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January 8, 2018

CEO Pay 209 Times More Than Average Worker

For the first time, Canada’s 100 highest paid CEOs netted 209 times more than the average worker made in 2016, says a report from the Canadian Centre for Policy Alternatives (CCPA). The report shows the country’s highest 100 paid CEOs on the S&P/TSX Composite Index now make, on average, $10.4 million ‒ 209 times the average income of $49,738, up from 193 times more in 2015. “Canada’s corporate executives were among the loudest critics of a new $15 minimum wage in provinces like Ontario and Alberta, meanwhile the highest paid among them were raking in record-breaking earnings,” says David Macdonald, author of the report and senior economist at CCPA. “CEOs are making 316 times more than someone who makes $15 an hour. If shareholders can afford this year’s CEO pay hike, they should absolutely be endorsing higher wages at the bottom as well.” The report finds the average CEO pay shot up eight per cent over 2016 and represents a new high in this data series since the 2008 global recession. On average, base pay made up only 11 per cent of a CEO's compensation. The lion's share came from share grants (33 per cent), bonuses (26 per cent), and stock options (15 per cent). He says one way to help shrink the inequality gap is for the federal government to tax top earners at a higher rate.

Increasing Risks Ahead For Business Leaders

Canadian business leaders and entrepreneurs are facing an economy that is increasingly complex and unpredictable, says a report by Borden Ladner Gervais. Its ‘Top 10 Legal Risks for Business in 2018’ report shows they are not only affected by the policies of Canada’s federal and provincial governments, but also by international changes such as the rise of populism and protectionism. This combination is bound to raise the level of uncertainty for businesses and have serious impacts on the economy, says the report. In its most recent Economic Outlook, the Organization for Economic Co-Operation and Development (OECD) states that the world economy has strengthened in 2017 and that its annual growth should improve slightly in 2018. However, long-term challenges may prevent the economy from reaching its full potential. On a national level, many challenges are facing Canadian business. OECD data shows the Canadian economy bouncing back to three per cent growth rate last year, before slowing to 2.1 per cent this year and 1.9 per cent in 2019, as policy stimulus dwindles down. In addition, the cost of doing business in Canada is constantly increasing at a time when other jurisdictions are reforming their tax systems to become more competitive. It says 2018 will be a year when Canadian business must navigate through unchartered territory as new challenges and opportunities are arising concurrently, making it difficult for businesses to adapt successfully.

Mercedes-Benz Achieves Strong Sales

Mercedes-Benz Canada had total sales of 52,298 passenger vehicles, vans, and smart units in 2017, an 8.2 per cent increase over sales of 48,320 in 2016. Sales of Mercedes-Benz passenger cars and luxury light trucks equalled 45,456, up 12.2 per cent from 40,526 the previous year. This total was divided almost evenly between the two segments with 22,781 (+7.2 per cent year over year) passenger cars and 22,675 (+17.6 per cent) luxury light trucks. The new E-Class Coupe and Cabriolet saw the most significant gains in the passenger car segment at 33.1 per cent over 2016. In luxury light trucks, the GLC SUV and Coupe together had an 86.3 per cent increase in sales over 2016. Mercedes-AMG sales were 10,124 units in 2017, a 50.6 per cent increase over sales of 6,723 in 2016. The Mercedes-AMG unit sales have accounted for an increasingly large proportion of overall sales over the years; in 2014, the brand represented six per cent of total Mercedes-Benz passenger vehicle sales in Canada, while in 2017 it constituted 22.3 per cent of overall sales.

Robust Returns Won’t Return

Equities will continue to perform well in this year, but without the robust returns of 2017, says UBS Asset Management’s 2018 investment forecast. It also says that although the global equity markets have not suffered a major drawdown for an unusually long period, the risk of recession in the U.S. and other developed nations is low and equities globally remain attractively valued. The report says that European Central Bank (ECB) policy, improving consumer and business sentiment, accelerating credit growth, and a healthier banking sector are all contributing to the recovery in Europe. Although geopolitical risks in the Eurozone have lessened near-term, they have not entirely disappeared, citing 2018’s elections in Italy as the most obvious potential flash point. For the U.S. economy, there is upside to current expectations for U.S. economic growth and corporate profitability from corporate and personal tax reform with events in Washington likely a key focus for investors in the coming months.

