By Rob Edel, CFA

Highlights This Month

• • • • • • • The current rally is one of the most mistrusted and unloved in history
            • Strategists are split in their outlook on both stocks and bonds
            • Monetary policy will be needed to keep investors from focusing on corporate earnings, which are expected to remain modest at best
            • So far, economic growth for 2020 looks resilient
            • What could derail this happy environment for investors?

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Nicola Wealth Portfolio

Returns for the Nicola Core Portfolio Fund were +1.4% in the month of November.  The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Pooled Funds and Limited Partnerships.  Actual client returns will vary depending on specific client situations and asset mixes.

The Nicola Bond Fund returned +0.4% in November and is +5.7% year-to-date. Returns for the month were driven by strong contributions from Marret Investment Grade Hedge Strategies Fund and Arrow East Coast Investment Grade Fund returning 0.8% and 1% respectively. Returns from both Marret and Arrow East Coast were driven by credit selection and active trading as general credit spreads remain relatively tight. New issuance this year surpassed last year’s pace with close to $100B issued year to date. Issuance during November was dominated by BBB’s, which represented 83% of primary transactions. We continue to maintain an overweight in BBB names as credit quality in BBB’s remain attractive in Canada versus their global peer group.

The Nicola High Yield Bond Fund returned +1.1% in November, and is +5.9% year-to-date. Currency provided a boost of 0.5% to the fund as a stronger U.S. dollar contributed positively to returns. Credit fundamentals in high yield remain stable. High yield issuance for the year remains strong but a significant portion of new issues were used to finance and extend current debt further out causing the picture of net supply to not dramatically change.

Next year, there will likely be new money entering the market and the supply demand dynamics in the market may not be as attractive. Trends seen throughout the year continue to remain on track. Low quality CCC’s continue to mark new lows in the market, widening the valuation gap with BB companies.  However, BB spreads in the U.S. may come under pressure as companies in this space focus on shareholder returns through M&A opportunities causing a re-leveraging.

The Nicola Global Bond Fund was down -0.1% for the month. Brazil and Argentina sold off during the month leading to weakness in the Templeton Global Bond fund as it returned -0.4%. The softness in the Templeton Global Bond fund was partially offset by gains in the Pimco Monthly income fund which rose 0.3% for the month.

Government bond yields rose across most of the developed world in November. In the U.S., U.S. Federal Reserve Chair Jay Powell noted the generally good health of the economy and indicated that the Fed would likely hold rates ready for the time being. Higher interest rates were a headwind for Pimco Monthly Income but losses from interest rates were more than offset by tightening credit spreads and exposure to non-benchmark names which helped guid Pimco Monthly Income to positive returns for the month.

The Nicola Wealth Mortgage Pools continued to deliver consistent returns, with the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund returning +0.3% and +0.4% respectively last month. Current yields, which are what the funds would return if all mortgages presently in the fund were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.1% for the Nicola Primary Mortgage Fund and 5.3% for the Nicola Balanced Mortgage Fund.  The Nicola Primary Mortgage Fund had 16.4% cash at month end, while the Nicola Balanced Mortgage Fund had 20.8%.

The Nicola Preferred Share Fund returned +1.6% for the month while the BMO Laddered Preferred Share Index ETF returned +1.1%.  Preferred shares moved higher as both 5 year Government of Canada bond yields moved higher and sentiment improved in the preferred share space with strong positive flows into ETF’s. However, demand specifically for floaters (floating rate issues) appears to have waned. Both Enbridge and Pembina extended rate reset issues during the month giving holders the ability to convert to a floating series but not enough holders voted in favor of conversion to floating to reach the minimal threshold so all issues will remain fixed to the 5 year Government of Canada yields.

The S&P/TSX was up +3.6% while the Nicola Canadian Equity Income Fund was +4.0%. The Financials sector was the largest positive contributor to the Index for November followed by Energy. Health Care was the largest negative contributor. The outperformance of the fund was mainly due to being overweight the Industrials and Consumer Discretionary sectors. Leadership in the market seemed to transition toward cyclical sector and value equities. Consequently on an individual stock basis, the top positive contributors to the performance of the fund were smaller value oriented names: Canwel Building Materials, Diversified Royalty Corp, and Pinnacle Renewable Energy. The largest detractors to performance were Rogers Sugar, NFI Group, and Wheaton Precious Metals. There were no new additions or deletions to the portfolio.

The Nicola Canadian Tactical High Income Fund returned +2.1% vs the S&P/TSX’s +3.6%.  The Nicola Canadian Tactical High Income Fund benefited from being overweight in Consumer Discretionary names; however, the underweights in Financials, Info Tech and Energy detracted from relative performance.

Option volatility increased 13% during the month.  The Nicola Canadian Tactical High Income Fund was able to find opportunities to earn high single-digit Put option premiums with double-digit downside protection on select names. The Nicola Canadian Tactical High Income Fund has an equity-equivalent exposure of 57% (65.9% prior) and remains defensively positioned with companies that generate high free-cash-flow and generally have lower leverage relative to the market.  Enbridge is a new name to the portfolio.

The U.S. Equity Income Fund returned +2.6% (USD), while the S&P500 returned +3.6%.  Our exposure to defensive sectors such as Utilities and Consumer Staples hurt relative performance.  In terms of stock selection, stable businesses such as cell-tower operator Crown Castle, utility Nextera Energy, and beverage company Pepsico, were down for the month which more than offset gains in growth stocks Adobe and Accenture, as well as UnitedHealth.  We sold Carnival after pricing wasn’t as strong as expected, and bought WalMart on expectations of margin improvement in their U.S. ecommerce business.

The Nicola U.S. Tactical High Income Fund returned +1.5% vs +3.6% for S&P 500. The Nicola U.S. Tactical High Income Fund’s relative underperformance was due to being underweight Info Tech, Financials, Communication Services & Healthcare.  Stock selection was positive within Consumer Discretionary and Industrial names but was offset by stock selection within Financials and Consumer Staples.

Option volatility decreased 4.5% during the month with the largest amount of volatility occurring at month-end.  The Nicola U.S. Tactical High Income Fund has been very selective in deploying capital.  We were still able to generate double-digit annualized premiums with high single-digit break-evens.  The combination of the rally in stocks and the option-overwriting decreased the delta-adjusted equity from 40.2% to 34%. No new names were added.

The Nicola Global Equity Fund returned +2.4% vs +3.3% for the iShares MSCI ACWI ETF (all in CAD).  As the U.S. led global equity markets, our pool’s weight in international hurt our relative performance.  The IT sector, which the fund has a relative underweight in, was the strongest performing sector last month; while defensive sectors such as Consumer Staples, where we are overweight, lagged.  Our Global Small Cap and Growth managers outperformed our International-focused strategies with performance of our managers in descending order: Lazard Small Cap: +3.1%, CWorldwide +3.0%, Global Value +2.7%, Edgepoint Global: +2.5%, Nicola EAFE: +2.5%, BMO Asian Growth & Income +1.4%.

The Nicola Global Real Estate Fund return was +1.5% in November vs. the iShares (XRE) +1.7%. Publicly traded REITs continued their strong performance as the interest rate environment is positive for real estate. With the exception of mid-market enclosed retail and Calgary office, real estate operating conditions appear favourable across most major asset classes in most major markets (high occupancy and rising rents) and there is upward pressure on replacement costs (land; labour; hard costs; development charges).

Current valuation levels are fair but further multiple expansions may be difficult to achieve. We think the best opportunity to be in the multi-family and industrial sectors where the multi-year outlook appears strong for rental growth. There were no new additions or deletions to the portfolio in November.

We report our internal hard asset real estate Limited Partnerships in this report with a one month lag.  As of November 30^th, October 31^st  performance for the Nicola Canadian Real Estate LP was +0.3%, the Nicola U.S. Real Estate LP +1.2%, and the Nicola Value Add LP +1.0%.

The Nicola Alternative Strategy Fund returned 0.5% in November (these are estimates and can’t be confirmed until later in the month).  Currency contributed 0.6% to returns as the Canadian dollar weakened through the month. At the end of the month we revised our pricing policy for the fund to align better with existing Nicola Wealth funds. Previously the Nicola Alternative Strategy Fund was priced 18 business days after month end; we have revised the Nicola Alternative Strategy Fund so that it is priced two days after month end. To assist in the management of liquidity for the Nicola Alternative Strategy Fund we have introduced a three month notice period for redemptions. Because of the change in policy, returns for the month of November only reflect the last week of the month. During this period only three managers reported changes in their values in local currency terms, Winton returned -0.3%, Renaissance Institutional Diversified Global Equities Fund 0.0%, and Polar Multi-Strategy Fund -0.1%.

The Nicola Precious Metals Fund returned -0.4% for the month while underlying gold stocks in the S&P/TSX Composite index returned -1.9% and gold bullion was down -2.4% in Canadian dollar terms. Generally gold stocks are more levered to bullion prices so it is somewhat of an anomaly to have bullion sell off more than stocks. Outperformance from the RBC Global Precious Metals Fund was driven by stock selection as Wesdome Gold mines continued its strong showing from last month returning +8.5% along with strong contributions from Detour Gold and K92 Mining.

November in Review

The Everything Rally remained firmly in place last month as most asset classes maintained or even added to year to date gains last month.  With only one month to go in 2019, a balanced portfolio comprised of 60% stocks and 40% bonds is on course for its highest returns since 2009.

It’s not unprecedented for bonds and stocks returns to be positively correlated, but lower rates and strong bond returns are usually attributed to slower economic growth and lower equity returns.  Lately, it hasn’t mattered what yields have done, stocks have been moving higher.  Last month, bond yields moved up and the S&P 500 had the best November in a decade, while the Dow reached and exceed 28,000 for the first time ever.

The gains weren’t confined to U.S. stocks either, with the exception of Chinese equities, most global bourses ended the month firmly in the black.  In Canada, the S&P/TSX gained nearly 3.6%, within a rounded error of the S&P 500’s gain.  Of course stocks were moving along nicely at this point last year as well, before falling over 9% in December.  Macro Research shop Strategas assures us a repeat this year is unlikely, given back to back negative December’s has only occurred four times since 1950.   We will hold them to it!

Working in Strategas’ favor have been strong market technicals in November, with 75% of stocks in the S&P 500 trading above their 200 day moving average (versus only 50% last year) led by smaller capitalization stocks and cyclical sectors like banks and industrials.  These are all typically signs of a stronger economy, as are higher bond yields.

After consistently falling below forecasted levels, U.S. 10 year yields appear to have seen their lows in early September and continued to move higher in December, as did yields for most developed country government debt.  There is still over $12 trillion in global debt trading at negative yields, but this is down considerably from over $17 trillion in August.

Only in corporate credit do we start to see some cracks starting to form in the Everything Rally.  While investment grade and even most non-investment grade bonds continued to perform very well, the lowest grade of non-investment grade (CCC rated) have not kept pace.  This is notable because if the global economy were truly reflating, returns for CCC rated bond would be expected to outperform.  The fact they are not implies concerns over the credit cycle, and likely the economy in general.

The current rally is one of the most mistrusted and unloved in history

High Yield bond performance is but one example of the current rally being one of the most mistrusted and unloved in history.  Despite year to date stock returns of over 25% (S&P 500 +27.6% total return in local currency at the end of November), data provider Refinitiv Lipper recently reported investors have withdrawn over $135 billion from U.S. Stock funds and ETF’s this year, the most on record (or at least the most since 1992 when they started recording the data).

While this can be a bullish indicator as it means there is plenty of potential upside if or when investors start to flock back to stocks, it isn’t exactly a vote of confidence in the Everything Rally and its ability to continue into the New Year.

Strategists are split in their outlook on both stocks and bonds.  

For bonds, some see the Fed continuing to ease in 2020, driving 10 year yields lower and following the path of European and Japanese rates.  For others, the three rates cuts were just what the rally ordered, drawing comfort from the favorable market experience after the mid-cycle rate cuts of 1995.

In this favorable economic scenario, there is room for 10 years to drift higher.  For stocks, Morgan Stanley and UBS have been the most vocal in claiming lower corporate earnings will push market returns lower in 2020, while the bulls at BMO believe the current 10 year rally in only reaching its half way point, with plenty more upside to come.

Who is right, and what factors will determine the direction of the market in 2020?  Likely the same forces investors were focused on last month, namely the US/China trade war, the Fed and monetary policy, the economy, and finally, the 2020 US election.  Next month we will go into more detail on how these four factors will impact markets in 2020.  In this month’s comment we’ll try and focus on their impact this year, and November in particular.

Will he or won’t “Xi” agree to a deal?

Probably the biggest source of volatility for the market this year has been the trade war between the US and China.  When negotiations appear to hit a wall, the market declines.  When it looks like progress is being made, stocks rally.

Investors are left powerless as the two economic superpowers engage in a high stakes negotiating battle, trying to determine “will he or won’t Xi” agree to a deal.  The concerns are valid.  The U.S. has applied tariffs on about $360 billion of Chinese imports, but alternative foreign sources have meant the disruption to U.S. companies and consumers has been manageable.

Additional tariffs scheduled to start December 15^th will be on Chinese imports, and are harder to replace.  It is likely either U.S. corporate profit margins or U.S. consumer pocket books will bear most of the pain.  Both sides are working towards some kind of phase one agreement that will see no new tariffs in December and probably some kind of roll back in existing tariffs.

For its part, China will agree to buy more agriculture, especially desperately needed pork. The African swine flu has wiped out about half of China’s pork production, an important stable on Chinese dinner tables, resulting in a disturbing spike in food inflation.  Chinese CPI in November rose 4.5% year over year, its highest since January 2012.

