Bloomberg's Matthew Boesler is my go-to media source for all things related to the U.S. Federal Reserve and global monetary policy. On Tuesday, Mr. Boesler posed an interesting question on Twitter: "If [U.S. President Donald Trump] hadn't launched a trade war with China a year ago, and the Fed and China had therefore stayed on their respective tightening paths as a result, would the global growth picture look better or worse today than it actually does now?"
Any answer is speculative counterfactual, but I believe investors are better off with the trade war than they would have been with monetary tightening.
Global equity markets tracked U.S. financial conditions — the ease of credit availability — rather than deteriorating economic data throughout the latter half of 2018 and this year.
I posted a chart on social media highlighting the strong correlation between the MSCI World Index and the Goldman Sachs U.S. Financial Conditions Index. The Goldman Sachs index uses bond yields, Federal Reserve policy rates, BBB-rated corporate bond yields relative to government bond yields, and the U.S. trade-weighted dollar to assess whether credit conditions are tightening (credit harder or more expensive to attain) or loosening.
Essentially, global stocks have been climbing as interest rate expectations and bond yields have fallen. The market's high degree of sensitivity to financial conditions suggests that, in a hypothetical trade-war-free world where central banks were withdrawing stimulus, stocks would be lower than they are now.
Where China is concerned, the country's economic issues are likely caused less by the trade war than a massive debt hangover. In the Financial Times article "Donald Trump is wrong — drags on Chinese growth are homegrown" (FT subscription required), author James Kynge notes that total debt in China has bloomed to US$40-trillion or 310 per cent of gross domestic product, compared with 150 per cent of GDP in 2008.
To the extent that China has increased monetary stimulus to combat the trade war, it has helped investor portfolios. It's also entirely possible that the majority of China's economic challenges would have been in place had the trade war never occurred.
If, as Mr. Boesler's question implies, China had continued to tighten monetary conditions absent the trade tensions, the resulting financial stress may have hit North American portfolios in a decidedly negative way. A slowdown in Chinese construction activity, for instance, would have affected resource demand and commodity prices worldwide.
I wouldn't go as far as to say Canadian investors should be thankful for Mr. Trump's trade war — there are specific situations in the semiconductor and agricultural sectors that remain troublesome. There is a very good chance, however, that equity prices driven in large part by financial conditions would be far lower now with central bank tightening.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Home Capital stock’s stunning comeback raises questions about level playing field for lenders
Poor Warren Buffett. Home Capital Group Inc. shares have surged more than 50 per cent since the chief executive of Berkshire Hathaway Inc. sold his stake in the Canadian alternative mortgage lender in December, writes David Berman (for subscribers). Mr. Buffett left $88-million on the table by selling too soon, according to Globe and Mail estimates. But what’s more important to investors is that Home Capital’s stunning comeback over the past six months raises questions about whether recent regulatory changes to Canada’s housing market are benefiting some of the smaller players at the expense of Canada’s Big Six banks.
Four dividend growth stocks that fly under the radar
Heward Investment Management Inc. portfolio manager Renato Anzovino believes yield is underrated, writes John Heinzl (for subscribers). When Mr. Anzovino is hunting for promising stocks, he’s more interested in a company’s dividend growth. The yield may be modest, but if the dividend is growing, it’s often a bullish sign. But a rising dividend alone isn’t enough for a stock to make it into his fund. Mr. Anzovino also looks for strong and growing free cash flow, a management team that reinvests prudently in the business and an attractive valuation as measured by price-to-earnings, price-to-cash flow, intrinsic value and other metrics. Mr. Anzovino’s highlights four of his favourites right now.
Quebec lumber company Stella-Jones plunges as long-time CEO steps aside
An unexpected changing of the guard at Stella-Jones Inc. is stoking concern among investors as Brian McManus gets set to leave the Canadian wood-products manufacturer after an 18-year run as chief executive, writes Nicolas Van Praet (for subscribers). Montreal-based Stella-Jones, which produces pressure-treated railway ties and utility poles for rail freight carriers and power companies in Canada and the United States and also supplies residential lumber for big-box retailers, said Monday that Mr. McManus made the decision to step down and will leave the company Oct. 11. Current chief financial officer Eric Vachon, who has been with Stella-Jones for 12 years, will take over as interim CEO in three months while the board searches for a permanent replacement, the company said.
Maxar sale of MDA unit could raise sovereignty concerns
Canadians have plenty at stake in MDA Corp., the satellite, radar and space robotics company famous for the Canadarm grabber that ensured the Maple Leaf was emblazoned on space shuttle and International Space Station missions, Jeffrey Jones writes (for subscribers) The country’s space agency is entering a new era that promises more exploration by public and private sectors, putting MDA’s technology front and centre. The company’s equipment and know-how is also critical to helping guard national sovereignty, especially in the Far North. What’s more, taxpayers have funded no small amount of what it has to offer. Now, MDA’s parent company, Maxar Technologies Inc., is said to be seeking a billion-dollar deal to sell the company to help out Maxar’s financial struggles, and that could include foreign bidders. An old worry is cropping up: Such a transaction could put MDA’s stable of space, defence, maritime, satellite imagery and communications technology at risk of being transferred, once again, to foreign owners – where it really shouldn’t be.
A trio of dividend-rich ETFs that have had a dramatic turnaround and are worth buying right now
It’s almost certain that the U.S. Federal Reserve Board will lower interest rates at its next meeting at the end of the month, writes Gordon Pape (for subscribers). The only question is whether the drop will be a quarter of a percentage point or a half-point. Mr. Pape says the Bank of Canada isn’t ready to follow the Fed down, but believes any further rate increases this year are unlikely. He says this is good news for interest-sensitive securities, such as utilities and many dividend-paying equities. He looks at three ETFs that could benefit.
Others (for subscribers)
Why the Fed is worried about the global economy, and Canadian investors should be too
Wednesday's Insider Report: Board member invests over $100,000 in this stock yielding 6.4%
Starting with Netflix, FANG reports to test Wall Street rally's mettle
Why investors should cheer a dividend hike of just one puny cent
Canada, New Zealand most at risk for housing market correction
These 17 Canadian-listed small-cap stocks show solid fundamentals
Eighteen TSX companies aggressively buying back their shares and primed to outperform
Wednesday's small-cap stocks to watch
Wednesday's analyst upgrades and downgrades
Tuesday's analyst upgrades and downgrades
Globe Advisor
A 'last chance' for advisors who favour embedded commissions?
For the past two decades, John De Goey has been a thorn in the side to many in the investment industry for being a staunch proponent of eliminating mutual funds with embedded commissions, writes Globe Advisor editor Pablo Fuchs. For much of that time, Mr. De Goey, now portfolio manager at Wellington-Altus Private Wealth Inc. in Toronto, has focused the majority of his efforts on persuading fellow financial advisors and the industry’s regulators that it’s in their best interests to abandon this compensation model. Instead, he has long advocated for a wholesale move toward one in which the cost of advice is separate from the cost of the financial product itself. Mr. Fuchs met with Mr. De Goey to get his take on recent regulatory initiatives; why he believes advisors should move away from embedded commissions; and his message for advisors who are dedicated proponents of that model.
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Compiled by Brenda Bouw