Looking back over the past year, global equites ended up performing stronger than most analysts predicted, consumer confidence improved, volatility was down, and central banks kept inflation in check. All in all, besides weakness in the US dollar and underperformance in Canada, portfolios had a very strong year.
Source: The Economist
At Invisor, our global allocation, and relatively low allocation to Canada, helped our portfolios achieve strong risk-adjusted returns. One key area of underperformance was our exposure to the US dollar which lost about 7% versus the Canadian dollar, but added exposure to the US market – which significantly outperformed its Canadian counterpart. By keeping our portfolios closer to global weights than other Canadian firms do, we feel that our portfolios are better positioned to take advantage of the broader gains seen in global markets, and improve our risk-adjusted exposure due to added diversification.
*Performance numbers are net of fees
Looking at the past month, December had a slight pull back in the USD since the impact of tax reform on growth is hard to anticipate. As we’ll discuss further, the Fed will be in a precarious position as it juggles between keeping a lid on a rapidly growing economy versus overly restricting growth and drawing recession concerns. Although substantial rate increases are not priced into the market, we believe that over the past few years the Fed has proven its ability to maintain a solid handle on its duties, and will approach future decisions in the same manner.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index
Looking ahead to 2018
Three factors that are likely to play a big part in the coming year are the impact of US tax reform, global investment, and central banks’ immediate responses to positive and negative information. Despite the recent surge in confidence, investors are still treading lightly as they navigate the rapidly changing times we find ourselves in today.
As the tax reform experiment gets underway, we will not only have to pay attention to the US economy, but the global impact of the reform as well. The question in the US is whether the economy will benefit as business flocks to the US and savings are reinvested into deserving areas, or if US debt will rise faster than the gains can keep up with, hurting confidence in the world’s most trusted debt. Flourishing investment will also have a strong impact on global trade, but an increasing dollar will likely hurt commodities that many nations heavily rely on.
While the US tax reform may kick off initial gains, global trade – helped by burgeoning consumer markets in developing countries – may also be a significant tail wind. And as emerging economies close the economic gap between their developed counterparts, developed markets like Europe and Japan finally look like they’re turning a corner with major indicators such as the purchasing managers index showing global manufacturers’ confidence is the highest it’s been since 2013.
Finally, central bank’s response to inflationary and cautionary political issues will likely remain at the forefront. As the global economy ramps up, spending will increase, and inflationary pressures will increase along with them. For example, the demand for money is still low and bank reserves are at $2 trillion more than the amount required to collateralize their debts. If bank demand is to hold less cash, then that spending would likely result in inflation.
On the other hand, global tightening could be a large issue and is already making waves in China, something analysts expect to drag down global growth from 3.5 to 3.3%. In addition, geopolitical issues like Trump’s Twitter feed, North Korea, and the Middle East could threaten to derail an upward moving economy.
The broader outlook for the long term is fundamentally solid, but how the market will react in the short-term to incoming new information is anyone’s guess. Our best course of action is to control the things we can and do our best to position for things we cannot. At Invisor, we position our portfolios with the longer-term effects in mind, and we take a diversified approach to global investing to reduce risk, keeping costs to a minimum throughout the process.
Here is to a prosperous 2018!