Trump wants and needs a deal

According to the Donald, China wants a deal now, but he is content to wait until after the U.S. election next year.  Don’t believe it.  Posturing aside, Trump wants and needs a deal.  The only one that appears to not want a deal is Congress.  Two bills addressing human rights transgressions in China attained bipartisan support and passed through the Republican controlled Senate by unanimous consent, meaning not a single Senator stood in its way, preventing President Trump from using his veto, even if he wanted to.

This is notable because it certainly doesn’t help U.S. negotiators in reaching a deal with China, and it is rare that the Republican Senate would work against its own administration. Most still believe a Phase one deal will be made, but it’s taking longer than initially thought.  Optimism over a deal helped the market in November, but Traders are nervous knowing either side will walk away rather than sign what they consider to be a bad deal.

An accommodative Federal Reserve

Balancing off any disappointment on the trade front has been an accommodative Federal Reserve.  After cutting three times in 2019, the Fed looks to be done cutting rates for now, but remains on call to lower rates again if necessary, like if the trade war ramps up.

More importantly, however, Chairman Powell has indicated the U.S. central banks won’t raise rates until inflation has moved significantly and persistently higher, meaning the Fed could be on the side lines for an extended period.  In addition, the Fed has started buying about $60 billion Treasury Bills a month in order to add liquidity to the overnight repo market (repurchase agreement market), which Banks use to fund their trading books.

Interest rates in the repo market spiked higher at the end of September (Banks needed to draw down reserves in order to make quarterly tax payments), indicating excess Bank reserves at the Fed weren’t large enough.  The Fed draws a distinction between these new purchases and the quantitative easing programs used to fight the financial crisis, but the impact on liquidity and financial markets should still be positive.  According to Citigroup, total global central bank asset purchases should hit $1 trillion by September 2020.

Monetary policy will be needed to keep investors from focusing on corporate earnings, which are expected to remain modest at best. 

According to Morgan Stanley, more than a third of S&P 500 companies reported lower earnings in 2019 and Societe Generale believes lower profit margins will mean earnings will continue heading lower.  This could be problematic given stock prices already appear to have decoupled from profits.  It’s not a given earnings will weaken next year, however.  Some of the weakness in earnings this year can be attributed to tough 2018 comparables, with 2018 earnings benefiting from the 2017 tax cuts.

SocGen believes wage growth and higher labor costs will be the main reason profit margins will come under pressure next year.  Higher wages are good for consumer spending, however, which would be good for the economy and corporate top lines.

So far, economic growth for 2020 looks resilient.

The economy will likely be the final arbiter for the direction in corporate earnings next year, and so far economic growth looks resilient.  Manufacturing continues to look weak with non-residential fixed investment contracting in the second half of 2019, but manufacturing isn’t the force it once was for the U.S. economy, and slower growth doesn’t mean negative growth.  Most forecasters have 2020 GDP growth coming in just under 2% growth next year, not far off trend growth since the great recession.  Less than 35% of economists in a recent WSJ survey believe a recession will begin next year.

The consumer is just too strong for a recession to feel immanent. 

Job growth last month was a robust 266,000 with the unemployment rate moving down to 3.5%, lowest since 1969.  To SocGen’s point, wage growth was higher than expected at 3.1%, but hardly strong enough to cause concern at the Fed.  Holiday retail spending is forecast to be strong, and lower mortgage rates have helped boost new home sales.

Even global growth looks to be stabilizing.  Sure, growth is expected to be modest, but slow growth is still growth, and it means monetary policy is likely to remain accommodative.  After all, the current bull market, the longest in history, has been built on modest growth.

What could derail this happy environment for investors? 

Well the 2020 Presidential election comes immediately to mind.  We still believe the impeachment trials are a non-issue.  Trump’s popularity has barely moved.  Democrats still hate him, and most Republicans still see him as a necessary evil.

Unless Trump’s support deteriorates materially, the Senate will not vote to impeach President Trump.  In the meantime, the Trump playbook has been to look as presidentially busy as possible, which is why leaked video footage of Canadian Prime Minister Trudeau appearing to mock the U.S. President at the recent NATO summit was so unfortunate.

He’s trying people, cut him some slack!  In reality, this is an unforced error by our Prime Minister.  Making the leader of the free world and our largest trading partner look bad can’t be good for Canada, particularly if that leader is a narcissistic egomaniac.

Like it or not, a Trump victory in 2020 is good for the markets, and we didn’t see anything last month that would indicate his chances of being re-elected have materially declined.  PredictIt still shows Trump’s odds of winning holding steady, while it remains very unclear which Democrat he will face come November.  The market’s biggest fear is an Elizabeth Warren victory, who was the front runner only a month ago.  Fortunately, Warren’s Medicare for All policy has hurt her popularity and the Massachusetts Senator’s support has since crumbled.  We are not saying this is why the market rallied in November, but it didn’t hurt.

Strength of the market last month and year to date has been stronger than expected

While we’ll take the returns, we admit the strength of the market last month, and year to date, has been stronger than we expected.  Low interest rates and an accommodative central bank are likely the main drivers behind this good fortune, in combination with growth strong enough to avoid recession, but weak enough to keep inflation at bay.  The problem with modest growth, however, is it is more susceptible to negative shocks, both economic and geopolitical.  The trade war with China and the 2020 Presidential election top the list of potential spoilers, and while both weren’t major factors for the markets last month, 2020 might not be so lucky.  But more about that next month.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Returns are quoted net of fund/LP expenses but before Nicola Wealth portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. For a complete listing of Nicola Wealth Real Estate portfolios, please visit www.nicolacrosby.com. All values sourced through Bloomberg. Effective January 1, 2019 all funds branded NWM were changed to the fund family name Nicola. Effective January 1, 2019 Nicola Global Real Estate Fund, Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add LP adopted new mandates and changed names from NWM Real Estate Fund, SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.

The post Market Commentary: The Everything Rally appeared first on Nicola Wealth.

By Mark Hannah

How do industrial property users cope with the inflated rents and lack of options? To answer this, we examine the current state of the industrial market, the key factors impacting it, and the new strategies for navigating this environment.

Canada’s users of industrial real estate are stressed and have reason for concern due to the limited opportunities caused by soaring land prices in all major markets. The national industrial vacancy rate is 2.9% according to CBRE’s 3rd quarter report. Toronto and Vancouver lead all major markets in Canada with record-low vacancy rates of 0.7% and 1.4% respectively.

New construction is creating supply but at significantly higher rental rates in order to offset high land prices and the increased cost of labour and materials. This has in turn had a trickle down effect to existing inventory. While there is a general shortage of all industrial space, the small (2,500 – 7,000 sf) and mid (7,500 – 20,000 sf) bay users are particularly impacted as opportunities are scarce. Properties that have excess land/yard area are being marketed for sale at inflated prices based on a “higher and better use” making it uneconomical for the traditional owner and/or user. This has priced many of the small to mid-bay users out of the market forcing them away from urban locations and into outlying markets.

In the 1900s and 2000s, rental rates were flat with plenty of options to choose from in Toronto and Vancouver. This allowed users to reasonably afford “market rent” without negatively impacting their business. Over the past 8-10 years, the push to re-zone industrial properties to higher density, coupled with the gentrification of industrial nodes bordering urban locations, has forced users out notwithstanding the desire by many municipalities to preserve their industrial base. As a result, rental rates have more than doubled.

For example, Toronto rental rates historically trended in the $5.00-$6.00 per square foot (psf) net range for 20 years and have recently escalated to the $8.00 – $12.00 psf net range (depending on the unit size). In Vancouver, rental rates were stagnant in the $6.00 – $7.00 psf net range for the similar time frame and have also experienced similar rent inflation in the $8.00 – $13.00 psf net range (depending on the unit size).

The economy appears to be strong with several industrial user groups such as e-commerce, food production, film production & distribution, cold storage, cannabis and last mile delivery of products contributing to this strong demand. However, the pent up demand is causing a major problem for tenants as availability is challenged and economic rents rose by 12% last year alone, according to JLL’s recent Q3 2019 Industrial Report. There appears to be no relief in sight as the primary culprit is soaring land prices.

Issues and Potential Solutions

Meeting the demand of industrial users in Toronto and Vancouver is the primary issue we face. According to Avison Young’s Q3 2019 Industrial Report, 3.0 million sf of new inventory will be completed in Vancouver this year and Toronto will add another 9.5 million square feet. While this new supply is good news, it is not enough to meet the demand.

Government at all levels (Federal, Provincial and Municipal) cannot be expected to control land prices but they can contribute in other areas. Municipal governments can help to improve the inefficient approval process for developers. Land prices are already very high and the lengthy time for approvals adds to the overall project cost for developers. Fast tracking approvals will ensure there is ample supply to meet the demand.

Another area that is a significant barrier to developing new product is the very high development cost levies (DCL’s). These costs could be lowered to offset the upfront cost of a new project. For example, in Mississauga Ontario, the DCL’s are as high as $25.00 psf whereas in Richmond BC, they are as high as $12.00 psf. This is a significant burden and disincentive for developers.

The Provincial government could eliminate the Property Purchase Tax (PPT) on land acquisition for development. The Provincial Government could also offer attractive low interest rate construction financing as it does with multi-family rental apartment buildings, to help encourage developers to build new product.

At the Federal level, GST is a deterrent to developing new industrial product as this cost is passed along to the tenant and reflected in the rental rate. The Federal government can have a big impact encouraging new supply of industrial product by eliminating the GST on new buildings. In many areas of the United States, the Federal Government has established “Opportunity Zones” and “Property Tax Holidays” to help encourage new development.

As a result of these conditions, there has been a movement by developers to build multi-level industrial for both small bay and large bay distribution users to meet the demand for both a strata/condo and lease opportunities.

Our Strategic Plays

Nicola Wealth Real Estate (NWRE) follows trends carefully to identify when future opportunities may exist.

The shortage of industrial space, specifically in the Toronto and Vancouver markets, is an obvious concern and an area for opportunity. Other than rental apartment buildings, the industrial asset class is, in our view, one of the safest asset classes for commercial space, as businesses need urban locations to lease and/or own.

As a result, Nicola Wealth Real Estate has identified a need in the marketplace for both “lease” and “strata/condo” ownership from users.

Here is what Nicola Wealth Real Estate has done over the past few years to help satisfy the demand:

IntraUrban Laurel – 8811 Laurel Street, Vancouver, BC

In 2015, NWRE acquired a 4.5 acre site in South Vancouver and designed a three-building, 155,270 sf small bay industrial strata project. The project was branded as our first “IntraUrban” project and appealed to the small bay industrial user who could acquire units as small as 2,500 sf but also combine multiple units to acquire larger premises.The units feature a ground floor showroom in the front, mezzanine office upstairs and a large warehouse area in the back with 24 foot ceiling heights. The project pre-sold 100% prior to construction proving that the demand was strong from small bay users seeking quality industrial product. The project is in partnership with PC Urban Group.

IntraUrban Brentwood – 5495 Regent Street, Burnaby, BC

In 2016, NWRE acquired a 4.04 acre site in Burnaby, BC and designed a three-building, 99,463 sf small bay industrial strata project. The project is branded “IntraUrban Brentwood” and appeals to the small bay industrial user who can acquire units as small as 2,700 sf or combine multiple units to acquire larger premises. The units feature ground floor showroom in the front, mezzanine office upstairs and a large warehouse area in the back with 24 foot ceiling heights. The project is 100% pre-sold and expected for completion by Q4 2020. The project is in partnership with PC Urban Group.

IntraUrban Evolution – 1055 Vernon Drive, Vancouver, BC

In 2016, NWRE acquired a 0.80 acre site and designed a four (4) storey, mixed-sue industrial/office building in the False Creek area of Vancouver. The project was branded “IntraUrban Evolution”. The property configuration represents light industrial use on the first, second and third floors with 18 foot clear height and office use on the fourth floor with 12 foot clear height. Construction for the site started in Q3 2019 and is expected to complete in Q4 2020. The project is in partnership with PC Urban Group.

IntraUrban Rivershore – 11111 Twigg Place, Richmond, BC

In 2017, NWRE acquired an 11.8 acre site on Mitchell Island and designed a single industrial building with a total area of 258,811 sf. The project named “IntraUrban Rivershore” appeals to the small bay industrial user who could acquire units as small as 3,640 sf or combine multiple units to acquire larger premises. The project is 100% sold and turned over to the purchasers as of Q2 2019. The project is in partnership with PC Urban Group.

IntraUrban Enterprise – 1625 Dilworth Drive, Kelowna, BC

In 2017, NWRE acquired a large land parcel at the prime intersection of Dilworth and Enterprise in Kelowna, BC. The assembly was subdivided into two phases, with Phase 1 for a new Ford dealership and Phase 2 being a development of two industrial strata buildings with a total area of 72,624 sf. This project branded “IntraUrban Enterprise” targets the small bay industrial users. The project is currently under construction and scheduled for completion in Spring 2020. The project is in partnership with PC Urban Group.

West Kelowna Industrial Park – 2648 Kyle Road, West Kelowna, BC

In 2018, NWRE acquired a 10.33 acre site in an established industrial neighbourhood in West Kelowna, BC, with a near zero percent industrial vacancy. The strategy is to subdivide the
lot into two legal parcels of 2.00 and 8.33 acres, respectively. The smaller lot will be sold and the remaining 8.33 acres will be developed into four small bay strata industrial buildings with a total area of 179,324 sf and units sizes ranging from 1,400 sf to 6,500 sf. Purchasers will have the ability to combine multiple units. The project is currently 55% pre-sold with construction expected to complete by Q4 2020.

