On March 2, Nicola Wealth President David Sung, CIO Rob Edel and CEO John Nicola spoke to a full room at the Vancouver Convention Centre on what 2020 has in store for investors and how to navigate the markets in these uncertain times.

After an introduction by David Sung, Rob Edel spoke to short and long term factors impacting the 2020 economy and John Nicola addressed the value differences between private and public markets. If you are interested in reviewing their presentation slides, we’ve provided them below.

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The post Tales from the trenches: Female advisors describe obstacles, perseverance appeared first on Nicola Wealth.

By Chris Carosa

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Can you predict the future?

Don’t worry. That’s a trick question. No one can.

And yet, if you’re like most people, you do worry about it.

That’s normal. And it’s not really the future you’re worrying about. It’s the uncertainty.

Think about it. Are you more concerned about what will happen in the next minute or the next day? The next day or the next week? The next week or the next month? The next month or the next year?

As you move further distant in time from the present, you naturally become more uncertain. And with that progression, you have an inherent tendency to increase your anxiety.

Why do you think so many people fret about their own retirement? It’s not about the money. It’s about how so many far away uncertainties ravage their thinking.

“I would say the most critical factor in a successful retirement is not financial at all. As a financial advisor, sometimes you have to read between the lines. What most people really want to know about their portfolio is: Do I have enough for my future? I would say the most important part of retirement is peace of mind,” says Dan Trumbower, Senior Wealth Advisor at Halpern Financial in Rockville, Maryland.

While it remains impossible to see into the future, it is possible for you to reduce your stress as it relates to uncertainty. Just treat your own retirement the same way you approach project management at work.

You don’t have to be an engineer or a management consultant to understand project management. It’s just another name for a recipe. It’s simply a series of steps you take to, say, make a delicious cake.

Sure, the first time you make a cake you may be worried whether it will turn out right. But that worry is alleviated once you find the perfect recipe from that cover-worn old cookbook that’s been handed down to you from the generations.

With the confidence provided by this tried-and-tested numbered set of instructions, you can greatly reduce, if not fully eliminate, your culinary concerns. You’ve identified and acquired the necessary ingredients, collected the necessary cooking utensils and placed the oven at the proper preheat level.

You now stand athwart the winds of the future, ready to face uncertainty with the poise of a master chef.

While making a comfortable retirement isn’t as easy as making a cake, it does have a fairly reliable sequence of steps you can implement without too much effort. Undertaking these four steps, no matter where you are on the road to retirement, will help alleviate any retirement-related stress you might be experiencing as a result of today’s headlines.

Step 1: Start at the End: Picture the Perfect Retirment

Before you decide what cake to make, you must first envision it. That’s your starting point. You work backwards from that end image. Retirement is no different.

“It might sound simple although often overlooked, but the most critical factors that can make retirement comfortable is spending time thinking about what is most important to you, how you view a comfortable retirement, and what resources you will have to allocate for yourself now and in the future,” says Kayse Kress, Director of Financial Planning at Physician Wealth Services in West Hartford, Connecticut. “If you are not sure what the end goal looks like it is hard to create a long-term savings plan to account for your current needs and expenses while also planning for a comfortable future.”

Once you have the image of your retirement in your mind you can move on to the next steps. But be careful here. That image must have a firm foundation in fact. It cannot be mired in unrealistic fiction.

“Be honest with yourself in terms of goals and lifestyle in retirement,” says Patrick Healey, Founder and President of Caliber Financial Partners located in Jersey City, New Jersey.

Step 2: Define the Critical Path to Pave the Road Ahead

This step is often the most difficult to accomplish without help. It’s possible, but only if you’re very disciplined. That being said, it’s better to humble yourself and seek advice from those who have done this before than risk missing a link in the chain that results from this step.

That’s right, this step produces a series of instructions you must follow to attain the comfortable retirement you first pictured in Step #1. You may call this your “Financial Plan.”

“Having a Financial Plan is the most critical factor for a comfortable retirement,” says Amin Dabit, VP of Advisory Service at Personal Capital in Denver. “It’s the best way to make sure you are making good decisions and staying on track for a comfortable retirement. Having a plan will help you pinpoint the most important goals and the biggest concerns you have so you don’t get distracted by all the noise that is out there.”