Fund Indices Improved Last Year

Forty-one of the 44 Morningstar Research Inc. fund indices increased during the calendar year, including 12 indices that increased by 10 per cent or more. The best performer among the fund indices was the one that tracks the Greater China Equity category, with a 35.9 per cent increase, mirroring the 36 per cent increase of Hong Kong’s Hang Seng Index. Funds in this category that hedge their currency exposure will likely outperform their peers that do not since the Hong Kong dollar depreciated by 7.3 per cent against the Canadian dollar during the year. European equity funds benefited from a combination of strong market performance and favourable currency movements and the Morningstar European Equity Fund Index posted a 14.6 per cent increase for the year. In the United States, the S&P 500 Index posted a total return of 21.8 per cent ‒ its ninth consecutive calendar year in positive territory and best performance since 2013. However, Canadian fund investors only captured a fraction of this gain as the Morningstar U.S. Equity Fund Index increased 13.2 per cent for the year, hampered by the loonie’s seven per cent appreciation against the U.S. dollar. Domestic equity funds had positive results for the year, but trailed their foreign counterparts. The Morningstar Canadian Equity Fund Index increased 7.7 per cent, underperforming the benchmark S&P/TSX Composite Index which had a total return of 9.1 per cent, while the fund indices that track the Canadian dividend and income equity and Canadian small/mid cap equity categories were up 7.9 per cent and 3.2 per cent, respectively. Despite the interest rate hikes enacted by central banks in many countries including Canada and the United States, seven of the eight fund indices that track fixed income categories increased in 2017. By far the best-performing fund index in this area was preferred share fixed income with a 14.1 per cent increase.

Canadian Assets Hit Record

Assets invested in ETFs listed in Canada increased by a record $28.3 billion during the first 11 months of 2017, the greatest annual increase on record, to reach a new high of US$113 billion at the end of November, says ETFGI. Its November 2017, Canada ETF and ETP industry insights report shows assets invested in ETFs grew by 33.5 per cent from $84.6 billion at the end of 2016. With one month of 2017 still to go, the increase of $28.3 billion far surpassed the previous record of $19.8 billion for the whole of 2016. If the trend continues through December, 2017 is also on track to see the greatest percentage increase in assets since 2009 when markets recovered following the 2008 financial crisis.

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December 18, 2017

Affluent Shoppers Plan To Spend More

On a global basis, 92 per cent of affluent consumers anticipate purchasing luxury goods and services in the coming year, and consumers report a slight increase in luxury spending, says the Luxury Institute in its ‘2018 State of the Luxury Industry’ report. More than one-fourth (28 per cent) of affluent consumers say that they plan to spend more in the next 12 months on luxury goods and services than they did in the past year. This is up from 26 per cent who conveyed plans to boost spending in last year's survey. In line with last year's results, nine per cent report that they expect to reduce spending in the coming year. Categories where affluent consumers plan to increase spending the most are all related to leisure travel: hotels (41 per cent), airfare (40 per cent), cruises (38 per cent), and tours (37 per cent). Other categories frequently cited as areas where spending will rise include dining (33 per cent), health and fitness (30 per cent), automobiles (30 per cent), entertainment (30 per cent), technology (29 per cent), and vacation real estate (29 per cent). In apparel, only 26 per cent report that they will spend more or much more. For jewelry and watches, the percentage of consumers who plan to spend more or much more are 25 per cent and 24 per cent, respectively. As well, affluent customers show a growing penchant for online shopping, but stores are still the preferred channel for a majority of shoppers. Just over half (52 per cent) of respondents say that they prefer to shop in-store, while 21 per cent would rather shop online, up from 17 per cent last year. More than one in four (27 per cent) have no preference for either channel.