South Shore Business Centre – 11611 No. 5 Road, Richmond, BC

In 2018, NWRE acquired a 1.88 acre site on No. 5 Road in the heart of Riverside Industrial Park in South Richmond, BC. The site was shovel ready with permits in place to construct a
42,423 sf multi-unit strata industrial building, with units ranging in size between 6,427 and 7,330 sf. With a record low industrial inventory in Richmond, 7 out of 8 units were sold within
60 days of launching the sale campaign. As of Q1 2019, the project was 100% pre-sold and the project completed in the Summer of 2019. The project is in partnership with South Street
Development.

880 Avonhead Road – Mississauga, ON

In 2019, NWRE acquired a 13.39 acre industrial site in Mississauga, Ontario. The property was acquired through a “build to own” strategy to construct a modern 270,473 sf distribution centre featuring 36-foot ceilings, flexible for either multi-tenant or single tenant occupancy. This opportunity enables NWRE to develop a quality industrial asset in a strong industrial node with a low industrial vacancy rate of 2.3%. Construction will commence in Q1 2020 with completion expected for late 2020. The project will be 100% owned by NWRE upon completion. The project is in partnership with First Gulf.

Bronte Road – Oakville, ON

In 2019, this 13.39 acre site located on Bronte Road in the town of Oakville was put under contract and closing is expected in Q1 2020. The proposed development will be comprised of 4 small-bay industrial strata buildings with a total saleable area of 220,000 sf, sub-dividable into 2,800 sf units. The construction is expected to break ground by Q2 2021, with completion expected for Q1 2022. This deal represents NWRE’s first small bay industrial strata project in the Greater Toronto Market. This project is in partnership with First Gulf.

This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.

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VANCOUVER, British Columbia, January 6, 2020 – Nicola Wealth Real Estate has acquired an 85% interest in Origin at Longwood, one of Vancouver Island’s leading seniors living communities.  The firm continues expansion in this segment after identifying seniors housing as a growing real estate investment trend.

The real estate group at Nicola Wealth, known for their broad range of Canadian and US properties, first added seniors housing to its Canadian portfolio by acquiring a 50% interest in the Bria Communities portfolio back in 2016. Focusing on opportunities in major cities in Canada and strong secondary markets, Nicola Wealth Real Estate views seniors living properties as a significant addition to their Canadian real estate portfolio moving forward.

Seniors living is a growing asset class with demand for units outpacing new supply. With interest in the firm’s real estate funds growing rapidly, this sector is an opportunity to further diversify fund offerings, as they work to provide unique investment opportunities to clients.

“We are looking to continue to add seniors housing properties to our Canadian Real Estate LP to complement our existing asset classes in the fund, which include office, industrial, retail, self-storage, and multi-family,” says Alex Messina, Director of Acquisitions, Real Estate.

The Nicola Canadian Real Estate Limited Partnership is comprised of over $1.2 billion in assets across the country and growing. Seniors housing properties will be a complementary asset class within this diversified fund.

About Nicola Wealth

Established in 1994, Nicola Wealth (www.nicolawealth.com) helps families and accomplished individuals across Canada build financial legacies with purpose, delivering the stability, security, and resources they need to focus on goals and aspirations that extend beyond wealth.  The firm manages over $6.9 billion in assets, providing portfolio diversification well beyond stocks and bonds, comprehensive and integrated wealth planning, and consistent and stable returns.

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By Rob Edel, CFA

Highlights This Month

• • • • • • • • The 2020 U.S. election played only a minor role in market returns last year, but could be a major factor in 2020.
              • An economic slowdown would seal Presidnet Trumps’ fate.
              • Monetary policy remains accomodative next year.
              • A stronger economy should positively impact credit spreads, and help offset the impact of rising interest rates for corporate bonds
              • High valuations are one of the biggest obstacles investors face going into 2020.

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Nicola Wealth Portfolio

Returns for the Nicola Core Portfolio Fund were +0.2% in the month of December, and an even 10.0% for 2019.  The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Pooled Funds and Limited Partnerships.  Actual client returns will vary depending on specific client situations and asset mixes.

The Nicola Bond Fund returned +0.4% in December and is +6.1% year-to-date (as of Dec. 31, 2019).  Recently we used proceeds from the redemption of the Sunlife Private Fixed Income Plus Fund and redistributed into short term bonds with the goal of marginally improving credit risk, while improving liquidity and reducing interest rate duration exposure.

Returns in December for the general fixed income market (iShares Core Canadian Universe Bond Index ETF) saw losses of -1.1%. The headwind from rising interest rates was largely muted for the Nicola Bond Fund as we are overall positioned with low duration. Credit spreads continue to be driven by technicals as foreign buying and demand for yield has driven credit spreads lower as opposed to credit fundamentals.  As a result, we believe it is prudent to focus on defense and generate excess returns through active trading.

The Nicola High Yield Bond Fund returned -0.5% in December and is +5.4% year-to-date (as of Dec. 31, 2019).  Currency was a significant headwind for the month with a -1.1% detraction to fund returns as the U.S. dollar weakened.  Credit spreads tightened through the year, helping to drive returns, but are still wider than 2018 levels.  However, the overall picture is slightly deceiving given the significant bifurcation in the high yield market.  High quality BB names finished the year with record low yields while CCC names closed the year with yields above 10%.  Similarly, default rates for the year came in at a very normal 2.1%.  Surprisingly, the retail industry which had been under pressure in 2018 rebounded strongly for 2019, whereas defaults effectively all came from energy names which represent roughly 15% of the market.

The Nicola Global Bond Fund returned +0.7% for the month.  The Nicola Global Bond Fund’s exposure to risk assets in both developed and emerging market credits contributed to performance as credit spreads tightened around the world.

Currency positioning in Latin America (Brazilian Real and Columbian Peso), Asia ex-Japan and positions in Northern Europe helped performance, but was partially offset by weakness in Templeton’s USD$ exposure.  Performance of our managers in descending order: PIMCO Monthly Income +1.1% and Templeton Global Bond +0.8% and Manulife Strategic Income Fund -0.2%.

The Nicola Wealth Mortgage Pools continued to deliver consistent returns, with the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund returning +0.3% and +0.5% respectively last month.  Current yields, which are what the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Funds would return if all mortgages presently in the fund were held to maturity, and all interest and principal were repaid and in no way is a predictor of future performance, are 4.2% for the Nicola Primary Mortgage Fund and 5.4% for the Nicola Balanced Mortgage Fund.  The Nicola Primary Mortgage Fund had 11.7% cash at month end, while the Nicola Balanced Mortgage Fund had 15.7%.

The Nicola Preferred Share Fund returned +3.5% for the month while the BMO Laddered Preferred Share Index ETF returned 2.7%.  Government of Canada 5 year bond yields moved higher by 0.20% to end the year at 1.69%.  During December, Pembina Pipelines closed their acquisition of Kinder Morgan (KML) with the preferred shares changing tickers from KML to PPL.  Maintaining a history of dividend increases, Enbridge announced during their investor day a planned 9.8% increase in dividends in-line with their 10% growth guidance for the common equity stock.  Common stock dividend increases support preferred shares indirectly as stock dividends need to be cut to zero before preferred share dividends can be reduced.  National Bank and Royal Bank both tapped credit markets for bail-in and non-viability contingent capital (NVCC) debt.  Given maturities don’t start until June 2020, there will likely be muted new issues for NVCC during the earlier part of the year.

The S&P/TSX was up +0.4% while the Nicola Canadian Equity Income Fund was unchanged.  The Energy sector was the largest positive contributor to the Index for December followed by Materials as Gold producers finished the year strongly.  Financials was the largest negative contributor.  The underperformance of the Nicola Canadian Equity Income Fund was mainly due to being underweight Gold and Information Technology.  The top positive contributors to the performance of the Nicola Canadian Equity Income Fund were smaller value oriented names: Pinnacle Renewable Energy, Maple Leaf Foods, and ATS Automation Tooling Systems.  The largest detractors to performance were Interfor, CP Railway, and Shaw Communications.  In December, we added two new positions: Restaurant Brands International and CP Railway.  We sold Brookfield Property Partners.

The Nicola Canadian Tactical High Income Fund returned +2.1% vs the S&P/TSX’s +0.5%.  The Nicola Canadian Tactical High Income Fund benefited from being underweight financials and overweight Materials and Communication Services.  The largest stock contributor during the month was Cineplex Inc.; mid-December Cineworld proposed buying Cineplex for just over $2.1B which resulted in the stock climbing +33.9% during the month.  Option volatility increased 10% during the month (flat last two weeks of December).  The Nicola Canadian Tactical High Income Fund has an equity-equivalent exposure of 66.5% (57% prior to last month) and remains defensively positioned with companies that generate high free-cash-flow and generally have lower leverage relative to the market.

The Nicola U.S. Equity Income Fund returned 2.5% during the month, trailing the S&P500 which returned 3.0%.  Positive relative performance from positions in EOG Resources, Crown Castle, and NVidia, were more than offset by declines in Boeing and Costco, as well as our underweight in Apple.  We exited AIG and bought Citigroup; and sold Home Depot to buy Lowe’s.

The Nicola U.S. Tactical High Income Fund returned +0.4% vs +3.0% for S&P 500.  The Nicola U.S. Tactical High Income Fund’s relative underperformance was due to being underweight in Info Tech & Healthcare.  Stock selection was mixed: negative within Consumer Discretionary and positive selection within Consumer Staples and communication services (Electronic Arts was +6.4%).

Option volatility decreased 7.7% during the month.  The Nicola U.S. Tactical High Income Fund was very selective in deploying capital (excess cash of 18% at month-end).  The delta-adjusted equity rose slightly from 34% to 37%.  New names: Aptiv – Tier 1 Automotive supplier that is well positioned for the secular long-term electrification theme.

The Nicola Global Equity Fund returned +0.3% vs +1.1% for the iShares MSCI ACWI ETF (all in CDN$).  The Nicola Global Equity Fund underperformed the benchmark due to country/region mix (underweight Latin America and overweight Japan) and sector selection (underweight Info Tech, Financials and Energy while being overweight in Consumer Staples).  Market-cap and style had a neutral impact as the Nicola Global Equity Fund’s lower relative market cap was offset by its overall growth style tilt.  Performance of our managers in descending order was BMO Asian Growth & Income +1.6%, NWM EAFE Quant +1.3%, C Worldwide +1%, ValueInvest +0.3%, Lazard -0.1% and Edgepoint -1.2%

The Nicola Global Real Estate Fund return was -1.8% in November vs. the iShares (XRE) -2.2%.  Publicly traded REITs had a strong year in 2019 but in December, the Canadian REITs cooled.  The fund was also hit by foreign exchange as the USD was off -2.2% in December.  The low interest rate environment is a positive for real estate and property level fundamentals are improving.  Absent a material change in the current environment, we think that the set up for 2020 is a good one for the REITs.  We continue to think that the best opportunity to be in the multi-family and industrial sectors where the multi-year outlook appears strong for rental growth.  Globally, based on differences in the market-level total return outlook, we intend to increase our weight to Asia Pacific.  There were no new additions or deletions to the portfolio in December.

We report our internal hard asset real estate Limited Partnerships in this report with a one month lag.  As of December 31^st, November 30^th performance for the Nicola Canadian Real Estate LP was +0.6%, Nicola U.S. Real Estate LP +0.6%, and Nicola Value Add LP +1.0%.

The Nicola Alternative Strategies Fund returned -1.0% in December (these are estimates and can’t be confirmed until later in the month).  Currency detracted -1.5% to returns as the Canadian dollar strengthened significantly through the month.  In local currency terms, Winton returned -1.5%, Millennium +0.2%, Renaissance Institutional Diversified Global Equities Fund -2.6%, Bridgewater Pure Alpha Major Markets +3.0%, Verition International Multi-Strategy Fund Ltd +1.1%, RPIA Debt Opportunities +0.6%, and Polar Multi-Strategy Fund +2.1% for the month.  Winton’s returns were impacted by metal positions which detracted from returns.  In August, nickel prices soared after the Indonesian government announced a 2020 export ban but since then the market has sharply reversed course.

The Nicola Precious Metals Fund returned 6.3% for the month while underlying gold stocks in the S&P/TSX Composite index returned 5.2% and gold bullion was up 1.4% in Canadian dollar terms.  Apart from Barrick Gold which had a stellar month up +8.8%, large cap gold companies underperformed their mid and small cap counterparts.  Currently, we believe there is more opportunity in the mid cap space where management is better aligned with shareholders and any improvement in reserve life or asset quality has a larger impact on the stock price.  RBC Global Precious Metals Fund continues to benefit from mid-cap companies such as Wesdome Gold mines and SSR Mining.

December in Review

Positive returns in December capped off a record year for risk assets with nearly every asset class advancing.  Stocks did particularly well, with the S&P 500 up over 31% (in US dollar terms) and the S&P/TSX nearly 23% higher, but bonds, commodities and real estate also rewarded investors with good returns.

In a lot of ways 2019 was the mirror imagine of 2018, which nearly ended the year with stocks in a bear market.  In fact, negative returns in the fourth quarter of 2018 and their subsequent recovery in 2019 was one of the reasons 2019 was such a good year.  Rather than just looking at the 2019 calendar year, if returns were measured starting from the end of September 2018, results are not as impressive.

Taking 2018 and 2019 together, the S&P 500 provided a respectable annualized +12.1% return versus +5.8% for the S&P/TSX.  Measured over the past decade, from 2010 to 2020, the S&P 500 has annualized +13.5% and the S&P/TSX +6.9%.  It’s been a wild ride, but the bull market of the 2010’s was one for the record books.