This plan will offer tactical guidelines regarding your current budget in light of your future goals.

“Your savings rate and the amount you spend in relation to that savings is the most important factor to consider,” says Kress. “The closer you can align your current and long-term goals to the resources and savings that you have, the more comfortable you will feel with your finances overall not just in retirement.”

Ultimately, the portrait of your comfortable retirement should anticipate your post-retirement budget, too. This helps you better cook up the future of your dreams.

“For those preparing for retirement, it’s critical that they know the timing and sources of income they expect to receive,” says Ahmad Soleiman-Panah, a financial advisor at Nicola Wealth in Vancouver, British Columbia. “For business owners and incorporated professionals, most of their saving and investing is done in their corporations. How they draw that income out in retirement is a key decision, particularly as it relates to taxation.”

Step 3: Embody the Virtue of the Tao of Cash Flow

“Cash flow is the most critical factor of a comfortable retirement,” says Robb Hill, President of R Hill Enterprises, Inc. in Aurora, Illinois.

That adage cannot be understated. To the extent you can more accurately predict your retirement revenues and expenses, you’ll move that much closer to predicting the future. “It’s important that clients and their advisors meet before retirement and map out a strategy for how their income needs will be funded throughout retirement,” says Soleiman-Panah.

Indeed, cash flow represents the oil that keeps your retirement engine humming comfortably. “How much is enough?” says Michael Farrell, Managing Director at SEI Private Wealth Management in Oaks, Pennsylvania. “You need to know your cash flow number. It is the lifeblood of planning and can overwhelm any other assumptions. Keep on track and revisit allocation and capital market assumptions to be sure you are optimally allocated to meet your cash flow needs.”

Alas, here’s where you can err if you count your revenue chickens before they hatch. “Government-sponsored pension plans, such as Social Security in the United States or Old Age Security in Canada, will reduce your entitlements if your income from other sources exceeds certain thresholds,” says Soleiman-Panah. “If you plan to retire early or begin taking pension income before set retirement age, also expect to receive a reduced pension amount.”

Ironically, it’s precisely when bad news headlines dominate the media that the greatest opportunity to extend future cash flow potential presents itself. “With low interest rates and the need to have stocks in your portfolio to keep up with inflation, retirees often cannot depend solely on interest and dividends,” says Abbey L. Henderson, CEO, wealth advisor, and coach at Abaris Financial Group in Concord, Massachusetts. “Cash flow needs to be planned for and created.”

Step 4: Relieve Stress by Conducting a Stress Test

Are you more afraid of the future you don’t know or the future you don’t know you don’t know? In the past, retirement, while anticipated by the hands of an omnipresent countdown clock, came with blunt suddenness. This means you need to go beyond your grandfather’s financial plan when it comes to readying yourself for a comfortable retirement.

“The obvious answer from financial professionals would be ‘to have a plan,’ and that’s a great answer and a must-do,” says Marcia Mantell of Mantell Retirement Consulting in Needham, Massachusetts. “But what I find from talking to many retirees is that they need a structure to their days. If they retired all at once after working 40, 45 years, it’s like jumping off a cliff into a great unknown. It’s too abrupt. They are used to a schedule, chock-full of important things to do. They are accountable to others. Their opinions matter. Then, there’s nothing. So, setting up their days with some semblance of time management helps ease the transition. Otherwise, they end up sitting on the couch all day and with no accomplishments.”

Today, a phased retirement strategy is recommended. This allows you to kick the tires and take retirement for a test drive before committing to the long journey.

“Your financial strategy can of course contribute to your peace of mind in retirement,” says Trumbower. “A few years before retirement, it is a great idea to ‘strength test’ your portfolio. Create projections of many possible market scenarios to see how your portfolio would respond. This gives you really valuable information before it’s too late to make a change. Perhaps a different portfolio allocation is needed in retirement, or maybe working one or two additional years and contributing to your accounts during that time would make the portfolio much more resilient to shocks.”