Global Growth Likely To Persist

Global growth momentum is likely to persist into 2018, pushing up equity markets over the first part of the year, says Russell Investments’ ‘2018 Global Market Outlook.’ It suggests Japan, Europe, and emerging markets are likely to outperform the U.S. Similarly, the euro, Japanese yen, British pound, and emerging market currencies may offer investors more potential upside in 2018 than the U.S. dollar. “The scenario for global markets in 2018 is likely to be driven by the U.S., which still dominates and is further advanced in its cycle than other economies,” says Andrew Pease, global head of investment strategy at Russell Investments. “Second-hand growth from the global economy could drive a blow-out U.S. rally in 2018, but rising headwinds later in the year are likely to spoil this goldilocks scenario.” The timing of the next U.S. recession will be a critical issue for the global economy in 2018. Further out, the strategists see the risk of a recession in 2019 if additional policy tightening by the Fed causes the yield curve to become inverted. In contrast to the U.S., the eurozone is amid a mid-cycle renaissance and at the early stage of its exit from a very loose monetary policy, which the strategists believe may keep core eurozone bond rates rangebound through 2018. The strategists also expect another strong year for the Asia-Pacific region, buoyed by an accommodative policy at the Bank of Japan, although re-emergent wage and price inflation may cause the Reserve Bank of Australia to raise rates twice in 2018.

Investors Optimistic, Despite Lack Of Knowledge

Fifty-three per cent of Canadian investors are optimistic about achieving their investment targets over the next year, compared with 39 per cent of investors in 2012, says a survey by the Canadian Securities Administrators (CSA). However, more than half of Canadians (51 per cent) failed the general investment knowledge test included in the survey, highlighting the continued importance of the CSA's and its members' investor education initiatives. The ‘2017 CSA Investor Index,’ which looked at investor behaviour and incidences of investment fraud affecting Canadians, also found that online investment advisors (sometimes referred to as ‘robo-advisors’) are gaining popularity among Canadians, with 23 per cent reporting that they are likely to use one if they open a new account or move an existing one. Yet, only nine per cent of Canadian investors currently have an account with an online investment advisor, and just 16 per cent of Canadians are familiar with automated online investing services. The survey also found that Canadians continue to be approached with fraudulent investment opportunities, with 18 per cent believing they have been approached with a fraudulent investment opportunity. This is down slightly from 22 per cent in 2016. As well, more Canadians (43 per cent) are using some form of social media for investing information, up from 35 per cent in 2012. Fewer Canadians who use financial advisors checked their background (29 per cent in 2017, down from 38 per cent in 2012). Those who did relied on the internet, with just four per cent checking with their provincial regulator.

Role of Collection Manager Explained

The online environment offers easy and efficient ways to research and acquire objects related to a particular topic for today’s collector. In ‘What Is The Role Of A Collection Manager ,’ the last of a three-part series on the Private Wealth Canada website, Spencer W. Stuart, who formerly worked for Bonhams Auctioneers in both Toronto and New York, explains how managing a collection allows collectors to view their collections from a distance.

Environment Positive For Risk Assets

Economic growth remains strong and synchronized across both developed and emerging economies which is a positive environment for risk assets, says HSBC Asset Management’s ‘Investment Monthly.’ However, pricing is becoming increasingly stretched in a number of markets. For U.S. and global high yield credits, although default and downgrade risks are low, the measure of implied credit risk premia (compensation for bearing credit risk) has compressed even further and the margin of safety is very thin. Better rewards come from equities as a way to benefit from a strong economic backdrop as relative valuations and fundamentals favour Japan, the eurozone, and EMs.

Tailwinds Promise Support For Equities

Late-cycle tailwinds should support modest positive returns for Canadian equities in 2018, though volatility is expected to increase as markets consider the timing of the next recession, says the ‘Canada Market Perspective’ in Russell Investments’ ‘2018 Global Market Outlook.’ Its strategists expect moderate economic growth for Canada as several growth factors from 2017 moderate. The Bank of Canada (BoC) will likely raise its target rate once in 2018, intentionally lagging the U.S. Federal Reserve to prevent another episode of sustained Canadian dollar strength. Despite the BoC’s constrained position, Canadian bond yields should trend higher in sympathy with the more aggressive tightening action expected from the U.S. Federal Reserve. “The prospect of recession in Canada remains at bay for 2018, but Canadian investors should expect a bumpy ride and a fair bit of uncertainty with the housing market, NAFTA trade discussions, and the potential for over-tightening by the BoC representing key downside risks,” says Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited.