But what about 2020 and the next decade? 

According to RBC Capital Markets December Investor Survey, over 50% of institutional investors have a bullish outlook for U.S. stocks over the next six to twelve months versus only 15% who are bearish (34% are neutral).  Now being “bullish” can be a fairly broad statement.  Not many (meaning none) predicted a 31% return for U.S. stocks last year, and we don’t think too many believe returns will be anywhere near this high in 2020.  It is also unlikely all asset classes will end the year in the black.  The “everything” rally we got last year will be tough to duplicate.  Mid-single digit returns would appear to be the safe bet, driven by the same four factors that drove returns in 2019.

As we highlighted last month, the US/China trade war, the 2020 U.S. election, the global economy, and central bank monetary  policy, all played a role in influencing capital markets last year, and will again this year.  Let us discuss each in more detail.

The biggest contributor to market volatility last year was the U.S./China trade war.

When negotiations appeared to be going well and a breakthrough was immanent, risk assets rallied.  When these negotiations fell apart, markets sold off.  Signs a truce of some sort had been reached started to materialize in October, with an apparent “Phase one” deal agreed to in early December.

Details are limited given a written agreement has not been released, but the meat of the deal involves the U.S. cutting or deferring tariffs in exchange for an increase in Chinese purchases of U.S. exports.  According to the U.S., China has agreed to increase its purchases of U.S. goods and services by $200 billion, and $40 to $50 billion in U.S. agricultural products over the next two years.

While U.S. negotiators believe these numbers are realistic, a breakdown of specific targets will be classified.  China has also agreed to end the practice of forced intellectual property transfer and a dispute-resolution mechanism has been settled on.  Phase two negotiations, which will tackle more contentious issues like Chinese subsidies to state-owned enterprises, are expected to start immediately.  The good news for markets is the phase one deal prevents a further escalation in the short term.

China is battling a slowing economy, and President Trump is facing an upcoming election.

This doesn’t mean the trade war still isn’t a risk for the markets in 2020.  There are still lots of ways it can fall apart.

First off, the fact China hasn’t confirmed some of the details U.S. negotiators have discussed is disturbing.  Second, China’s ability to hit targets highlighted by U.S. negotiators is debatable given the historical level of U.S. exports to China.  What if they fall short?  Another negative scenario might center on the phase two negotiations.  If China isn’t willing to make concessions, could Trump take a harder line on the interpretation and enforcement of Phase one?  If the U.S. economy surprises to the upside, does Trump take a firmer stance?

Phase one is a deal in name only.  Really it’s more of a truce.  While China might try and buy more U.S. goods, they are not going to make material changes in how their authoritative command economy operates.

China has also taken note of Japan’s experience in making concessions to the U.S., notably the Plaza Accord signed in 1985 which doubled the value of the Yen in less than three years and created asset bubbles, whose subsequent bursting resulted in economic stagnation for most of the 1990’s.  As for intellectual property theft, surely China isn’t acting any worse than the U.S. did with Britain before WWI?  For the U.S., most American politicians, both Republican and Democrat, know that the real issues extend well beyond the trade deficit the U.S. has with China.  China is viewed as an economic and military threat.  The process of decoupling the U.S. and Chinese economy has already started with China doing more business with South East Asian nations and even Europe.  One of the concerns investors had with the US/China trade war was its impact on uncertainty and capital spending.  The Phase one deal is unlikely to change this.  At best, the trade war becomes a non-issue for markets in 2020.  At worse, it falls apart and drives the market lower.

The 2020 U.S. election played only a minor role in market returns last year, but could be a major factor in 2020. 

The impeachment trials added some volatility, but the Republicans control of the Senate means Trump’s fate will most likely be decided in the November Presidential election, not by Congress.  Traditionally, a sitting President is very hard to beat if the economy is strong.  According to BCA Research, even after a mid-term election loss or a big scandal, a President seeking a second term has historically had a better than even chance of being re-elected.  History might not be the best guide for the future, however, given how polarized U.S. political support has become.  Support from Trump’s base has remained fairly constant, regardless of consumer confidence, as has the lack of support and approval from Democrats.

According to RBC Capital Markets, 76% of institutional investors polled in December believe President Trump will be re-elected, despite the fact a December WSJ/NBC News Poll reported only 44% of Americans gave Trump a favorable approval rating and 48% said they were certain to vote against him.

According to Predict It, a prediction market place where investors use real money to express their views, the odds of a democrat candidate winning the White House is still priced higher than that of a Republican.

Investors are probably letting their pocketbooks influence their views, as according to RBC’s Institutional Investor survey 66% believe a Trump victory would be bullish for U.S. equities versus only 4% who believed it would be bearish.  A Democrat in the White House would likely mean higher taxes, both personal and for Corporations.  Joe Biden would be the lesser of the Democratic evils, and Bernie Sanders would be the markets worst case scenario.

Volatility will likely pick up closer to the election, but if Sanders gets the Democratic nomination, markets will likely sell off.  If Biden gets the nomination, as is expected, there will be little to no impact.  The risk is that the market is discounting a Trump victory, which seems a little premature given Trump’s current popularity and polling numbers, especially when going head to head against Joe Biden.  Regardless, it should be great theatre, no matter who wins the democratic nomination and goes against Trump.  Political ad-tracking company Advertising Analytics estimates the 2020 political ad spending cycle could reach a record $6 billion, with nearly $1 billion being spent on the Democratic primary alone.

An economic slowdown would seal President Trumps’ fate.

The state of the economy will play a large role in determining who wins the White House this November.  An economic slowdown or recession would likely seal President’s Trumps’ fate as a one term President.  It would also go a long way to sealing the market’s fate.  A slowing Global economy spooked investors last year, especially after U.S. manufacturing also eventually turned lower.  The trade war and resulting uncertainty left companies paralyzed and reluctant to invest capital, a situation that will hopefully be helped by the Phase one trade deal, but likely not eliminated.

The slowdown in China’s economy was particularly concerning considering how important the world’s second largest economy has been for global growth over the past decade.  Chinese policy makers, however, have promised more monetary and fiscal measures to bolster growth, and manufacturing indices have turned higher.  As for the U.S., the consumer remains key, and even though manufacturing remains weak, the negative impact from the since settled GM strike and hopefully soon to be settled Boeing 737 Max fiasco, should stabilize the U.S. manufacturing sector.  Regardless, it’s the consumer that rules the American economy and low unemployment and strong consumer confidence means GDP growth should remain positive.  Recent strength in the housing market could also lead to an upside surprise.

For Canada, what is good for the U.S., is good for their northern neighbors. 

The U.S. is by far Canada’s largest trading partner, with over 70% of Canadian exports heading south across the 49^th parallel.  The USMCA (old new NAFTA), which looks to be finally working its way through Congress, should ensure Canadian access to American markets for the foreseeable future.

According to BMO Capital Markets, Canada’s population grew 1.5% year over year in Q4 versus U.S. population growth of just under 0.5%, largely due to immigration.  According to Bloomberg, Canada welcomed 300,000 new immigrants and over 170,000 non-permanent residents last year, with 60% entering as part of targeted economic entry plans.

Economic growth is the addition of population growth and productivity growth, and Canada’s immigration policy helps increase both.  On the negative side, inflated housing costs and high debt levels have put Canadian consumers in a vulnerable position.  Even with low interest rates and a strong job market, consumer insolvencies have started to move higher.  It’s a good thing we have access to U.S. consumers, because Canadians need to pay off their debts so consumer spending won’t be the growth driver in Canada that it will be for the U.S. economy.  Look for the Canadian economy to continue growing at a modest pace, but below that of the U.S. economy.

Monetary policy remains accommodative next year

One of the reasons we have confidence economic growth should remain positive next year is monetary policy remains very accommodative, not only in Canada and the U.S., but globally.  While we started off this commentary highlighting the impact the trade war had on markets last year, the other event we believe heavily influenced returns in 2019 and created the “everything rally” was the pivot by the U.S. Federal Reserve, from a tightening policy in 2018 to an easing policy in 2019 with three cuts to overnight rates totaling 0.75%.

In 2018 when the Fed was tightening (the Fed raised rates four times in 2018) and markets sold off, the Fed appeared to be trying to catch up to the market.  The message the market was sending was that financial conditions were too tight given the current economic conditions.  Fed Chairman Powell got the message and pivoted policy from tightening to easing and the market spent most of 2019 trying to catch up.  The resulting impact can be clearly seen by the rapid increase in money supply (M2 Money Stock), which turned sharply higher last year as the Fed Funds target rate declined.

The Fed has indicated they are done cutting rates for now, though the market is hoping for one more cut in 2020 or 2021.  At the very least, investors now believe Chairman Powell stands ready to come to the market’s recue if the trade deal falls apart, Bernie Sanders becomes President, or if the economy starts to slow materially.

Like Alan Greenspan, Ben Bernanke, and Janet Yellen before him, Powell has the market’s back.  The Fed sees a long pause in monetary policy and doesn’t appear to have an appetite to raise rates anytime soon.  The key to how long they remain on hold is inflation.  The Fed wants to see inflation above 2% for an extended period of time before starting to tighten again. They are concerned that inflation has been unable to hit their 2% target and worry inflationary expectations will continue ratcheting lower and lower.

A “make up” strategy, where by inflation rates are allowed to rise above target for a period of time to compensate for the time below target means inflation could be allowed to move uncomfortably higher before the Fed take action.  Already some inflation measures are showing inflation running above 2% and inflationary expectations have also shadowed oil priced to move higher after bottoming in early October.

The Fed’s favored inflation indicator, Personal Consumption Expenditures index, was only 1.6% in November, however.  Perhaps an ominous harbinger or omen of what might transpire in the near future was the death of former Federal Reserve Chairman Paul Volker in early December.  Volker is famous for breaking the back of inflation in the mid 1980’s by aggressively and painfully tightening monetary policy.  Volker’s legacy is more than three decades of declining inflation, which might now be coming to an end.

Don’t get us wrong, an accommodative Fed is good for the economy and the stock market, over the short term at least.  The picture for fixed income is more mixed.  With the Fed on hold, the yield curve should steepen (which it has), which means longer term yields rise and bond returns become more challenging.

A stronger economy should positively impact credit spreads, and help offset the impact of rising interest rates for corporate bonds. 

The hope low yields in developed bond markets like Japan and Germany will place a ceiling on U.S. yields by drawing Japanese and German investors into U.S. Treasuries is likely mis-placed.  Not only have yield curves globally started to steepen, with Japanese and German 10 year yields also moving higher (the total market value of negative yielding bonds globally has fallen to nearly $11 trillion in early 2020 after topping $17 trillion in late August), but the trade doesn’t work for foreign investors buying Treasury’s if they are unwilling to take U.S. dollar currency risk.

If they wish to hedge their currency risk back into Yen and Euros, not only will their yields still be negative, but they will be more negative than if they invested in their own domestic government bonds.  Such is the current demand for U.S. dollars that the hedging costs more than wipes out the yield differential.  This is not the case for U.S. investors, however, who can turn negatively yielding Japanese and German government bond yields into positive returns by hedging their Yen and Euro risk.

Investing in a currency hedged Japanese government position can actually provide U.S. investors higher returns than investing in U.S. treasuries.  Go figure.

While a more dovish Fed might provide headwinds for fixed Income in 2020, it’s all good for equities, and one of the reasons stocks ended 2019 on a high note and has continued to rally in early 2020.

A liquidity driven rally could create a “blow-off” top or “melt-up” if the market gets too extended, however, and an inevitable correction would follow.  Over 80% of S&P 500 stocks are trading above their 200 day moving average and equity ETF’s saw increased flows in the last quarter of 2019.

Valuations also remain a concern.  While forward P/E multiples for the S&P 500 still have  a long way to go before they reach the levels reached during the late 1990’s tech bubble, they are well above the 25 year average.  According to Deutsche Bank, the S&P 500 has historically traded at lower valuations 90% of the time over the past 85 years.  Valuation is one of the reasons some strategists are advising investors to avoid putting all their eggs in one basket in 2020 and to diversify away from U.S. stocks in 2020.  A more negative view, of the U.S. dollar adds to the argument.

High valuations are one of the biggest obstacles investors face going into 2020. 

Easy monetary policy and low interest rates have bid up the price of most financial assets.  Perhaps there are some opportunities in emerging market equities or beaten up European bank stocks, but for more conservative investors, everything looks expensive.

Bank Credit Analysts project U.S. equities will deliver only a 4% return over the next decade after delivering over 11% since 1982.  A diversified portfolio, which would include an allocation to emerging market equities, is expected to return only 4.4% or a mere 2.4% after inflation.  At some point the U.S economy, and likely the Canadian economy as well, will stall and this record bull market will end.  We don’t think it will be next year, or even the year after, but at some point the party will end.  And then what?  With central bank lending rates already at or near zero, monetary policy is nearly out of dry powder.  Government debt levels are elevated, and while there is likely room for them to go higher, it’s likely developed world governments will use this dry powder up before the next recession.  Enjoy the party this year, because the hangover is going to be a killer.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Returns are quoted net of fund/LP expenses but before Nicola Wealth portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. For a complete listing of Nicola Wealth Real Estate portfolios, please visit www.nicolacrosby.com. All values sourced through Bloomberg. Effective January 1, 2019 all funds branded NWM were changed to the fund family name Nicola. Effective January 1, 2019 Nicola Global Real Estate Fund, Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add LP adopted new mandates and changed names from NWM Real Estate Fund, SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.