Remember, these steps have a purpose. They’re designed to reduce your current retirement worry. They focus you on the here and now, the immediate tasks you can anticipate, control and complete.

Each tomorrow that you feel comfortable predicting sets your mind at ease when it comes to the tomorrow after that.

The post Retirement Worries Now? You Can Think Ahead With These Four Steps appeared first on Nicola Wealth.

Advisor explains his firm’s signature strategy, which he thinks will protect investors through the downturn

By David Kitai

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Investors should have taken on real estate ballast in their asset-allocation strategies before the current downturn, says one leading advisor. If they haven’t yet, he thinks investors should look for real estate exposure to protect capital.

Jason Nicola, a financial advisor at Nicola Wealth Management, told WP about the asset allocation strategy his firm has set their clients up with. He explained that they strike a three-way balance between fixed income, equities, and real estate to protect clients on the balance of probabilities. They’ve pushed for this defensive strategy lately, on the premise that North America, after more than 10 years without a recession, is due for an overall downturn.

“Ask yourself how much of your portfolio have you allocated to fixed income to publicly traded equities, maybe to real estate, maybe to alternatives,” Nicola told WP. “What were your reasons for setting those allocation targets? And have they changed?”

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By John Nicola, CFP, CIM, CHFC
Chairman & CEO

It is important to remember that above finances, the COVID-19 outbreak is a human tragedy, affecting hundreds of thousands of people around the world and, in doing so, is having a growing impact on both the global economy and daily life. This letter is intended to provide Nicola Wealth clients with our perspective on the evolving economic situation, the impact on the markets, and implications for their financial plans.

This newsletter reflects our perspective as of March 12, 2020. The current situation is changing quickly, and some of these written perspectives may fall out of date.

On March 9^th equity markets went into a freefall that saw many of them drop 10% in one day. The S&P 500 experienced its 7^th largest decline in 70 years. The next day (March 10^th) markets recovered significantly, but not completely, and had all of the earmarks of the proverbial dead cat bounce (my apologies to pet lovers). On the 12^th many markets had trading halted at the open as stocks fell the maximum allowed. As of the end of the trading day, the TSX, S&P 500, NASDAQ, all European exchanges and the Nikkei were in bear market territory (a drop of more than 20% from the last peak). Notably, the Dow Jones had its worst day in three decades.

In the meantime, investors are being asked to remain calm and stay the course. This reminds me of an old adage told to many of us years ago

When you’re up to your neck in alligators, it’s hard to remember that your initial objective was to drain the swamp.

You may be wondering, how much more will equity prices fall? What does this mean for the economy? Is all of this the result of Coronavirus?

As we strive for trust and transparency, we will lay out the facts and give you our interpretation of them. Most importantly, we will end with the actions we believe all of our clients should follow during this particular crisis.

This newsletter is written in three sections:

• Our current situation
• Looking at where we are in context
• Strategies and tactics we believe will perform best and that worked very well in during the last major crisis (the Great Recession of 2008/2009)

The Situation

As noted above, as of March 12^th almost all equity markets are down more than 20% off their peaks. The TSX is down 30% since early February and the S&P 500 25%. Commodity prices have fallen precipitously as global trade, tourism, and travel have been sharply curtailed as a result of many countries’ Coronavirus responses. Oil, in particular, has fallen about 60% from its 2019 high of $75/barrel to just over $30. Coronavirus infections now exceed 133,000 with more than 4900 deaths and 124 countries experiencing cases.

Interest rates have in some cases dropped to record lows. U.S. and Canadian 10-year bond rates are just over 0.6%, down from almost 2% 15 months ago. Swiss 10-year government bond rates are close to -.8%, which means that if one buys 10-year Swiss bonds today there is no interest paid for ten years and when the bond matures the investor receives just over 90% of their original investment. Other interest-paying vehicles such as high yield bonds and preferred shares have seen their prices fall (and correspondingly their yields rise) as capital moves in a flight to safety.

