Investors have good reason to be cautious, judging from a Citigroup report this week that debates whether we’re at the end of this stock market cycle, with a bear market imminent, or merely late in the cycle, with a chance of some decent further gains before the inevitable crash.
Matt King and Robert Buckland of Citi acknowledge the usual indicators are a mixed bunch. On the one hand, a flattening yield curve and lofty levels of corporate debt suggest this nearly decade-old bull market is ready to topple over. On the other hand, strong profit growth and still-low interest rates signal the bull could still have further to run.
As the Citi report makes clear, much will depend on how central banks proceed from here. After the financial crisis, monetary policy-makers nursed stock markets back to health with rock-bottom rates and unconventional asset purchases. “But now that has changed,” the Citi analysts say. “As central banks step back, so the credit and equity markets will catch up with fundamentals.”
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They’re not the only ones to be concerned about what will happen when the global trend toward higher interest rates collides with growing levels of corporate debt. Around the world, corporate bond issuance has more than doubled over the past decade, according to a report in June from McKinsey Global Institute. While companies in emerging markets have been some of the biggest borrowers, Canadian and U.S. companies have also loaded up on debt, according to the McKinsey report.
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Stocks to ponder
Aphria Inc. (APH-T). Aphria Inc. has offloaded the last of its holdings that violate U.S. federal laws in a creative deal that satisfies regulators while retaining the option to get the stake back. The Leamington, Ont.-based marijuana grower said on Thursday that it has sold its remaining 64 million shares in Florida-based Liberty Health Sciences Inc. to a group of investors, including Aaron Serruya, a Liberty director. It added that the move means that Aphria now complies with TMX Group Ltd.’s policy that prohibits issuers listed on its stock markets from breaching U.S. federal drug law. In the United States, cannabis is legal in some form in certain states – including Florida – but illegal at the federal level. Aphria's stock rose after the deal was completed. Christina Pellegrini reports (for subscribers).
Onex Corp. (ONEX-T). It is the focus of the overbought/oversold column this week as it was a surprise that a cash-heavy diversified holding company was on the oversold list. The Onex chart is not easy to judge. It depends on whether an ‘almost oversold’ reading of 32 in January 19, 2017 counts as a successful signal because the stock rallied 21 per cent to early July 2017. This column normally wouldn’t mention an "almost," but it might be relevant here because Onex looks like a case where buy signals are reliable when the stock is trading above the 200-day moving average, and not trustworthy when the price is below the trend line. Scott Barlow examines the technical signs for the stock (for subscribers).
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How Canada’s first pure-play cannabis mutual fund plans to outsmart other investors
Canadian investors who want to gain exposure to the high-flying cannabis sector without having to participate in individual stock picking will soon have the option of turning to a traditional mutual fund. The StoneCastle Cannabis Growth Fund is set to launch on Sept. 14, a month before recreational cannabis is expected to become legal in Canada on Oct. 17. It's believed to be the first Canadian pure-play mutual fund targeting the pot industry, although there were recent launches of actively managed exchange-traded funds with similar mandates. Brenda Bouw reports (for subscribers).
Why Canadian bank stocks should be trading higher
The third-quarter earnings season for Canada’s big banks underscored something that investors should embrace: The banks’ bread-and-butter lending activities are still gushing money. Sure, lending money to Bob and Mary for their first bungalow sounds like a sleepy activity next to backing corporate takeovers and underwriting splashy initial public offerings – and, yeah, there are lingering concerns about the housing market and indebted Canadians. But the scale of this lending activity is really something to behold, and it is driving up net interest income, or the difference between what a bank pays for deposits and what it makes on loans, at an impressive clip – good news for any bank investor who wants bigger earnings and quarterly dividends. David Berman reports (for subscribers).
Why investors need to look beyond diversification strategies to manage portfolio risk
We all know that it is possible to drown in a river with an average depth of six inches – and so it is in the investment world, where investors are often surprised by the turbulence of short-term statistics that make up a benign long-term average. Many of the long-term averages that underpin our investment decisions are correctly computed, but they are also the centre point of a wide distribution. In statistical terms, the standard deviation around these averages is huge. As a result, investors are often surprised at how difficult it is to determine if a particular outcome is the result of skill and judgement, or simply the output of random noise. Robert Tattersall examines the issue of risk.
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Trade tensions, tax changes slow Canadian deal making in U.S.
Corporate Canada has cut back substantially on its cross-border shopping habit as the country's political and economic relationship with the United States has sunk to its lowest point in recent memory. After a few lively years of hunting for deals, Canadian public companies have slowed the pace of acquisitions of U.S. assets so far in 2018 – a sharp contrast to the surge in outbound mergers and acquisitions of the previous three years. The slowdown coincides with a deterioration in U.S.-Canada trade relations, as the protectionist leanings of U.S. President Donald Trump have resulted in competing tariffs and brinkmanship over trade negotiations. Tim Shufelt and Jeffrey Jones report (for subscribers).
Index-provider overhaul to ‘change the way’ people approach portfolios
A major shakeup to the way index providers divide stocks by industry will force many investors to rethink how their portfolios are put together when the changes take effect later this month. More than 2,100 stocks around the world, encompassing about US$4-trillion in total market value, will be reclassified or shuffled into different sectors, altering the makeup of sector-specific indexes and the funds that track them. Starting on Sept. 24, investors will be introduced to the “communications services” sector, built from the existing telecom sector, plus a number of other stocks drawn from the tech and consumer discretionary sectors. Tim Shufelt reports (for subscribers).
U.S. shareholder presses pot firm HEXO to boost stock price or sell
Is there such a thing as an undervalued pot stock? A U.S. investor sees one in HEXO Corp., known until last week as Hydropothecary Corp., and is urging the company to sell itself or merge with another player if it can’t drive its share price higher. Shares in HEXO finished trading on Thursday up more than 20 per cent after a small New York investment firm, Riposte Capital, published a letter sent to HEXO’s board expressing concern about the company’s “severely depressed valuation.” Riposte describes itself as HEXO’s “second largest shareholder.” It has about 5 million shares, or 2.6 per cent of HEXO, worth about $35 million at Thursday’s close. David Milstead reports (for subscribers).
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Ask Globe Investor
Question: I have a question with regards to a capacity assessment. I have power of attorney for property for my elderly mother. She is showing signs of confusion, and I don’t think she can handle her finances. Do I need to get a capacity assessment for her?
Answer: You will have to check the terms and conditions of the power of attorney. It may say specifically that it can only be used when she doesn’t have capacity. Even if it doesn’t, there are other parties that may question your use of the power of attorney.
I would suggest that you have some assessment done so there is a defined time that a qualified professional can state that there was good reason for you to use the power of attorney. That would help protect you. I would further suggest that you get legal advice as to what your legal obligations are under the power of attorney.
It is also a good idea to review the will. If there is a specific bequest, such as a piece of jewelry left to a grandchild, it is important that you know that specific item should not be disposed of in any way. There are also accounting and reporting obligations that would be required for you to have accessible to other interested parties.
--Nancy Woods is a Vice President, Portfolio Manager and Investment Adviser with RBC Dominion Securities Inc.
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What’s up in the days ahead
Rob Carrick presents a face-off between new low-fee balanced ETFs and robo-advisers. Are robos worth the extra 0.5 per cent in cost? We’re about to find out.
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Compiled by Gillian Livingston