The post Market Commentary: Enjoy the Party This Year, Because There will be a Hangover appeared first on Nicola Wealth.

Professionals unite to meet industry challenges

By Michelle Schriver

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To best serve clients this year and beyond, you should aim to offer a full range of services through collaboration.

While collaboration is familiar to any financial advisor who’s ever referred a client to a tax expert or a lawyer, collaboration is becoming formal and extending to business models.

Advisors have long networked with other professionals as a way to offer holistic advice and more services, typically leveraging traditional channels for tech and compliance support, says Matthew Lawrence, senior director of PricewaterhouseCoopers Canada’s (PwC) financial services consulting practice in Toronto. Some advisors now use formal professional associations for those functions, he says.

The Alliance of Comprehensive Planners (ACP), for example, is a U.S. business association that offers compliance support, tech discounts and formal training for a membership fee. A Canadian equivalent is IRONSHIELD Financial Planning Syndicate. Scott Plaskett, CEO and senior financial planner with Toronto-based IRONSHIELD Financial Planning Inc., says the syndicate’s platform provides the cost-effective infrastructure that financial planners require as entrepreneurs, such as business processes and back-office capability, as well as training. Planners can choose between branded and non-branded versions.

While the syndicate’s practical offerings attract planners, Plaskett says, the real draw is joining a community of like-minded professionals who want to focus on advice within a transactions-based regulatory regime. Planners “can only get compensated for the product they sell,” Plaskett says. “To put food on the table, good-quality financial planners are having to get licensed to sell mutual funds [or] insurance.”

The IRONSHIELD syndicate solves the issue, Plaskett says: the group of professionals has bargaining power to attract portfolio managers and implement referral arrangements with them. This also benefits clients because portfolio managers operate under a fiduciary standard, he says. Syndicate members might also refer other professionals, including insurance specialists, mortgage brokers and corporate reorganization specialists.

While neither the ACP nor IRONSHIELD syndicates is new, there’s been a move to fee-only advice in recent years. In 2017, the number of referral arrangements between Ontario Securities Commission registrants and non-registered professionals increased by 69% compared with 2015, according to the regulator’s latest annual summary report.

Planners also are collaborating to establish their status as professionals. The Financial Planning Association of Canada, which launched last year, aims to support the financial planning industry’s transformation into a profession, with members adhering to ethical and fiduciary standards. As part of their duty of care to clients, members must provide clients with “independent, conflict-free professional advice that is free of bias,” the association’s charter states.

In some larger financial services institutions, tied selling can be a problem, even within the financial planning channel, says Dave Cassie, managing director, consulting and deals, in PwC’s financial services consulting practice in Toronto. What seems like an independent plan can turn out to have certain products as a solution, he says.

Saskatchewan and Ontario have or are enacting legislation to regulate the titles “financial planner” and “financial advisor,” but the focus is on credentials. This focus is despite industry participants such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) suggesting that being independent should be a requirement to call oneself a “financial planner.” (Insurance advisors in Ontario are unlikely to be subject to the regulation, even though the Financial Services Regulatory Authority of Ontario regulates them.)

Client collaboration

Offering professional advice also requires collaboration at a grassroots level.

“As we collaborate with other professionals, it’s important not to get distracted by the fact that collaborating with the client and their family is the most important thing,” says Ethan Astaneh, certified financial planner at Nicola Wealth Management Ltd. in Vancouver.

At that firm, client/advisor collaboration produces such things as retirement projections and family trees. The latter demonstrate that the advisor understands who comprises the family and helps the family members visualize their wealth trajectory, Astaneh says. The result is greater client engagement.

Collaboration at Nicola extends to clients’ children, who must be prepared to receive wealth by acquiring the requisite financial and family knowledge, Astaneh says. Advisors can help by hosting events with outside experts or arranging meetings with a facilitator who can help the family with communication and decision-making.

Smaller clients

While collaboration can lead to better advice and promote industry change, the process typically is reserved for higher net-worth clients. “A mass-market, younger population is still being somewhat ignored,” Lawrence says, specifically citing insurance advisors, who tend to focus on high net-worth clients.

To serve younger clients, firms are looking for multiple low-cost self-serve solutions, such as curated content and financial planning tools that can monitor clients’ income, wealth and behaviour to identify when changes are required, Cassie says. That way, firms can offer products and services piecemeal as needed by clients.

Montreal-based National Bank of Canada, for example, has an agreement with Toronto-based Nest Wealth Asset Management Inc., which has access to financial planning products through Nest’s subsidiary, Razor Logic Systems.

Digital and hybrid models help firms seeking these solutions, Lawrence says. Still, when it comes to serving clients throughout their lives, he says, “I don’t think any [firm is] doing that really well.”

The post How collaboration is improving advice appeared first on Nicola Wealth.

Nicola Wealth Chairman and CEO John Nicola and Nicola Wealth Chief Investment Officer Rob Edel will discuss their thoughts on what 2019 has in store for investors and present strategic decisions for an uncertain future.

Presentation topics coming soon.

EVENT DETAILS

Monday, March 2nd, 2020 (add to calendar)
Vancouver Convention Centre West (map)

6:00 pm Registration |Wine and hors d’oeuvres
7:00 pm Presentation | Reception to follow

This annual event is always well attended and fills quickly.
RSVP before February 19, 2020, to secure your seat.

Please RSVP to events@nicolawealth.com

The post Vancouver Strategic Outlook – March 2, 2020 appeared first on Nicola Wealth.

Nicola Wealth Chairman and CEO John Nicola and Nicola Wealth Chief Investment Officer Rob Edel will discuss their thoughts on what 2020 has in store for investors and present strategic decisions for an uncertain future.

Presentation topics coming soon.

EVENT DETAILS

Monday, March 2nd, 2020 (add to calendar)
Vancouver Convention Centre West (map)

6:00 pm Registration |Wine and hors d’oeuvres
7:00 pm Presentation | Reception to follow

This annual event is always well attended and fills quickly.
RSVP before February 19, 2020, to secure your seat.

Please RSVP to events@nicolawealth.com

The post Vancouver Strategic Outlook – March 2, 2020 appeared first on Nicola Wealth.

We are pleased to share that five Nicola Wealth advisors have been named on the Top 50 Advisors 2020 List by Wealth Professional. Congratulations to Howard Kwan, Jason Nicola, Sophia Ito, Brent Thomson, and Karen Ikeda.

In total, this year’s Top 50 Advisors are managing more than $16 billion worth of assets, improving on last year’s total by close to $6 billion. Once again, this year’s list contains advisors from across the country, representing seven different provinces, with British Columbia narrowly surpassing Ontario for the first time this year with the most advisors on the list.

The years of experience amassed by this year’s Top 50 Advisors ranges from five to 37, highlighting both the current strength and the bright future of wealth management in Canada.

The Selection Process

To determine which advisors make the final list, Wealth Professional considers multiple factors, including overall AUM, AUM growth, number of clients and client growth. Each factor is given a specific weighting and entered into an equation that produces a score for each advisor; the final ranking is determined by that score. While these factors alone don’t measure an advisor’s overall abilities, in combination, they provide insight on an advisor’s performance and effectiveness.

You can read the full list and article in Wealth Professional here starting on page 22 or the online special report here. 

The post Five Nicola Wealth Advisors Named Wealth Professional Top 50 Advisors 2020 appeared first on Nicola Wealth.

VANCOUVER, British Columbia, January 24, 2020 – Nicola Wealth Real Estate recently acquired a large  multi-tenant industrial portfolio, comprised of 276,443 sf  on 17 acres located just off the Las Vegas strip. The Nicola Wealth Real Estate team sees long term opportunity in this portfolio, the industrial asset class, and the Las Vegas area.

Located in close proximity to the new NFL Las Vegas Raiders Allegiant Stadium and the McCarran International Airport, this industrial portfolio comprises 13 buildings spread over three adjacent properties in a market with a low vacancy rate environment. This portfolio is well positioned for stable cash flow and is 98% leased to a diverse roster of small to medium bay tenants. The current in-place rents are 10% below the market average affording the opportunity for near term upside in income growth.

We acquired this industrial portfolio with a long term investment horizon,” says Mark Hannah, Managing Director – Nicola Wealth Real Estate, “this is our first acquisition in the Las Vegas market which helps establish a foothold to complement our strategy to build an industrial portfolio through acquisition and build to own to accompany our Nicola US Real Estate Fund.

A strong US economy has contributed to booming e-commerce, third-party logistics and last mile delivery fuelling the need for more industrial inventory. There is a general shortage of industrial space in Las Vegas and considering the recent decline in new construction, rent growth is expected to increase in a supply-constrained environment.

Las Vegas is an attractive investment market which is underpinned by a low vacancy rate, strong tenant demand and rental rate growth. The Nicola Wealth Real Estate team will continue to build on their position in this market to complement other target markets such as Denver, Phoenix and Seattle to further expand their real estate portfolio in the US.  To learn more about the Nicola Wealth Real Estate funds, you can visit www.realestate.nicolawealth.com

About Nicola Wealth Real Estate

Nicola Wealth Real Estate (NWRE) is the in-house real estate arm of Nicola Wealth, a premier Canadian financial planning and investment firm with $7-billion (CAD) of assets under management. NWRE has an innovative team that acquires and manages a growing diversified portfolio of properties in major markets across North America including asset classes comprising office, retail, industrial, multi-family residential, self-storage, and seniors housing. The current real estate portfolio is $4-billion in gross asset value.

About Nicola Wealth

Established in 1994, Nicola Wealth (www.nicolawealth.com) helps families and accomplished individuals across Canada build financial legacies with purpose, delivering the stability, security, and resources they need to focus on goals and aspirations that extend beyond wealth.  The firm manages $7-billion in assets, providing portfolio diversification well beyond stocks and bonds, comprehensive and integrated wealth planning, and consistent and stable returns.

The post Nicola Wealth Enters Las Vegas Real Estate Market appeared first on Nicola Wealth.

Approaching Opportunities with 2020 Vision

Nicola Wealth Financial Advisor Mark Therriault and Nicola Wealth Chief Investment Officer Rob Edel will discuss their thoughts on what 2020 has in store for investors and present strategic decisions for an uncertain future.

Rob Edel, Chief Investment Officer, will look at the short and long term factors likely to impact the economy in 2020, including:

• The US/China trade war and economic decoupling
• America’s 2020 election
• The global economy and worldwide inequality
• Fiscal and monetary policy in the US, Canada, and abroad
• Global warming and socially responsible investing

Mark Therriault, Financial Advisor, will examine the value differences between private and public markets, focusing on:

• Modeling investment pools to minimize risk, improve returns, and preserve liquidity
• The place for public and private investments in an overall asset allocation
• How investors around the globe are approaching private markets
• Whether public markets are shrinking and how access to excess capital will impact corporations

EVENT DETAILS

Thursday, March 26th, 2020
Hyatt Regency Calgary | 700 Center Street SE (map)

6:00 pm Registration |Wine and hors d’oeuvres
7:00 pm Presentation | Reception to follow

This annual event is always well attended and fills quickly.
RSVP before March 18, 2020, to secure your seat.

Please RSVP to events@nicolawealth.com

The post 2020 Strategic Outlook, Calgary – Thursday, March 26 appeared first on Nicola Wealth.

Approaching Opportunities with 2020 Vision

Nicola Wealth Chairman and CEO John Nicola and Nicola Wealth Chief Investment Officer Rob Edel will discuss their thoughts on what 2020 has in store for investors and present strategic decisions for an uncertain future.

Rob Edel, Chief Investment Officer, will look at the short and long term factors likely to impact the economy in 2020, including:

• The US/China trade war and economic decoupling
• America’s 2020 election
• The global economy and worldwide inequality
• Fiscal and monetary policy in the US, Canada, and abroad
• Global warming and socially responsible investing

John Nicola, Chairman & CEO, will examine the value differences between private and public markets, focusing on:

• Modeling investment pools to minimize risk, improve returns, and preserve liquidity
• The place for public and private investments in an overall asset allocation
• How investors around the globe are approaching private markets
• Whether public markets are shrinking and how access to excess capital will impact corporations

EVENT DETAILS

Thursday, May 7, 2020
Four Seasons Hotel Toronto (map)

6:00 pm Registration |Wine and hors d’oeuvres
7:00 pm Presentation | Reception to follow

This annual event is always well attended and fills quickly.
RSVP before April 29, 2020, to secure your seat.

Please RSVP to events@nicolawealth.com

The post 2020 Strategic Outlook, Toronto – Thursday, May 7 appeared first on Nicola Wealth.

This event for Nicola Wealth clients, partners and friends is a first look at our latest development. We value our relationship and would like to share this unique and exciting project with you.

Through a brief presentation, you will learn how this redevelopment came to life before taking an exclusive tour through the building including the stunning views from the penthouse level.

Join us and learn about the history, the transformation and the opportunity of the James at Harbour Towers in Victoria, BC. This iconic hotel takes on new life as a contemporary rental building, just steps from the sea.

EVENT DETAILS

Thursday, February 20th, 2020 (add to calendar)
The James at Harbour Towers, 345 Quebec St, Victoria, BC (map)
Complimentary valet service included

5:00 pm Registration | Cocktails and Canapés will be served.
5:30 pm Presentation | Tour of the building to follow.

RSVP to Lanie Collins at lcollins@nicolawealth.com. We hope to see you there.

The post Building The James: An Investor Preview appeared first on Nicola Wealth.

By Tara Deschamps 

View pdf version 

TORONTO — In the 11 years Scott Terrio has spent in the financial services industry, he has heard the same thing over and over again: “I should have come in to see you 12 to 24 months earlier.”