Canada’s dollar is now just over 72 cents USD as a result of a combination of being seen as an oil/commodity currency and a desire by investors to own USD. 2020 growth rates for all countries have been reduced and many economists now expect this to be a recession year as a result of the impact of Coronavirus on the global economy.

One would not be criticized for seeing our current situation as glass half empty, especially considering we are likely to see more bad news before this crisis ends.

However, all of the above should also be looked at in context of other similar periods.  As we know, fear and greed drive public markets in particular. So before we look at our current situation in context, let’s consider the following question investors are asking themselves and their advisors.

Would it be better to get out of stocks in this environment and wait until this crisis is over?

My initial response to that question is:

• Do you intend to stay out of stocks forever? If not, when would you buy back in? What would the signals need to be?
• In ten years’ time which asset class will perform better? Bonds or equities?
• What impact has this current market had on your wealth? What has the impact been on the cash flow your portfolio generates? What impact will there be on the security of your retirement and other important legacies?

It seems to me that at the very least investors should be able to answer all of these questions before making a decision to sell their current assets invested in equities.

For those investors who want to liquidate all equities now and buy back in at a lower price in the future, they need to consider the facts from 2009. When the market bottomed in March 2009, the economy was in the middle of a great recession. Unemployment was 8.7% in the US and 8% in Canada. It would continue to deteriorate and reach 10% in the US and almost 9% in Canada by November of 2009.

Investors need to ask themselves if they honestly would buy back into equities with both hands under these conditions. However, if they waited until the recession was officially over and unemployment peaked they would have missed out on the S&P500 recovering to 1100 (almost 70%). Market timing is for the young and the restless who would rather speculate and gamble than building wealth.

The Context & Comparison

It was almost 12 years ago that I wrote a series of newsletters, similar to this one, in the middle of the 2008 financial crisis that eventually came to be known as The Great Recession, a time when the S&P 500 had a peak to trough drop of 57% from November 2007 to March 2009. Through this period, nearly all U.S. banks required government funding, major companies accepted bailouts and U.S. unemployment increased to 10%. The damage was done and the U.S. GDP took three years to recover to the level achieved in 2007.

In the 21^st Century, there have been two major bear markets. The first was the so-called “Dot Com Crash” when over two years between 2000 and 2002 the S&P 500 dropped almost 50% while the NASDAQ was down almost 80%.  The financial fallout of the 2008/2009 Great Recession has been covered above. Our current equity markets peaked in early February 2020. As of now, we are barely a month into it.

It appears obvious that the cause of our current market conditions and any future recession we may experience is the Coronavirus crisis; however, we also have to remember that as of December 2019 the S&P 500 was at its highest valuation level since March 2000 (using the Case Shiller model of measuring PE ratios using ten years’ earnings) and second highest in history (more than 1929 and 2007). In addition to that, the US has not had a recession in more than 11 years. At some point, both a major market correction and a recession were inevitable. Coronavirus may have been a trigger, but is unlikely the sole cause if even the major one.

When investors experience markets such as this, their focus is almost exclusively on price as opposed to cash flow. Our focus has always been cash flow from dividends, interest, and rents. If these grow consistently over time, then prices tend to take care of themselves. As of now the yields of the S&P 500 and TSX have risen by as much as the market has fallen (25% and 30% respectively). What is happening is the cash flow being generated is the same as it was a month ago but since prices have fallen by 25-30%, it takes that much less capital to acquire the same cash flow as a month ago and this is the reason the yield on both indices have risen. While it is true that some companies may have to reduce their dividends during 2020, there are also many other companies with very strong balance sheets that will maintain their distributions.

Some typically solid financial stocks have fallen by more than 35-40%, we can buy $1 of dividend income for 35-40% less with a number of Canadian banks and Lifecos than we could just a few weeks ago. The chart below shows a number of Canadian and U.S. companies, how their prices have fallen, and, as a result, the impact on their current dividend yields. All of these companies have very strong balance sheets and should be able to support their current dividends comfortably.

As a group, these companies have fallen, on average, more than 25% and now payout dividends equal to a yield of just over 4.3%. As of March 11^th that was about 7x the yield on 10-year government bonds in Canada and the U.S.