Economy Warning Lights Flashing

While the economy and markets appear to be firing on all cylinders, “to me these indicators are like the warning lights on a car’s dashboard,” says James Swanson, chief investment strategist at MFS. “Some see the ‘check engine’ light flashing, but think ‘hey, it seems to be running just fine.’ But I think warning lights are there for a reason. They’re meant to keep you out of major trouble.” He believes investors may want to consider capital preservation strategies as an option to “putting their foot to the floor” at this point in the cycle. While global economic growth continues its synchronized expansion, there are some worrisome signs of the next recession. Recessions are worrisome because they wreak havoc on risky asset prices and can be ruinous to portfolios. “Investors often dump their investments once markets have already declined ‒ the worst possible time ‒ and are slow to return, only jumping back in long after markets have begun to heal,” he says. And, once investors are scared, they tend to stay scared. In other words, it can take investors far longer to heal psychologically than it does for markets to heal from a price perspective. “So clearly, being mindful of the potential for recession is useful to investors positioning portfolios,” says Swanson.

Rebound Could Cause Repricing

A cyclical rebound in economic fundamentals could cause a market repricing, says Vanguard in its ‘2018 Economic and Market Outlook.’ In an environment in which consensus expectations have finally centered on a long-term outlook characterized by tepid growth and inflation, there is risk this is mistaken as “the trend for the cycle.” In the U.S. specifically, a wage or inflation hike could lead markets to reprice a more aggressive path of policy rate normalization by the Federal Reserve, ending a long period of low volatility. As the global economies embark on a historic path towards normalization, beginning first in the U.S., and enter into unchartered territory, the chances of unexpected shocks to markets are high. However, its research emphasizes that this past decade of low volatility should not be directly attributed to quantitative easing practices. Rather, an environment of low volatility and muted sensitivity to economic surprises is not specific to this current rate cycle. Therefore, while the forthcoming removal of extraordinary easy monetary policies will not be without uncertainty, it believes it is overly pessimistic to assume that the level and persistence of volatility will be equally extraordinary.

U.S. Equity Performs Best

Thirty-nine of the 44 Morningstar Research Inc. Canada Fund Indices increased during the month, with nearly all of them increasing between zero per cent and two per cent. The five losing indices in November decreased by 0.1 per cent to 0.7 per cent. Its November 2017 preliminary performance report shows the best-performing fund index for the month was the one that tracks the U.S. equity category, which increased 2.9 per cent, underperforming the S&P 500 Index which had a total return of 3.1 per cent for the month. Among sector-diversified fund categories, the ones that have a large dose of U.S. stocks had an edge with the index that tracks the global small/mid cap equity category up by two per cent increase. Domestic equity funds had weak, but mostly positive, results in November. The worst-performing fund indices were the ones that track the precious metals equity and the energy equity fund categories, decreasing 0.5 per cent and 0.7 per cent, respectively.

Hedge Fund Assets Discrepancy Found

Assets managed in hedge funds total about $850 billion, says data from Winton Group. That’s in contrast to the $3.6 trillion the U.S. Securities and Exchange Commission reported as of March 31. The discrepancy is definitional, it says. The extent to which a given definition of a hedge fund includes various characteristics can affect the size of what is commonly perceived to be the industry. Its analysis found that aggregate assets managed by funds that charge a management fee of at least two per cent and a minimum performance fee of 20 per cent, use leverage and employ shorting in lightly regulated, traditional hedge fund vehicles is about $848 billion. Under a looser definition, funds that charge 2-and-20, but don’t use leverage or shorting, manage a total of around $914 billion. If the universe of funds is further expanded to include those that charge at least one per cent for management and 10 per cent for performance and don’t lever or short assets, industrywide assets under management rise to about $2 trillion.

