The progress of the NAFTA negotiations seemed to dominated the economic news last quarter with a deal reached literally at the last second on September 30th. While the question of the fate of NAFTA may be resolved, the US tariffs on Canadian steel and aluminum still remain with no sign that they will be removed any time soon; to top it off, Trump has also ramped up the trade war with China. The light at the end of the tunnel that we thought we saw after the new NAFTA deal was struck may actually be a train coming straight for us. If the trade war was relatively short lived then the collateral damage would likely be limited, however this is not the case and we have not begun to feel the effects yet that will ripple throughout the world economy.
The Chinese government has a significantly longer term vision and mindset than the Americans and Trump has likely damaged the US economy for years, if not decades, to come. Take soybeans, for example, where last year China purchased almost 60% of the US soybean exports. Sales of the 2018/19 US crop to China so far total only 1.45 million tonnes, compared to the historical average of around 10 million tonnes for the same period. This represents an 85% drop! China has turned to Brazil and Argentina, among other countries including Canada, to help make up the difference and they are willing to pay a premium for Brazilian soybeans just to avoid importing from the US.
What does this all mean? It means that although imposing tariffs can be almost as easy as flipping a switch, undoing them will not restore world trade as it was before. China already began adjusting their domestic production with provincial officials in the provinces of Henan, Jilin and Heilongjiang directing farmers back in the spring to significantly increase their soybean acreage. These three provinces are considered to be among the major agricultural areas and combined they produce over 50% of the domestic soybean production.
Only time will tell how well these tariffs will go over with Trump’s core supporters, but given the fact that the US is facing record ending stocks of soybeans and combined with a forecasted record crop, soybean farmers do not have a rosy outlook; the already weak soybean prices do not appear to have anywhere to go but down. Even though Trump may tout the strength in the economy, the reality of what some of his supporters are facing could be very different.
We also cannot overlook the rate increase by the Bank of Canada back in July from 1.25% to 1.50%. So far rates have been increasing gradually on both sides of the border and they have not negatively impacted the market, however, there will be a tipping point. The 10 year US Treasury yield closed at 3.23% on October 5th and at some point investors will begin to question whether the added risk of equities are worth it; have they begun to do that now with the increased pressure on global markets?
We do not believe it is all doom and gloom for the markets and the world economy; however, one needs to be aware of the potential risks. Portfolios are well positioned to weather potential volatility with the fixed income and gold allocations providing stability and a moderate equity underweighting in preparation of buying opportunities as we exit any volatility.
Canada –The S&P/TSX Composite has continued to struggle this year, despite a respectable Q2 return, Q3 was down -0.6% with small caps the weakest down -2.8%; for the year, the TSX is up only 1.4%.
United States – Equities south of the border had a good quarter in USD terms, up 7.1% as a whole, with growth stocks leading the way, up 8.9%; however, a strong Canadian dollar eroded returns when converted: US stocks advanced 5.2% and growth stocks were up 7.0%, in CAD terms.
International & Emerging Markets – International and emerging markets equities were the weakest in Canadian dollar terms, with international down -0.3% and emerging markets down -2.7%; for the year, international is up 2.2% but emerging markets are struggling, falling -4.5%. International growth showed the strongest performance, up 2.4% while all remaining sub-asset classes were mixed.
Real Estate – Canadian real estate has continued its strong performance again this quarter up 3.5% and up 9.8% year to date. Global real estate pulled back -1.4% this quarter but is still up 4.5% this year. As a whole, real estate has continued to outperform Canadian and International (including emerging markets) equities so far this year, with only US equity faring better.
Alternative Fixed Income – Canadian bonds fell -1.0% this past quarter and are down -0.4% for the year. We expect that the Bank of Canada will continue with their gradual and tempered rise in rates over the foreseeable future; this will no doubt pressure bond prices as yield climb. As a result of rising yields, we have stepped back into the corporate bond market but on the extremely short end targeting terms to maturity of two to four months. Corporate yields are currently in the 2.0% to 2.2% range.
The alternative fixed income funds continued to show consistent performance with Trez up 2.0%, Productivity Media up 1.8%** and Cortland up 1.7%; year to date the funds are up 6.3%, 5.8%** and 4.4%, respectively. The Stewardship Alternative Income Fund was up slightly at 0.2% for the quarter and is down -1.4% year-to-date.
Gold – Gold has continued its decline this past quarter down 6.3% in CAD terms but now appears to be in a trading range from about $1,190 to $1,215 USD. We continue to hold gold bullion as a defensive hedge.