As noted above, in the middle of the 2008 Financial Crisis we wrote two newsletters asking the question “How Bad Is It?” A more relevant question might be “How did our clients’ portfolios perform during 2008/2009?” Our average client experienced a net drop in account value of 6.5% for 2008 and a positive return of 14.8% in 2009, resulting in virtually no change in the annual cash flow that the portfolio generated. By comparison, a 60% equity (Canadian/Global) and 40% bond (Canadian/Global) portfolio would have earned a return of -1.5%/year (assuming total fees of 1% annually). That is approximately 11% less return over those two years. How was this possible? Follow along below for Strategies and Tactics.

Strategies and Tactics

So that brings us to what should we do now. What about our strategy for building wealth and a successful financial plan and what does that mean for our short-to-medium-term tactics?

First I’d like to state my opinion (and it is just that) of where we are now. I expect things to get worse. I believe a long-term resolution to the impact of Coronavirus is many months off and that it will create significant fallout in the real economy globally.  Those impacts are already being felt in tourism, transportation, supply chains, and capital investment, just to name a few.  When we combine that with the fact that equity markets were very expensive at the end of 2019, we need to be prepared for high volatility in asset prices, especially in public markets.

That caveat notwithstanding, we believe our approach should be as follows:

• Every investment strategy should have a financial plan bespoke for the individual or family who owns the assets. Now is the time to review that plan and reinforce the key objectives it is trying to achieve.
• In these markets, the focus on building cash flow is more critical than ever. This is a crisis that is also an opportunity to buy more income for considerably less money.
• Record-low interest rates provide an opportunity to refinance existing debt and perhaps lock in some or all of it for longer terms (5-year personal residence rates are approaching 2% from some lenders). We are reviewing all mortgages we have on our U.S. and Canadian real estate to determine where we can best apply these low rates. On an $80-million asset with a $40-million mortgage the impact of reducing a mortgage rate by 1% over 10 years is almost $4 million and would improve our return on equity by 1% annually for those 10 years.
• Market timing works for those who are lucky and then rarely consistently. The best way to take advantage of bear markets in any asset class is to rebalance on a regular and disciplined basis. Our average client had 32% of their portfolio in long-only equities (typical advisor recommendations are for 60-80% exposure to stocks).

As a result as of this week our Nicola Core Portfolio Fund is down about 3% net of fees on a YTD basis vs. more than 25% for many equity markets. Our objective is to systematically purchase equities and to do so even if markets continue to fall. The math worked in 2008/2009 and it will work in this environment.

When I wrote those  2008 newsletters, I wanted to build a special model to test our own belief that a truly diversified model should own real estate, private assets, public equities, and fixed income, not just 60/40 stocks and bonds. We used a hypothetical couple (Jonathan and Martha Kent and their baby named Clark) with a portfolio designed to resemble our own Nicola Core Portfolio Fund.

At the beginning of 1929 they invest a $100,000 inheritance and try to live off the income they hope it will generate from that point forward. We tracked their results during the entire 10 years of The Great Depression and six years of World War II (a much bigger crisis and challenging environment in which to invest than anything we have seen since then).

They survived the 16-year period with no significant impairment in their income or their capital and ended up with an after-inflation return of almost 5% annually throughout that very difficult investing period. The bottom line is that their portfolio was truly balanced and diversified; therefore, they were generating a significant portion of their return from cash flow.

Those principles of good investing and wealth building have not changed and they will be very effective, in our opinion.

This too shall pass.  And from our point of view, the glass is half full.

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. 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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VICTORIA, British Columbia, March 16, 2020 – Nicola Wealth Real Estate (NWRE) has recently completed a conversion of the former Harbour Towers Hotel into The James, a 219-unit rental tower with hotel-inspired amenities and breathtaking views of the Victoria Harbour and coastline. Located in the heart of Victoria’s James Bay neighbourhood, the iconic building takes on new life as a collection of contemporary rental units bringing much needed supply to the market.