That refrain comes from his clients — some who have had to move homes or file for insolvency — to climb out of mountains of debt they’ve accrued.

It’s obvious you’re in deep trouble when collection agents are constantly calling or you have months of unpaid bills piling up. However, the ideal time to decide you need financial help is long before it gets to that, says Terrio, the manager of consumer insolvency at Hoyes, Michalos and Associates Inc., a licensed insolvency trustee in Toronto.

But what should be your warning sign? That’s tricky to determine because most experts agree there is no magic earnings-debt ratio or even a specific number of straight months of spending more than you earn that should alert you of financial trouble ahead. Everyone’s financial situation is different, so the warning signs and how fast someone can act on them will vary, professionals say.

Terrio recommends keeping an eye on your monthly cash flow because it can be a telltale sign of when you need to be more prudent.

In Canada, there are reportedly plenty of people who could benefit from paying some extra attention.

The Canadian Association of Insolvency and Restructuring Professionals expects personal insolvencies will grow in 2020 after the rate of filings increased 8.9 per cent in November over the same 12-month period the previous year.

When looking at your cash flow, pay attention to any balances you have on high-interest debt because they can be good indicators of your financial status, says Terrio.

“If you’re carrying balances for six to 12 months or 24 months, you probably should be talking to somebody at that point,” he says.

For Kim Inglis, a financial adviser and associate portfolio manager at Raymond James, a first sign of trouble is spotting when you are spending more than you make.

“If you’re seeing people that are trying to keep up with the Joneses and they’re not saving at all because everything that they bring in a month is going out and then some, that’s a definite sign that they are not establishing the right habits,” Inglis says.

Nicola Wealth financial adviser Kyle Westhaver agrees.

He says he sees a lot of people who end up in trouble because they have no clue what they are spending every month and so they won’t necessarily spot a problem right away.

If you create a plan for the year and you say, ‘I am going to spend $5,000 a month’ and you are lagging behind, it would allow you to pay more attention and know when you’re in trouble,” he says.

Warning signs should be even more heightened when you are considering paying off one liability with another, he adds.

“If you are paying your credit card off with your line of credit that is an easy moment to realize I don’t have a great handle on my situation,” she says.

Most advisers agree that a budget is a good place to start because it helps you set goals and can alert you when you spend too much.

Depending on how concerned you are about your financial situation, many advisers recommend turning to professionals for help.

But there are some things people can do if they catch their situation early enough or want to help turn their finances around.

“They can travel in the off-season instead of peak season and they can bring their lunch to work instead of buying every day,” Inglis suggests. “There’s endless, endless ways you can cut back and just little changes make a big difference.”

The post Make a budget to spot your financial troubles before it’s too late: experts. appeared first on Nicola Wealth.

Nicola Wealth’s Toronto office is relocating to a new, larger space on Monday February 10, 2020 to serve our growing client base better.

Our new office address is (map):

Suite 1610 North Tower
175 Bloor Street East
Toronto ON, M4W 3R8

The new office is conveniently located on the south-east corner of Bloor and Church Streets, offering a centrally accessible location, reserved parking, more comfortable meeting spaces, and room for our continued growth.

Public Transit

If you are taking the subway, the nearest station is the Bloor-Yonge station. Our office building can then be reached by heading east through the PATH and exiting out at Park Road and Bloor.

Parking

If you are driving to our office, there is complimentary reserved parking in our building while you are here for your meeting. Parking is accessible off of Hayden Street. View our parking directions here.

Our contact numbers remain the same. Please reach out to your  Advisory team if you have any questions concerning our new location or our services.

The post Nicola Wealth Toronto is Moving! appeared first on Nicola Wealth.

Venturing Beyond the Traditional Portfolio Model and What it Means for You.

By Russell Feensta and Kyle Westhaver

View the pdf version

We live in an ever-evolving world, where the pace of change is seemingly accelerating each year. Managing an investment portfolio during tumultuous and turbulent times may feel increasingly more complex with a multitude of asset allocation options now available to the typical investor. You might wonder, “what should I invest in?” and “how do I get the best possible mix of investments?”

Historically, investing was significantly simpler than now. Prior to the 2000s, it was common for most Canadian investors to hold a portfolio in a traditional 60/40 “balanced” model. At the time, many traditional money managers had a fairly narrow universe of assets to choose from. An allocation of 60% equities (Canadian Equities, Foreign Equities, Small Cap, etc.) and 40% bonds (Canadian Bonds, Foreign Bonds) was, and in many cases, still is quite typical for clients of traditional money management firms. However, just because a portfolio had various types of mutual funds, stocks, and bonds did not mean the portfolio would avoid volatility, as many investors experienced during the 2008 financial crisis.

The 60/40 allocation strategy gained momentum during the 1980s when a 10-year Canadian bond yielded 12.5% (1980)¹; average historic equity returns were 11.5%³ and Canadians typically had a 10-year gap to fund between retirement (average 65) and life expectancy (average 75). This investment mix assumed that bonds, acting as a “risk-free” asset, should move inversely to equities and therefore dampen equity volatility. The current environment has 10-year Canadian bond yields at 1.57%¹, average TSX equity returns of 6.14% since 2000² and double the gap (19 years) to fund retirement (average retirement age is 63 and life expectancy is now 82). As we said, the world has changed, and investors need to adapt as well.

It poses the question: why on earth is a traditional “Balanced Portfolio” still considered satisfactory diversification? A quick internet search of “asset allocation calculators” will bring up a plethora of tools that essentially ask you a dozen questions and in the end provide you an “optimal” asset allocation. We tested several of these online tools, using both a hypothetical average investor and an ultra-high net worth profile as test subjects, and each time were recommended a balance of only stocks and bonds.

What about balanced portfolio mutual funds? Are they truly diversified? In short, no. The largest six financial institutions in Canada all offer a balanced mutual fund made up of only stocks and bonds, averaging 60% stocks and 40% bonds.

At Nicola Wealth, our investment philosophy is one that is shared by some of North America’s largest and most well-respected pension funds, university endowments, institutions, and ultra-high net worth investors; such as the Ontario Teachers’ Pension Fund, Harvard University’s endowment, and TIGER 21 – a membership of 600 ultra-high net worth individuals with more than $50 billion in personal investible assets, collectively. This approach is a disciplined focus on broad asset allocation and acquiring high quality assets that produce sustainable, and ideally growing, cash flows. Judging by the charts to the right, it appears to be working.

Relying on price appreciation and staying exposed to the equity markets (regardless of sector) is simply asking to ride the rollercoaster of stock market unpredictability. Our investment approach uses both cash flow and broad asset allocation to provide stability, increase long-term risk-adjusted returns, and build wealth.

Prepare for the Trip of a Life Time

The basic principles behind this proven investment strategy could be compared to how one plans for an epic vacation. Think about it – what’s your bucket-list adventure? A sailing voyage around the world. A soul-searching hike along pilgrimage trails. A cycling tour through old world wineries. Regardless of your destination or preferred mode of transportation, you need to pack strategically. For that, you need the expertise of a trusted tour guide, someone backed by years of experience and who knows the lay of the land inside and out …otherwise you could wind up saddled with a cumbersome backpack full of seasonally inappropriate clothing that never see the light of day (i.e. bonds-heavy portfolios that yield low returns). Worse yet, you might be left out in the cold (i.e. stuck with a traditional portfolio that leaves you vulnerable to unpredictability) – or in this case, holed up in your hotel while other savvy travelers enjoy the trip of a life time. The same goes for your portfolio. You need to be prepared for all eventualities and the best way to do that is through strategic diversification.

Using cash flow investing, our investment philosophy doesn’t rely solely on the price appreciation of assets. We are less focused on whether a stock moves up or down, rather concentrating on the income – the cash flow – generated by each investment, because a steady and reliable income from assets effectively reduces risk.

What is Broad Asset Allocation? Traditional asset allocation as described above is often 60% equities and 40% bonds, where ‘diversification’ means owning various kinds of “stocks and bonds.” In our view, however, most investors aren’t truly diversified with the typical model of only stocks and bonds. Nicola Wealth’s in-house team of portfolio managers utilize an extensive array of asset classes, far more than an industry-standard portfolio, to further diversify out of equities and into areas such as investment-grade hard asset real estate, private equity, private debt, commercial mortgages, and other alternative strategies such as hedge funds, infrastructure, and renewable resources.

Having a truly diversified portfolio and consistent cash flow has been the cornerstone to our ability to provide historically consistent above-average returns during all market conditions.

Enjoy Life’s Little Excursions

Think of cash flow as one of those unexpected side trips, the ones that take you off the beaten path and wind up being the highlight of your journey. If you don’t have access to extra spending money, you might be left waiting at the dock, while the rest of your tour cohorts board a last-minute ferry to an ancient, cobble stoned island. Packing properly means having enough accepted currency on-hand for life’s little excursions. It also means including a strategic mix of big-ticket items like durable hiking boots you know you’ll use (equities and bonds), and smaller day tripping accessories such as a lightweight windbreaker, Gravol and yes, dare we say… a fanny pack (mortgages, real estate and private debt). Likewise, at Nicola Wealth, we make sure your portfolio provides the flexibility you need to enjoy every aspect of the journey, as you work towards your long-term goals.

Why is Asset Allocation Important?

The importance of asset allocation lies in creating a portfolio which will have one area doing well when another is not. This can result in a portfolio that has less volatility by mitigating investments that drop in value with investments that go up. The objective is that over the long term, the entire portfolio is generating a reasonable rate of return. In fact, studies have shown that 90% of investment performance is due to asset allocation, as opposed to market timing or securities selection. The asset allocation that’s best for you at any particular point in time depends on your current personal circumstances, your comfort level with risk, and most importantly the goals and objectives you have set out in your financial plan.

In the same vein, not everyone has an appetite for adrenaline fueled expeditions (high-risk portfolios). For example, you may not have the stomach for heli-skiing untouched terrains in BC’s back country or trekking the Himalayas – but if you did, surely you’d consult with your Sherpa about how many oxygen tanks versus how many water bottles you need to pack before leaving the base camp. Your dream vacation may be more along the lines of soaking up some Vitamin D on a hot tropical beach (low risk portfolios), and that’s great but even then, packing a swimsuit and sunscreen won’t cut it. After all, sometimes it rains…even in Hawaii. Point being, a diverse customized portfolio is paramount when it comes to building personal wealth at a pace that meets your goals and always stays within your comfort zone.

Varying market conditions can cause an investment’s value within those asset classes to rise and fall and, up until relatively recently, the returns of the two main asset classes (stocks and bonds) have not moved together. In fact, market conditions that resulted in one asset class doing well, often resulted in another asset class under performing.

Here’s an example. In 1999, Emerging Markets had an average return of 56.70%, Foreign Equities had a 18.20% return, and who could forget U.S. Technology with a 68.24% return. The Canadian Bond market had a lack-luster -1.14% return.⁴

The following year, Emerging Markets were down -28.10%, Foreign Equities were down -9.55% and U.S. Technology was down -38.65%. Canadian Bonds, however, were up 10.26%.⁴ There are numerous other examples of similar situations throughout market history. Prior to 2008, by including a traditional balanced portfolio, investors could, for the most part, protect themselves against significant losses when market conditions changed.

Unfortunately, it appears this convenient negative correlation is not what it used to be, from August through October 2008, U.S. stocks lost more than 22% of their value and U.S. bonds lost nearly 14% of their value. Clearly 2008 was a uniquely dire financial crisis, but the ‘no place to hide’ trend could materialize more often with the outlook of higher inflation and interest rates. One would be justified to worry if stocks and bonds continue to experience drawdowns at the same time.

Luckily, not all asset classes have joined the positive correlation theme, which can be illustrated by Nicola Wealth’s broad diversification and corresponding out performance compared to the Morningstar Canadian Neutral Balanced Index in 2008 and 2018.⁵

The same can be said for how climate change has affected travel planning. There was a time when all you had to do was check out the weather channel prior to packing your suitcase. Now, with more and more extreme, and often unpredictable, weather systems becoming the norm in all parts of the world, you need to be prepared for all eventualities. Political landscapes can be just as volatile these days too. You never know when a world leader will befriend a ruthless dictator or launch a trade war with a long-time ally. Consequently, you may need different visas for various ports of entry, customary clothing to appease newly instated cultural practices and lightweight luggage for hasty exits from areas of civil unrest. In short, you need someone who stays abreast of the latest travel advisories (market upsets), and can plan, prepare and adjust your itinerary (portfolio) accordingly.

Conclusion

At nicolawealth.com we have the chart (below) which illustrates that it has not been a good time to be invested in a 60/40 stock/bond portfolio for a long time. After fees, the Morningstar Neutral Balanced Index has a net return of about 4.5% annually or about 2.5% after inflation. Well below the 4% real rate of return we feel clients require to build wealth and retire comfortably.

Expertise is at the core of what we do. Sure, you can Google around for some financial advice, or in our example, vacation pointers, but you run the risk of getting one-size-fits-all advice – at best. It’s not the most reliable way to get information for sound decision-making. Put it this way: if you’ve spent the better part of a lifetime dreaming of, and saving up for, an epic vacation, you wouldn’t rely on unsourced travel tips from a fly-by-night, social media influencer, would you? No, you’d turn to a well-versed expert who can back their travel advisories with facts, extensive knowledge of the landscape and years of experience.

Our client’s returns (represented by the blue line called Nicola Wealth Core Composite Return) has returned 7.05% net of fees since January 1st, 2000 or 5%/year after inflation.