Capital Launches Diversified Fixed Income

Capital Group has launched a globally diversified fixed income portfolio for Canadian investors. The Capital Group World Bond Fund (Canada) seeks to provide a prudently managed portfolio of bonds and other debt securities of global issuers and can act as a good complement to equity portfolios. With a focus on investment-grade bonds, it provides exposure to global bond markets ‒ with different economic cycles, yields, and currency valuations ‒ which can add an extra layer of bond diversification. It can invest in any country, currency, credit quality, coupon, or maturity, including a mix of government/agency, corporate, and mortgage- and asset-backed bonds from around the world.

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December 11, 2017

Case For Gold Polarizes

The investment case for gold will continue to polarize and it is difficult to make sweeping generalizations about the types of investors for whom a strategic allocation might make sense, says Phil Edwards, global director of strategic research within Mercer’s wealth business. In a ‘Research Perspective,’ he says, however, it is possible to suggest some of the characteristics of investors who are more likely to be open to the merits of gold. They are investors who are highly sensitive to inflationary scenarios, while not being able to access other forms of inflation hedge (such as inflation swaps). As well, they have a willingness to accept a potentially significant drag on returns in normal scenarios in order to access some protection against extreme scenarios (for example, one in which investors lose faith in the fiat money system). A willingness to view gold as a risk management tool in a portfolio context, as opposed to an isolated exposure that is expected to deliver a consistent contribution to the total return, is another trait. Ultimately, consideration of gold will necessarily be an investor-specific decision, he says. However, some investors will find the diversifying characteristics of gold attractive in mitigating the impact of certain extreme scenarios.

QE Not Over Yet

The era of quantitative easing (QE) is not over yet, says Scott DiMaggio, AB’s director of global and Canada fixed income. Speaking on ‘#Fake News in Fixed Income’ at its ‘2017 Canada Institutional Investment Symposium,’ he said while the U.S. fed is selling securities, Japan and Europe continue to buy as they are still really in expansion modes. This matters because QE has depressed interest rates. Supply explains yields of 2½ per cent so bond yields should be higher by 150 basis points (bps) from where they are today. But QE has driven yield down by 200 bps in the U.S. and about 60 bps in Canada. QE is still going to be in effect in a big way next year and will keep bond yields contained over the next 12 months. Then, the first signs of imbalance will appear as central banks issue more debt than they are buying since the beginning of QE.

Canadian Net Worth On The Rise

The median net worth of Canadian families was $295,100 in 2016, up 14.7 per cent from 2012 ($257,200), says Statistics Canada. The 2016 median was more than double that of 1999 ($144,500). Housing was both the largest asset and the largest debt for Canadians. In 2016, 61.7 per cent of Canadian families reported a principal residence as an asset and 57.3 per cent of these families reported holding a mortgage on their principal residence. Overall, 29.6 per cent of Canadian families were debt-free. The share was highest among senior-led families, where 58 per cent were debt-free. However, this was down from 1999 when 72.6 per cent of senior-led families were debt-free. British Columbia reported the highest median net worth at $429,400. Families in Ontario reported the second-highest net worth at $365,700. New Brunswick reported the lowest median net worth among the provinces at $158,400. Manitoba (+35.2 per cent) had the largest growth in median net worth from 2012 to 2016, followed by Ontario (+30.5 per cent) and Prince Edward Island (+28.6 per cent). Differences in the value of homes determines, in part, provincial differences in net worth. The median value of principal residences in British Columbia was $550,000 in 2016, the highest value in the country and $105,000 more than the next highest, Ontario. The total value of assets held by Canadians in 2016 was $12 trillion. The median value of total assets owned by families rose 12.4 per cent from $391,700 in 2012 to $440,200 in 2016. Private pensions was the second-largest asset category at 29.2 per cent of assets, rising 17.7 per cent from 2012 to $3.5 trillion. The majority of this growth came from employer-sponsored registered pension plans, which increased 17.4 per cent to $2.3 trillion in 2016.