When NWRE acquired the property in 2015, the building continued to operate as a hotel until 2017 when the real estate arm of Nicola Wealth decided to close the doors and begin the transformation and a new chapter for the aging building. Calling on the expertise of development partner, Omicron, the revolution of 345 Quebec Street started taking shape, including reconfiguring rooms to suites in the tower and cutting a new L-shaped courtyard through the two storey podium containing banquet and meeting rooms to create 37 new suites opening on to the new landscaped courtyard.  The indoor pool was retained and revitalized including a new fully glazed wall providing views and access to the courtyard.  Amenities also include a gym, great room and spaces to relax, work, and play.

Sustainable design features used throughout the project include new thermally efficient glazing, enhanced envelope insulation and low flow plumbing fixtures. “Energy modelling confirms that the sustainable measures implemented will result in the completed building using 29% less energy and 58% less water than the operating hotel in its last year of operation in 2016,” said Doug Vincent, Principal/Senior Director of Renewals at Omicron.

At a time when the rental crisis in the Victoria area continues to escalate and vacancy sitting around 1%, the added supply is welcomed.  “The James will deliver a new standard of service and resident experience that is generating excitement and a lot of anticipation in Victoria’s rental housing market that is in much need of new, high quality supply”, said Gary Lee, Managing Director, Residential with BentallGreenOak. “Our property management team has created partnerships with local businesses in the community to deliver compelling services to our residents and we look forward to welcoming them in mid-March.”

This project is the first build-to-own project within Nicola Wealth Real Estate’s greater real estate strategy. The firm has plans to identify other value-add properties of this kind to acquire and manage as part of their Value Add/Development portfolio.

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.

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By Rob Edel, CFA

Highlights This Month

• A start and end with COVID-19.
• The market decline.
• The economic cost of containment.
• COVID-19 could cost Trump the White House.
• An industry desperately in need of some good news is the oil industry.

Read the pdf version

Nicola Wealth Portfolio

Returns for the Nicola Core Portfolio Fund were -1.9% in the month of February.  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 +0.3% in February. Corporate spreads widened 11 basis points in Canada during the month while U.S. spreads widened 23 basis points as spreads for all sectors widened in sympathy with the equity market correction. Auto finance reversed course and widened 18 basis points after narrowing last month. In early March, the Bank of Canada matched the Fed’s 50 basis point interest rate cut in order to manage concerns on the potential economic fall-out from COVID-19. Despite credit spreads widening, the tremendous rally in treasuries saw all in yields move lower and helped support fixed income securities. Positive returns for the month were also supported by flows. Retail investors sold high yield funds and bought investment grade funds in a flight to quality.

The Nicola High Yield Bond Fund returned 0.7% in February. In local currency returns, the Nicola High Yield Bond Fund was relatively flat as U.S. dollar strength helped support the Nicola High Yield Bond Fund’s returns by 0.7%. Relative to the market, the Nicola High Yield Bond Fund held in strong as the market sold off approximately -1.7%. High yield spreads widened during the month to 600 basis points matching the highs in 2016. The collapse of oil prices caused energy to continue its underperformance. The default rate for energy now stands above 9% and the high yield distress ratio (which measures the % of the market trading below $80) has climbed to over 8%. Defaults are likely to continue to rise in the future. The Nicola High Yield Bond Fund flows were also negative for the month driven by ETF selling as retail investors flowed to more defensive positions. The selling caused pressure within BB issues as traders targeted the more liquid portions of the market to the Nicola High Yield Bond Fund’s redemptions.

The Nicola Global Bond Fund returned +0.1% for the month.  The Nicola Global Bond Fund’s exposure to risk assets in both developed and emerging markets detracted from performance as credit spreads widened around the world; Manulife was most impacted by their high yield bond exposure.

Duration produced mixed results with Templeton’s exposure in Asia ex-Japan and Latin America contributing to performance while their short-duration exposure to U.S. Treasuries (30 year) detracted from performance.  Currency positioning in Latin America (Brazilian Real), Asia ex-Japan and in Northern Europe (Norwegian Krone) detracted from performance, but was partially offset by strength in the Yen and USD$ exposure. Performance of our managers in descending order: Templeton Global Bond +0.5% (estimate), and Manulife Strategic Income Fund -0.1% and PIMCO Monthly Income -0.4%.