This has been achieved through our diversified broad-based approach to asset allocation and our commitment to cash flow investing. Today, we feel this strategy is more important than ever and we will continue to utilize this approach when constructing and managing client portfolios. Your goals are our goals. In other words, we invite you to enjoy the journey while we take care of the destination.

[1] Source: Statistics Canada

[2] Annual returns from January 1, 2009 to September 30, 2019

[3] Source: BloombergCOMPASSA

[4] Source: Bloomberg

[5] Refer to Conclusion and final page of newsletterGROWTH

This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This investment is generally intended for tax residents of Canada who are accredited investors. Some residency restrictions may apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. The Nicola Core Composite returns represent the total returns of Cdn. dollar denominated accounts of all fee-paying portfolios with a Nicola Core mandate. The composite includes clients who are both fully discretionary and nondiscretionary. Historical net of fee composite performance returns are calculated using individual realized time-weighted client returns net of fees and is presented before tax. The Nicola Wealth inclusion policy is based on clients’ weights at calendar month end. The composite returns are asset-weighted based upon ending monthly market value. The Nicola Core mandate may change throughout time. Additional information regarding policies for calculating and reporting returns is available upon request. The composite returns presented represent past performance and is not a reliable indicator of future results, which may vary. The Nicola Wealth Core Portfolio Fund past performance is not indicative of future results. Returns are net of fund expenses. Please refer to the Nicola Wealth Funds sales disclosure document for additional details and important disclosure information. The Nicola Wealth Core Portfolio Fund Asset Mix takes into consideration only the primary asset class of the aggregated funds but does not take into consideration the underlying fund’s holdings of other asset classes. For example, the Nicola Primary Mortgage Fund is allocated in its entirety to “Mortgages” even though it holds some “Cash.” Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. Client returns are net of Nicola Wealth portfolio management fees.

The post Compass: Broaden Your Horizon with Diversification appeared first on Nicola Wealth.

By Rob Edel, CFA

Highlights This Month

• • • • • • • • • How will Coronavirus impact the markets?
                • Geopolitics was on investor radar screens.
                • Complications to the U.S./China Trade War.
                • It gets better (for Trump that is).
                • Global growth looked to be turning a corner.

Read the pdf version

Nicola Wealth Portfolio

Returns for the Nicola Core Portfolio Fund were +1.1% in the month of January.  The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Wealth Pooled Funds and Limited Partnerships.  Actual client returns will vary depending on specific client situations and asset mixes.

The Nicola Bond Fund returned +0.8% in January. Corporate spreads overall were flat to slightly tighter for the month with financials, particularly the shorter dated auto finance sector leading the narrowing. While we remain short duration focused, net new issuance during the month continued to push further out the duration of the overall market. The overall rates curve flattened during the month as a more dovish Bank of Canada coupled with fears over the Coronavirus caused investors to look for more defensive positioning.

The Nicola High Yield Bond Fund returned 1.9% in January. The strong month came despite spread widening in the US. The larger scale trends seen in 2019 continued into the New Year as high quality BB names continued their divergence with CCC names while energy names were down more than 2% during the month. Energy saw a tidal wave of new issuance during the first couple of weeks of the year which has almost matched the issuance across the sector seen in all of 2019. Overall, new issuance was very active during the month with the most activity seen in the past 2 years while demand was less supportive as retail fund flows saw a net outflow during the last 2 weeks of the month. Approximately 6% of the market now trades with distressed prices (less than $80), which likely points to a pick-up in default rates. Currency added 1.0% to fund returns as approximately 50% of the fund is in US dollars which strengthened steadily during the month.

The Nicola Global Bond Fund was up 0.7% for the month. Although we do not believe there are material risks on the short term horizon with the IMF lowering its expectations on global growth this year and next, there is a potential for some market re-pricing. Overall the portfolio has positioned into a slightly more defensive posture with incrementally more exposure to risk off currencies like the Yen and some Scandinavian currencies although we still maintain select credit exposure. Manulife contributed most to returns for the month as both sector and country allocations were positive contributors to returns.

The Nicola Wealth Mortgage Pools continued to deliver consistent returns, with the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund returning +0.3% and +0.5% respectively last month. Current yields, which are what the funds would return if all mortgages presently in the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.0% for the Nicola Primary Mortgage Fund and 5.5% for the Nicola Balanced Mortgage Fund.  The Nicola Primary Mortgage Fund had 19.3% cash at month end, while the Nicola Balanced Mortgage Fund had 14.8%.

The Nicola Preferred Share Fund returned -0.1% for the month while the BMO Laddered Preferred Share Index ETF returned 0.1%.  The market was positive during the first half of the month but reversed direction as concerns on the Coronavirus started to impact financial markets. The Bank of Canada left rates unchanged but concerns on weaker growth contributed to the 5 Year Government of Canada Bond yields falling from 1.69% to 1.28%. Technicals in the marketplace remain constructive as both Brookfield and Artis REIT have been buying back preferred shares while there has not been a new preferred share issue since May 2019, limiting supply in the marketplace. The risk off tone saw investors generally waiting on the sidelines as volumes during the month were muted and those investors participating in the market mainly focused on more defensive positions.

The S&P/TSX was up +1.7% while the Nicola Canadian Equity Income Fund was +0.8%. The Financials sector was the largest positive contributor to the Index in January followed by Information Technology. Energy was the largest negative contributor as investors fear what the impact of the Coronavirus will be on global growth.

The underperformance of the Nicola Canadian Equity Income Fund was mainly due to being underweight Information Technology, and poor results from holdings in the Consumer Discretionary category. The top positive contributors to the performance of the Nicola Canadian Equity Income Fund were Cargojet, Aritzia, and NFI Group. The largest detractors to performance were Spin Master, Methanex, and Air Canada. In January we added four new positions: Northland Power, Andlauer Healthcare Group, Open Text, and Kirkland Lake Gold. We sold Artizia and Teck Resources.

The S&P/TSX was up +1.7% while the Nicola Canadian Tactical High Income Fund was -1%. The Financials sector was the largest positive contributor to the Index in January followed by Information Technology. Energy was the largest negative contributor as investor fear what the impact of the Coronavirus will be on global growth.  The top positive contributors to the performance of the Nicola Canadian Tactical High Income Fund were NFI Group, Sleep Country and Guardian Capital Group. The largest detractors to performance were cyclical names which were hit hard: Methanex, Westshore Terminals and West Fraser Timber.

The Nicola Canadian Tactical High Income Fund is overweight in the cyclical and value sectors as option writing is usually attractive in these areas and these names underperformed in January. In January we added six new positions: Enbridge, Royal Bank, Telus, Manulife, Ag Growth, and Northland Power. We sold KP Tissue and Sleep Country.  Currently the Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 70% and the projected cashflow yield on the portfolio is 8.6%.

The Nicola U.S. Equity Income Fund returned +0.6% vs -0.04% for S&P 500. The Nicola US Equity Income Fund’s relative outperformance was due to being overweight select names in Info Tech (Microsoft & VISA), Communications (Alphabet) & Utilities (Nextera Energy).

The worst performing stocks were within the Energy, Materials, Health care & Financials sectors which were impacted by a Coronavirus uncertainty, lower interest rates and Bernie Sanders moving up in the betting markets.  Call option activity increased during the month as the Nicola U.S. Equity Income Fund took advantage of heightened volatility.  The Nicola U.S. Equity Income Fund ended the month 19% covered with a delta-adjusted equity exposure of 90%. New positions included Dollar Tree, Tractor Supply Company & John Deere.  We sold our position in Vulcan Materials and reallocated to new names above.

The Nicola U.S. Tactical High Income Fund returned +0.3% vs -0.04% for S&P 500. The Nicola U.S. Tactical High Income Fund’s relative outperformance was from two stock specific events and being underweight the worst performing sectors last month (Energy, Materials, Health care & Financials) which were impacted by a Coronavirus uncertainty, lower interest rates and Bernie Sanders moving up in polls.

Stock selection was mixed: positive contribution from select Consumer Discretionary stocks (Delphi & L Brands were involved in separate M&A discussions) were partially offset by a few names within the industrial sector (FedEx, Deere and Boeing).  Option volatility spiked 37% during the month (13.8% to 18.9% vol) and the Nicola U.S. Tactical High Income Fund was very selective in deploying capital (excess cash of 18% at the beginning of the month; 2% excess cash at month-end).   The delta-adjusted equity rose slightly from 37% to 50% and four new names were added to the portfolio: UnitedHealth Group, Walmart, Comcast and Disney.

The Nicola Global Equity Fund returned +0.3% vs +0.5% for the iShares MSCI ACWI ETF (all in CDN$).  The Nicola Global Equity Fund slightly underperformed due to country/region mix (underweight U.S., overweight Asia) and our underweight in Info Tech; however, these were largely offset by our overweight in Consumer Defensive companies through Valueinvest and by our growth-focused manager, C Worldwide.  Performance of our managers in descending order was C Worldwide +2.0%, ValueInvest +1.6%, Lazard +0.4%, NWM EAFE Quant -0.6%, Edgepoint -0.9%, BMO Asian Growth & Income -1.6%.

The Nicola Global Real Estate Fund return was +3.1% in January vs. the iShares (XRE) +4.5%. Publicly traded REITs had a strong month after a down month in December.  10 year Canada bond yields declined in the month from 1.70% to 1.27% as investor worry about global growth and the low interest rate environment is positive for real estate and property level fundamentals are improving.

The Nicola Global Real Estate Fund also benefited from a strong USD which appreciated 1.9% vs. CAD in January. We added Artis REIT to the portfolio this month.  We report our internal hard asset real estate Limited Partnerships in this report with a one month lag.  As of January 31^st, December 31^st  performance for the Nicola Canadian Real Estate LP was +1.3%, Nicola U.S. Real Estate LP +0.8%, and Nicola Value Add LP +0.2%.

The Nicola Alternative Strategies Fund returned 2.2% in January.  Currency contributed 1.2% to returns as the Canadian dollar weakened significantly through the month. In local currency terms since the funds were last priced, Winton returned 0.5%, Millennium 1.3%, Renaissance Institutional Diversified Global Equities Fund -0.2%, Bridgewater Pure Alpha Major Markets 2.3%, Verition International Multi-Strategy Fund Ltd 1.4%, RPIA Debt Opportunities 1.4%, and Polar Multi-Strategy Fund -0.1%. Broadly speaking strong returns overall for the fund with Bridgewater’s overall long net exposure to global equity markets being supportive to returns.

The Nicola Precious Metals Fund returned 3.0% for the month while underlying gold stocks in the S&P/TSX Composite index returned 2.9% and gold bullion was up 6.7% in Canadian dollar terms. RBC Global Precious Metals lagged the overall gold equity market as Wesdome Gold mines reversed course during the month and gave back some returns from its torrid pace over the past two years.

Both Detour and Kirkland were larger detractors over the month as well. Kirkland announced intentions to acquire Detour in November 2019 and the deal was completed recently. Both names sold off during the month as the transaction came to completion but we remain constructive on the acquisition and Kirkland.

January in Review

The strong market momentum we saw at the end of 2019 carried through to the New Year as most markets continued to melt slowly higher in January.  So consistent was the market’s performance, in fact, that one needed to go back as far as October 15^th to find the last time the S&P 500 had more than a 1% daily move, either up or down.

This unusually “quiet” streak was broken on January 27^th when the S&P 500 fell nearly 1.8%.  What was behind this extended 70 day period of calm, and what caused it to be interrupted?  As we discussed last month, the trade truce between the U.S. and China and an accommodative Federal Reserve have helped create a “risk on” environment in global capital markets.  Both these factors should help stabilize global growth in 2020 and increase investor confidence.  If anything, concerns the enthusiasm of the market advance would soon outstrip the more positive economic fundamentals was more on investor radar screens than threats of a recession and declining earnings.

How will Coronavirus impact the markets?

It was uncertainty around the Coronavirus, more formally known as 2019-nCoV that caused the market to turn lower in late January. It’s still too early to forecast the ultimate impact 2019-nCoV will have, but most believe the damage will be confined mainly to China and only impact the first quarter.

At best, 2019-nCoV could have helped give the markets a needed breather before continuing its march higher. At worst, it could be the start of a recession and a bear market.  We  think the former is more likely and will spend the rest of this commentary delving a little deeper into the Coronavirus and its impact, as well as checking in on other market drivers like the U.S. election, which is starting to heat up.

Geopolitics were on investor radar screens.

While the Coronavirus caught the market off guard, Geopolitics was on investor radar screens. It was the growing threat of a military conflict between the U.S. and Iran that investors were focused on in early January.

A U.S. drone killed a top Iranian General in Iraq and Iran retaliated by launching a missile attack on U.S. bases.  Market reaction was fleeting with a brief correction quickly erased as both countries appeared motivated to de-escalate and ease tensions in the region.

Continued protests in Hong Kong and a landslide election result in Taiwan resulted in the re-election of anti-reunification President Tsai Ing-wen (throwing cold water on China’s “one county, two systems” aspirations for the country). This made little impression on the steady march higher for markets.  Not even the announcement from Prince Harry and Meghan Markle, the Duchess of Sussex, and their intention to step back from their royal duties was enough to shake the confidence of traders.

We throw this one in there not only to lighten the mood a little, but to fairly point out it did dominate the news channels early in the New Year.  The fact that the happy couple might settle in Canada made the story even more all-consuming.  Perhaps more seriously, the Australian wildfires also dominated headlines and will have a far greater impact on the markets over the longer term as climate change becomes an important topic for investors to consider.  While certain alternative energy stocks and sectors were positively impacted, the wildfires didn’t seem to trouble the broader markets overall.