What To Look For In A Collection Manager

The online environment offers easy and efficient ways to research and acquire objects related to a particular topic for today’s collector. In ‘What To Look For In A Collection Manager?,’ the second of a three-part series on the Private Wealth Canada website, Spencer W. Stuart, who formerly worked for Bonhams Auctioneers in both Toronto and New York, explains how managing a collection allows collectors to view their collections from a distance.

Japan Requires Prudent Approach

While the overall outlook for Japanese equities remains positive, investors should consider a more prudent investment approach, says a research paper from Unigestion. Written by Gael Combes, a fundamental analyst for equities, and Maria Musiela, an investment specialist, equities, at Unigestion, it says despite a relatively positive story for Japan’s economy post-election, risks still lurk and could potentially disturb the bullish trend for equities. One risk to consider is a slowdown in China’s economy, Japan’s closest export economy; any weakness in the Chinese economy could have a significant impact on Japan’s exporters and the global economy at large. In addition, the geo-political turmoil with North Korea remains a significant tail risk as Japan’s geographic proximity and political allegiance puts it at risk. A broader risk is public debt. Abenomics has generated high government debt, as well as a large primary deficit.

Investor Confidence Drops

An index of global investor confidence dropped one point in November to 97.1, says the State Street ‘Investor Confidence Index. The minor decline in was attributed to a 12-point drop in the European investor confidence index to 81. By contrast, the North American index rose 3.7 points to 102.6 and the Asian index increased by one point to 97.5. “While tax reform prospects likely helped boost investor confidence in the U.S., rising political uncertainty and worries over tighter monetary conditions likely drove down sentiment in Europe,” says Rajeev Bhargava, managing director and head of investor behaviour research at State Street Associates.

Hedge Fund Assets Hit Record Level

Assets under management (AUM) of the global hedge fund industry hit a new record of $3.253 trillion in October, says eVestment. Its ‘October 2017 Hedge Fund Asset Flows Report’ shows net flows for the industry year-to-date in 2017 are positive, with AUM up $33.26 billion in the 10 months to October. It also found that fixed income/credit funds saw AUM rise $2.59 billion in October and $10.99 billion year-to-date, bringing AUM for these funds to $984.1 billion. Equity funds were down nearly $3 billion in AUM in October, but are still up $15.16 billion in year-to-date AUM.

Alpine Macro Launched

Macroeconomic and financial market research veterans Chen Zhao, Tony Boeckh, and David Abramson have partnered to launch Alpine Macro – an independent research firm dedicated to providing unique analysis, insights, forecasts, and actionable investment strategy recommendations. Chen is a former chief global strategist with BCA Research Group and, more recently, co-director of global macro research with Brandywine Global Investment Management. Boeckh is former chairman and editor-in-chief and Abramson is a former chief U.S. strategist with BCA. They will focus on providing differentiated market insights, contrarian views, and profitable investment strategy recommendations that help investors manage risk and make better informed investment and asset allocation decisions.

iA Financial Launches Global Funds

iA Financial Group, in partnership with Forstrong Global Asset Management and Fidelity Investments, has launched four global funds and a family of five global index portfolios. The four global segregated funds are Global Diversified Fixed Income (Forstrong), Global Diversified Equity (Forstrong), Fidelity Global Monthly Income, and Fidelity Global Concentrated Equity Forstrong funds. The funds encourage global exposure, thereby making it possible to manage risks overall. There is strategic portfolio diversification by analyzing growth and income opportunities within a wide range of asset classes, sectors, countries and currencies. Indexia funds, a family of five low-cost global index portfolios, are also available. These funds are comprised of recognized stock indexes and are for all types of investors: prudent, moderate, balanced, growth, and aggressive.

Mackenzie Launches Gender Diversity ETF

Mackenzie Financial Corporation has launched an exchange traded fund (ETF) providing investors with an opportunity to impact social and governance change with a focus on promoting the benefits of women in leadership. The Global Leadership Impact ETF will invest primarily in companies that promote gender diversity and women's leadership, anywhere in the world. Its portfolio managers assess potential investments using a number of criteria, such as whether there is proportional representation of women on boards of directors and in leadership positions in the companies, including as chief executive officers and chief financial officers.

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