The 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 Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund 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 Fund had 17.8% cash at month end, while the Nicola Balanced Mortgage Fund had 13.7%.

The Nicola Preferred Share Fund returned -4.8% for the month while the Solactive Laddered Preferred Share Index returned -4.1%. The BMO Laddered Preferred Share Index ETF which tracks the Solactive Laddered index returned -2.8% as volatility in the market made it difficult for ETF market makers to oversee pricing for the ETF.

ETF market makers provide multiple vital roles for ETF’s including ensuring that the price of the ETF accurately reflects the value of the underlying instruments. During market volatility ETF pricing can deviate from the value of the underlying securities. We track the potential mispricing in the market place including the ETF market and have been selling the BMO ETF at a premium to the value of the underlying securities. This premium has since dissolved. Five year Government of Canada yields resumed their precipitous fall and were down 0.2% ending the month at 1.08%.

It wasn’t too long ago, October 2018, that Government yields flirted with 2.5% and had to look to buck the multi-decade trend of lower bond yields. At the current five year Government of Canada yields, we are at a level were the yield of the preferred share market will likely reset at the same value; however, if the five year Government yields move lower and stay low for an extended period of time, preferred share yields will reset lower.

The S&P/TSX was down -5.9% while the Nicola Canadian Equity Income Fund was -6.7%. There were no positive contributing sectors to Index returns in February as Coronavirus fears gripped the markets and investors sold everything. The underperformance of the Nicola Canadian Equity Fund was mainly due to being overweight the Industrials sector (and Air Canada in particular) which were hit hard in the month. Our Industrials sector positioning more than offset positive contributions from Health Care, Materials and Financials. The top positive contributors to the performance of the fund were Great Canadian Gamin, Nutrien and Andlauer Healthcare. The largest detractors were Air Canada, Maple Leaf Foods, and Ag Growth International. There were no new additions in February. Nutrien was our only sell.

The Nicola US Equity Income Fund returned -7.3% vs -8.2% for S&P 500. The Nicola US Equity Income Fund’s relative outperformance was due being underweight Financials and positive contribution from select stocks within Information Technology (Nvidia +14.3%) and Real Estate (Crown Castle called-away on February 21^st).   The worst performing stocks were within the Energy and Financials sectors which were impacted by Coronavirus and uncertainty around global growth.   Call option activity increased during the month as the Nicola US Equity Income Fund took advantage of heightened volatility.  The Nicola US Equity Income Fund ended the month 21% covered.  The delta-adjusted equity exposure is 92%.  New position(s): Walt Disney Company and Verizon Communications.  Sold positions(s): Crown Castle via call options.

The Nicola U.S. Tactical High Income Fund returned -7.6% vs -8.2% for S&P 500. The Nicola U.S. Tactical High Income Fund’s relative outperformance was due to being underweight Utilities and Materials (both 0% weights) and from certain stocks being called-away ($2.4M of L Brands and all of Dave & Busters were sold on February 21^st at significantly higher prices than month-end; 40% higher in Dave & Busters’ case).  The sectors and stocks that hurt performance were in Energy (Valero), Financials and Industrials.  Option volatility spiked 113% during the month (18.9% to 40.11 vol).  Unfortunately the Nicola U.S. Tactical High Income Fund deployed a lot of capital just days before the market sell-off which hurt performance. The delta-adjusted equity rose from 50% to 73%.  1 New name: Verizon Communications.

The Nicola Global Equity Fund returned -6.3% vs -6.7% for the MSCI ACWI Index (all in CDN$). The Nicola Global Equity Fund slightly outperformed the benchmark due to our underweights in Energy and Materials which were the worst performing groups in February. Performance was marginally offset by country/region mix (underweight US, overweight Asia) and our underweight in Communication Services which was one of the best performers. Performance of our managers in descending order was EdgePoint -8.9%, ValueInvest -7.5%, Lazard -7.5%, Nicola Wealth EAFE -7.3%, C Worldwide -5.1%, and BMO Asian Growth & Income -1.65%.