While the outbreak was first officially reported to the WHO on December 31, it is believed to have originated in a seafood and meat market in Wuhan China earlier in the month, or even November.  The speed in which the virus has spread and China’s swift reaction has been unprecedented.

On January 23^rd Wuhan, the epicenter of the outbreak and a city of 11 million, was locked down, quickly followed the next day with nearly the entire province of Hubei and it’s over 50 million inhabitants coming under quarantine.  The closest comparison the market has to weigh the severity of the Coronavirus outbreak is SARS, which originated in Southern China around November 2003 and eventually infected over 8,000 people worldwide causing 774 deaths.  The good news with the Wuhan Coronavirus is that the fatality rate is much lower, but it has spread much more quickly, likely because the incubation period is much longer and those infected can spread the virus before even showing any symptoms.

The hope is the virus remains largely contained to Wuhan and slowly burns itself out by the end of March.  The key is the number of daily new cases.  Once the peak has been confirmed, the markets will become more confident that the damage can be more accurately assessed.  Goldman Sachs recently forecast a 1.6% hit to China’s first quarter GDP growth resulting in a 6.4% quarter on quarter annual rate decline.

In layman terms, this would mean Q1 Chinese GDP would be essentially zero.  The negative impact just from a reduction in Chinese growth could take 1% off global growth, however spillover effects to the rest of the world would likely result in a 2% overall hit.  If the impact is confined to Q1, the reduction to global growth for 2020 might be only 0.1 to 0.2%.  A horrific and scary event for China and those affected, but an event the market will likely look past.  Let’s all hope this is the case.

Complications to the U.S./China Trade War.

Apart from the negative hit to global growth, the timing and negative impact of the virus also complicates one of the positive drivers for the market rally, the trade deal between the U.S. and China.  President Trump and China’s Vice Premier signed the first phase of the U.S.-China trade agreement on January 15^th, in which China has committed to buy an additional $200 billion of U.S. goods over the next two years. Hitting these targets was always going to be a stretch given it is projected to take America’s share of total Chinese imports from 9% to 17% (based on 2017 totals), but given China’s economy has ground to a virtual standstill, progress on these targets is likely to lag expectations.

If President Trump is looking for an out on the deal, he will likely get an opportunity by claiming China isn’t living up to their side of the bargain.  Trump will probably cut China some slack, however.  While the market has largely discounted the positive impact of the trade deal, corporate America has not.  Trump needed the trade deal to ensure the economy remained on track leading up to the November election.  It’s in Trump’s best interest to let business confidence heal and hope capital spending recovers.  If anything Trump could actually lower tariffs if the impact of the virus hurts global growth more than expected and threatens the U.S. economy.

From President Trump’s perspective, status quo is pretty good right now.  In fact, the Donald probably had his best week as President in early February.  The Senate acquitted Trump on articles of impeachment, Gallup reported his approval rate hit 49%, the highest since he took office, 63% approve of his handling of the economy, and a J.P Morgan study showed the economic backdrop is at the highest level of any incumbent President running for re-election since 1900.

It gets better (for Trump that is).

On February 3^rd, the Democrats kicked off their official nomination process with the Iowa caucus, and it was a complete disaster.  As we write, we are still not sure who the winner was, though it is likely that President Trump will be declared the only real winner!  Problems with a voting app and irregular totals resulted in an inconclusive result that robbed both Bernie Sanders and Pete Buttigieg, the two eventual front runners, the momentum normally ascribed to the victor of the Iowa Caucus.

Sanders looks to have won the popular vote, but may have been edged out by Buttigeig in the delegate count.  It is close.  This is significant because Sanders is expected to do well in the New Hampshire primary on February 11^th, and according to Strategas, no candidate from either party has won two of the first three primaries and not gone on to win the nomination.

More problematic for the Democratic establishment, however, was Joe Biden finishing well back in fourth place.  Biden was running neck and neck with Bernie Sanders according to polls, but faded badly, gaining less than 14% of the Iowa delegates.  Biden has campaigned on the idea that Trump can’t be allowed to serve another four years and he was the best chance to prevent this from happening.  The fact he came in fourth in Iowa raises serious questions about whether this is true, or if Pete Buttigeig, the 38 year old Mayor of the fourth largest city in Indiana is the best person to take on Trump.

The prospect of Biden dropping out of the race and Bernie Sanders becoming the front runner presents a huge problem for the Democratic Party establishment.  Sanders is a self-declared “democratic socialist” in a country where, according to a recent NBCNews/Wall Street Journal survey, only 19% of registered voters expressed positive views of socialism versus 53% negative, including 41% who were very negative.

Don’t think President Trump doesn’t know this and will make it the focus of his campaign if he goes against Sanders.  The problem for the Democrats is those 19% are Sanders’ base and they are likely to walk away if he doesn’t become the nominee.  Democrats don’t want Sanders, but they need his supporters.  Democrats might not agree with his policies, but no one in the field is able to energize their base like the 78 year old Senator from Vermont, certainly not sleepy Joe.

Many feel the Democrats erred in 2016 by alienating Sanders and his followers during the heated nomination battle in which Hilary Clinton ultimately emerged as victor, only to be upset by Trump.  Referring to Sanders, Clinton was recently quoted as saying “nobody likes him; nobody wants to work with him”.  This sounds like sour grapes from a beaten and humiliated Clinton who felt Sanders stayed in the race too long and weakened her chances of beating Trump, or a jab from a Democratic party insider concerned Sanders could win the nomination and destroy any chance of the Democrats taking back the White House in November.

Likely a bit of both, we would point out nobody liked or wanted to work with Trump either, but that didn’t stop him from becoming President.  According to BCA Research, the U.S. is moving towards the left with more Americans believing the Government should be taking a larger and more active role.  Sanders’ policies, like Medicare for all, the cancellation of student debt, and free tuition, were considered radical in 2016 but are more mainstream now and have been endorsed by many of his running mates.  They are expensive, however, and in an economy that appears to be working, why take the risk?

A Sanders Presidency would be a disaster for the markets, and even the smallest chance of this happening is not being discounted in the market.  Interestingly, however, Sanders winning the Democratic nomination might be good for the markets if the market believes Trump has a better chance of beating Sanders than Biden or Buttigeig.

Michael Bloomberg, the wildcard.

There is, however, one wildcard we haven’t discussed yet, namely Michael Bloomberg.  Bloomberg strategically chose not to even put his name on the ballot for the first four Primaries, opting to wait for March 3, aka Super Tuesday, when 14 states, including delegate rich California and Texas go to the polls.  Bloomberg is being strategic, not economical.  According to RealClearPolitics the former NYC Mayor, worth an estimated $55 billion, who  is self-funding his campaign, has spent an unprecedented $301 million as of the end of January and directed his staff to ramp up ad spending even more after Biden’s poor results in Iowa.

Like Biden, Bloomberg is a moderate who believes defeating Trump is job one.  He is aware splitting the moderate vote with Biden could hand the nomination to Sanders and ultimately a victory to Trump.  By taking a pass on the early primaries, Bloomberg positions himself as the alternative if Biden falters, which it looks like he has.  Unlike the other candidates, Bloomberg can stay in the race as long as he wants.  Bloomberg is said to be willing to spend $500 million on the Democratic nomination, and up to $1 billion on the entire election, even if he doesn’t stay in the race.  Can an old white New York Billionaire become President?  Well, you know the answer to that one.  It might not excite the Democratic base, but the markets would be happy with either Billionaire. An old white socialist, not so much.  So far, the U.S. election isn’t impacting the market, but it is early days and it has the potential to be the number one issue for investors in 2020.

Global growth looked to be turning a corner.

In the meantime, the economy is what investors will likely be focused on, and up until the Coronavirus outbreak, global growth looked to be turning the corner.  Manufacturing indices in Asia, Europe and the U.S. appeared to be inflecting higher in January, and a strong job market in the U.S. is keeping consumer confidence high and insulating the U.S. economy from geopolitical issues like the U.S. China trade war.  U.S. stocks moved higher last year despite flat corporate earnings.

Valuations increased as the Fed lowered rates in an attempt to stimulate the economy.  This year, earnings are expected to do more of the heavy lifting as the Fed stays on the sidelines.  How investors discount the impact of the Coronavirus and Sanders’ rise in the polls could determine how this scenario plays out.  Low interest rates and simulative financial conditions are a powerful elixir for the market, but uncertainty tends to have the opposite effect.  We have a lot of both so far this year.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Returns are quoted net of fund/LP expenses but before Nicola Wealth portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. For a complete listing of Nicola Wealth Real Estate portfolios, please visit www.nicolacrosby.com. All values sourced through Bloomberg. Effective January 1, 2019 all funds branded NWM were changed to the fund family name Nicola. Effective January 1, 2019 Nicola Global Real Estate Fund, Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add LP adopted new mandates and changed names from NWM Real Estate Fund, SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.

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TORONTO, Ontario, February 12, 2020 – Nicola Wealth Real Estate recently acquired 1160 & 1170 Birchmount in partnership with Northbridge Investment Management. The property is a multi-tenant two-building industrial asset totalling 362,000 sf on 14 acres in Toronto (Scarborough), Ontario. This acquisition is part of Nicola Wealth’s ongoing strategy to acquire well-located industrial assets that offer growth potential.

A shortage of developable industrial land in Toronto has driven land prices higher which has resulted in rental rate growth and property appreciation. The asset is currently 99% leased to a variety of tenants and the property’s average in-place rental rates are below market. These factors, combined with the weighted average lease term at less than 3 years, provides an opportunity to add value by increasing rents within the foreseeable future.

Across Canada, industrial real estate in major markets is in high-demand with minimal new supply coming on stream. The vacancy rate in the GTA, and more specifically the Scarborough submarket, are at record lows of 1.1% and 1.0% respectively, according to Colliers International’s GTA Industrial Market Report, Q3 2019. The low  industrial vacancy rate coupled with strong tenant demand in the Toronto area ensures this property is well positioned for growth.

To learn more about the Nicola Wealth Real Estate funds, you can visit realestate.nicolawealth.com.

About Nicola Wealth Real Estate

Nicola Wealth Real Estate (NWRE) is the in-house real estate team of Nicola Wealth, a premier Canadian financial planning and investment firm with $7-billion (CAD) of assets under management. NWRE has an experienced and innovative team that sources and asset manages a growing portfolio of properties in major markets across North America including a diversified range of asset classes including office, retail, industrial, multi-family residential, self-storage, and seniors housing. The current real estate portfolio is $4.0 Billion gross asset value.

About Nicola Wealth

Established in 1994, Nicola Wealth (www.nicolawealth.com) helps families and accomplished individuals across Canada build financial legacies with purpose, delivering the stability, security, and resources they need to focus on goals and aspirations that extend beyond wealth.  The firm manages $7-billion in assets, providing portfolio diversification well beyond stocks and bonds, comprehensive and integrated wealth planning, and consistent and stable returns.

The post Nicola Wealth Advances Real Estate Strategy by Acquiring Industrial Property in Toronto (GTA) appeared first on Nicola Wealth.

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Here are some of the reasons why Nicola Wealth was selected as one of BC’s Top Employers (2020):

• Nicola Wealth lets all employees share in the firm’s successes through share purchase, profit-sharing and year-end bonus programs that are open to all employees
• Nicola Wealth’s employee social committee organizes a fun and busy social calendar for all employees, including monthly birthday parties, a summer party with live music and fun activities, a uniquely themed Christmas party at a downtown hotel and monthly kayak outings as well as supporting various employee sports teams
• New employees at Nicola Wealth start with three weeks of paid vacation and all employees receive up to 10 paid personal days that can be used for illness or personal reasons — and unused days are carried forward into the next year as half vacation days

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Sophia Ito shares how pursuit of challenges, natural curiosity, and unique ‘share the pie’ culture drove her success.

By Leo Almazora

Read article online | View pdf version

When asked how it felt to be recognized on Wealth Professional’s Top 50 Advisors list for 2020, Sophia Ito described it as: “Pretty incredible, but also humbling.”

Ito is the top female advisor on the list this year, though she considers that to be a mere detail. “It doesn’t matter if you’re female or male,” said the financial advisor from Nicola Wealth. “It’s about how confident you are, and how good you are at your craft.”

While the list recognizes individual advisors at the peak of their game, she was quick to say that credit for her victory doesn’t belong to her alone. “It was a concerted effort by a group of people,” Ito said. “The advisor may be the face in front of clients, but I think it’s important to recognize the great team and dedicated company that’s been there all along.”

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Approaching Opportunities with 2020 Vision

Nicola Wealth Chairman and CEO John Nicola and Nicola Wealth Chief Investment Officer Rob Edel will discuss their thoughts on what 2020 has in store for investors and present strategic decisions for an uncertain future.

Rob Edel, Chief Investment Officer, will look at the short and long term factors likely to impact the economy in 2020, including:

• The US/China trade war and economic decoupling
• America’s 2020 election
• The global economy and worldwide inequality
• Fiscal and monetary policy in the US, Canada, and abroad
• Global warming and socially responsible investing

John Nicola, Chairman & CEO, will examine the value differences between private and public markets, focusing on:

• Modeling investment pools to minimize risk, improve returns, and preserve liquidity
• The place for public and private investments in an overall asset allocation
• How investors around the globe are approaching private markets
• Whether public markets are shrinking and how access to excess capital will impact corporations

EVENT DETAILS

Wednesday, April 8, 2020
Mission Hill Estate Winery (map)

6:00 pm Registration |Wine and hors d’oeuvres
7:00 pm Presentation | Reception to follow

This annual event is always well attended and fills quickly.
RSVP before April 1, 2020, to secure your seat.

Please RSVP to events@nicolawealth.com

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