**Estimated as actual return figures were not available at the time of publishing.
Market Commentary – Q3 2018
The progress of the NAFTA negotiations seemed to dominated the economic news last quarter with a deal reached literally at the last second on September 30th. While the question of the fate of NAFTA may be resolved, the US tariffs on Canadian steel and aluminum still remain with no sign that they will be removed any time soon; to top it off, Trump has also ramped up the trade war with China. The light at the end of the tunnel that we thought we saw after the new NAFTA deal was struck may actually be a train coming straight for us. If the trade war was relatively short lived then the collateral damage would likely be limited, however this is not the case and we have not begun to feel the effects yet that will ripple throughout the world economy.
The Chinese government has a significantly longer term vision and mindset than the Americans and Trump has likely damaged the US economy for years, if not decades, to come. Take soybeans, for example, where last year China purchased almost 60% of the US soybean exports. Sales of the 2018/19 US crop to China so far total only 1.45 million tonnes, compared to the historical average of around 10 million tonnes for the same period. This represents an 85% drop! China has turned to Brazil and Argentina, among other countries including Canada, to help make up the difference and they are willing to pay a premium for Brazilian soybeans just to avoid importing from the US.
What does this all mean? It means that although imposing tariffs can be almost as easy as flipping a switch, undoing them will not restore world trade as it was before. China already began adjusting their domestic production with provincial officials in the provinces of Henan, Jilin and Heilongjiang directing farmers back in the spring to significantly increase their soybean acreage. These three provinces are considered to be among the major agricultural areas and combined they produce over 50% of the domestic soybean production.
Only time will tell how well these tariffs will go over with Trump’s core supporters, but given the fact that the US is facing record ending stocks of soybeans and combined with a forecasted record crop, soybean farmers do not have a rosy outlook; the already weak soybean prices do not appear to have anywhere to go but down. Even though Trump may tout the strength in the economy, the reality of what some of his supporters are facing could be very different.
We also cannot overlook the rate increase by the Bank of Canada back in July from 1.25% to 1.50%. So far rates have been increasing gradually on both sides of the border and they have not negatively impacted the market, however, there will be a tipping point. The 10 year US Treasury yield closed at 3.23% on October 5th and at some point investors will begin to question whether the added risk of equities are worth it; have they begun to do that now with the increased pressure on global markets?
We do not believe it is all doom and gloom for the markets and the world economy; however, one needs to be aware of the potential risks. Portfolios are well positioned to weather potential volatility with the fixed income and gold allocations providing stability and a moderate equity underweighting in preparation of buying opportunities as we exit any volatility.
Canada –The S&P/TSX Composite has continued to struggle this year, despite a respectable Q2 return, Q3 was down -0.6% with small caps the weakest down -2.8%; for the year, the TSX is up only 1.4%.
United States – Equities south of the border had a good quarter in USD terms, up 7.1% as a whole, with growth stocks leading the way, up 8.9%; however, a strong Canadian dollar eroded returns when converted: US stocks advanced 5.2% and growth stocks were up 7.0%, in CAD terms.
International & Emerging Markets – International and emerging markets equities were the weakest in Canadian dollar terms, with international down -0.3% and emerging markets down -2.7%; for the year, international is up 2.2% but emerging markets are struggling, falling -4.5%. International growth showed the strongest performance, up 2.4% while all remaining sub-asset classes were mixed.
Real Estate – Canadian real estate has continued its strong performance again this quarter up 3.5% and up 9.8% year to date. Global real estate pulled back -1.4% this quarter but is still up 4.5% this year. As a whole, real estate has continued to outperform Canadian and International (including emerging markets) equities so far this year, with only US equity faring better.
Alternative Fixed Income – Canadian bonds fell -1.0% this past quarter and are down -0.4% for the year. We expect that the Bank of Canada will continue with their gradual and tempered rise in rates over the foreseeable future; this will no doubt pressure bond prices as yield climb. As a result of rising yields, we have stepped back into the corporate bond market but on the extremely short end targeting terms to maturity of two to four months. Corporate yields are currently in the 2.0% to 2.2% range.
The alternative fixed income funds continued to show consistent performance with Trez up 2.0%, Productivity Media up 1.8%** and Cortland up 1.7%; year to date the funds are up 6.3%, 5.8%** and 4.4%, respectively. The Stewardship Alternative Income Fund was up slightly at 0.2% for the quarter and is down -1.4% year-to-date.
Gold – Gold has continued its decline this past quarter down 6.3% in CAD terms but now appears to be in a trading range from about $1,190 to $1,215 USD. We continue to hold gold bullion as a defensive hedge.
**Estimated as actual return figures were not available at the time of publishing.