Quarterly update | 2Q 2018 | EP11

July 12, 2018 Print

This episode features insights from the past quarter by Greg Peterson, Portfolio Manager of Mawer’s balanced and global balanced strategies. 

Highlights include:

  • Global trade wars
  • Rising corporate debt levels
  • The influence of central banks on markets

 



Your host

cam porthole3 Cameron Webster, CFA, MBA
Institutional Portfolio Manager

Cam likes to think and act long-term. He has broad experience in the capital markets over his 20+ years as an analyst, portfolio manager, and client service professional. When not thinking about markets and investing, Cam trains and participates in other “boring” and disciplined activities such as ultra-endurance races—marathon, triathlon, one-day 300+km bike rides.

Shownotes

Start – 1:00

1:49 – Fears and headlines don’t necessary translate to bad things in investments. Performance was generally positive for the second quarter of 2018.

2:11 – Why Canada performed the best out of the developed markets despite NAFTA and trade tariff concerns:

  1. Interest rates in Canada are generally still low
  2. Earnings in Canada are positive overall
  3. Strong U.S. economy should drag the Canadian economy higher going forward depending on what happens with trade discussions

4:27 – Currency impacts over the quarter from a Canadian perspective

5:05 – Two occurrences that contributed to Canadian dollar strength:

  1. Political uncertainty contributed to weaker currencies in other countries
  2. Oil prices were favourable to Canada despite the link between oil and the Canadian dollar not being as strong as it has been in the past

6:07 – Energy the top performing sector in Canada (up ~16%) supported by rising global oil prices and the reduction in the discount for Canadian oil relative to WTI

7:23 – The Mawer Balanced Fund: underlying factors that contributed to performance:

  1. Up mainly due to positive Canadian and U.S. Equities
  2. Would otherwise be adding to Canadian equities but Greg is taking 'a wait-and-see' approach to ongoing trade negotiations
  3. Case for 18.5% weight in U.S. equity: U.S. is a strong market and the currency exposure in case we go through a period where markets are declining

9:21 – Trade wars

  • Markets slow to react as they wait to see what will happen going forward
  • Our research team's observations in talking to management teams: companies also seem to be taking a 'wait-and-see' approach
  • Understanding the exposure that we have—what impact would higher tariffs have on our portfolios
  • Saputo—an example of a relatively nimble company that could adjust their production/supply in regards to tariffs depending on how the new rules are written

12:45 – The risk of rising debt levels in corporations

  • Higher leverage for a company can be a concern and one of the criteria we look at in evaluation companies
  • The concern is that the more debt a business takes on, it can increase their risk during an economic downturn and/or an environment of rising interest rates—when revenues shrink, it’s more difficult to service that debt and returns can suffer during this environment

15:51 – Central banks influence on markets

Rising interest rates are typically a headwind for markets because of the higher cost on debt (although this can be offset by solid economic growth), and rates are a big part of what is called the discount rate for evaluation stock prices—higher interest rates, all else being equal, can translate into lower stock prices.

19:00 – Risk of overtightening which can lead to recession—look to the yield curve on government bonds, specifically the spread between long-term and short-term rates. As the spread diminishes, it’s one of the signs that perhaps overtightening is taking place. (Ideally lower short-term rates and higher long-term rates is an indicator of growth to come).

22:00 – Setting investor expectations—may be periods of low or negative returns over the short-term, but we will not try to avoid this entirely as that would be attempting to market time. While we do make adjustments, all of this is part of the regular ebb and flow of economies and markets


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