining 12.7% on a weak currency that really helping this exporting nation. In contrast we saw the Shanghai Market lose 2.7% as the economy struggles to gain traction and move back above the 8% growth level. Overnight money rates have also been a drag on economic growth and the markets as liquidity conditions remain very tight and the shadow banking market continues to be problematic. We still believe that with the US economy grinding higher and the European economy looking to have bottomed that this will bode well for the Chinese economy as we move further into 2014. If we are correct we expect that this will have a positive impact on Commodity markets and the Canadian equity markets.
In Commodities and Currencies we have once again had quite the mixed picture with Gold and Oil performing poorly while Natural Gas and the US Dollar performed better than expected especially Nat Gas as colder than expected weather conditions drove the price 24% higher in the US. Copper gained marginally while agricultural commodities were weak due to a stronger than expected crop yield especially Corn and Wheat. The US Dollar gained against most other major currencies (Japanese Yen was the exception) as the uncertainty around the Federal Reserve actions and the debt ceiling debates lifted the weight on the currency. The Canadian Dollar had a poor quarter as expectations of a move in official interest rates from the Bank of Canada has played into many speculators minds. We will await the economic update from Mr. Poloz in late January to see if there is a shift in policy from the central bank. This weakness in the Canadian Dollar has gathered momentum in early January and the currency is pushing towards $0.90 to the US Dollar. Oil has weakened from its recent highs on an agreement with Iran to reduce sanctions and some easing of tensions in Egypt and Libya. The Syria situation is still evolving with peace talks expected soon.
As we start the New Year of 2014 things appear to be a little calmer around the world. We have a budget agreement in Washington but still face a debt ceiling debate. In Europe, Germany has formed a grand coalition which should help keep that economy on track and help others in the region. In the Middle-East tensions appeared to have eased a little in the region with the exception of Syria and we have an agreement with Iran on Uranium enrichment. Asia economies are still slower than expected however we feel that there will be a pick-up in Chinese economic activity post the Chinese New Year in early February which should have a positive impact on the whole region. Having said all that and we move back to more fundamental investing rather than looking at geopolitical events we could see more volatility than expected as Fund Managers look to position themselves in the right markets and right stocks for 2014.
Here are some of the highlights of what our Winter 2014 Investment Portfolio Quarterly (IPQ) offers: Scotiabank GBM Portfolio Strategy Team provides their Portfolio Strategy Outlook for 2014
Scotiabank Economist Derek Holt discusses his outlook for the US economy and his view that this recovery has just begun and believes in a fairly bullish outlook.
Himalaya Jain and Warren Hastings provide their Top 10 Canadian Stock Picks for 2014 and provide an overview of the performance of the Top Picks from 2013.
Marco Martin and Caroline Escott provide their Top 10 US Stock Picks for 2014 and also an overview of the performance of the top picks from 2013.
Nick Chamie, IPAG, provides his outlook for emerging markets.
Caroline Escott, Warren Hastings, Tim Vlahopoulos and Andrew Mystic provide their quarterly review and commentary on the performance of the Guided Portfolios.
We hope you all enjoy the Winter 2014 version of the IPQ and recommend you contact your ScotiaMcLeod Advisor with regard to any ideas presented here which interest you, or to review your investment portfolio
Portfolio Advisory Group
Winter 2014 3
Exhibit 1: Global Equity Returns (CAD) December & 2013 (price only)
-20% -10% 0% 10% 20% 30% 40% 50%
-20% -10% 0% 10% 20% 30% 40% 50%
U.S. (S&P 500)
MSCI AC World