The Nicola Global Real Estate Fund return was +0.4% in February vs. the iShares (XRE) -3.5%. Publicly traded REITs experienced a correction in the month but outperformed the broad S&P/TSX which was -5.9%. A key factor to watch is the yield on the 10 year Government of Canada bonds which were down from 1.27% down to 1.13% as investors worried about global growth. Falling long government bond yields have the effect of pulling both cap rates and FFO/AFFO yields lower. We prefer the multi-family and industrial sectors that have strong cash flow visibility, stability and built-in growth, where the multi-year outlook appears strong for rental growth.

Investor demand for apartments continues to be strong as two private Canadian firms (Starlight Investments and KingSett Capital) agreed to purchase the country’s third-largest publicly traded multi-family REIT, Northview, at a 12% premium over what the REIT was trading at. As a result, we took profits and sold NVU-U. There were no new additions.

The Nicola Alternative Strategies Fund returned +1.1% in February.  Currency contributed +0.8% to returns as the Canadian dollar continued to weaken through the month. In local currency terms since the funds were last priced, Winton returned -0.8%, Millennium +0.5%, Renaissance Institutional Diversified Global Equities Fund +2.4%, Bridgewater Pure Alpha Major Markets -5.4%, Verition International Multi-Strategy Fund Ltd +0.8%, RPIA Debt Opportunities +1.0%, and Polar Multi-Strategy Fund +1.1%. The returns for Winton were impacted by energy, metals and fixed income. Profits in long exposure to U.S. government bonds were offset by losses from Brent Crude, gasoline, and heating oil in the energy space and copper in the metals space. Polar had strong returns during the month as arbitrage strategies continued to have steady returns despite the turmoil in the rest of the markets. Specifically, convertible bond arbitrage had a strong month as stock prices fell materially and although credit spreads widened, select credits did not see a commensurate sell off. In addition, given low volatility was in the marketplace, the Nicola Alternative Strategies Fund had hedges in place as a type of insurance policy for a large market correction. These hedges helped to stabilize overall returns.

The Nicola Precious Metals Fund returned -6.6% for the month while underlying gold stocks in the S&P/TSX Composite index returned -6.8% and gold bullion was up 1.0% in Canadian dollar terms. Overall gold stocks were on their way to having a strong positive month in the first three weeks of February until everyone hit the panic button and gold stocks fell in tandem with the rest of the market.

However volatility was already percolating underneath the surface during the first few weeks of February as well. Agnico Eagle and Kirland Lake Gold, two large gold producers, were down more than 15% and 10% respectively during the first three weeks of the month, even before the large sell off started on company specific issues. This highlights paradoxically that gold and gold stocks are both volatile and a safe haven asset. We manage the Nicola Alternative Strategies Fund with a mix between precious metal stocks and the physical metal and will continue to review the balance between the two. However, we believe the most recent sell-off was mainly due to profit taking as people were selling their winners since gold stocks are up 33.6% over the past year compared to 4.9% for the S&P/TSX Composite.

February in Review

Global markets are being buffeted by a number of issues simultaneously, but the situation is also extremely fluid such that it becomes difficult to report on events and markets without making a decision between what to discuss this month versus what may or may not be relevant in next month’s commentary.

We mention this not in an appeal for sympathy, but rather to acknowledge that much of what we write this month may become outdated by the time it is circulated.  We also can’t emphasize enough that while we confine our remarks to the economic and market related impact of events taking place, the impact on humanity far outweighs any investment considerations and our thoughts go out to all those directly impacted.  When we make this statement, we are of course referring to the corona virus (COVID-19), which had by far the largest impact on markets last month, and likely will again this month as well.  There were, however, a number of other events contributing to volatility, like the U.S. election, oil prices, and perhaps lost in all the noise, the movement towards alternative energy.  We will touch on all these issues this month, but because it was the major driver, let’s start, and end, with COVID-19.

A start and end with COVID-19.

Knowledge of the COVID-19 outbreak wasn’t a February event.  We discussed it last month and the bond markets have appeared to start discounting it’s impact since late last year, around the time Chinese doctor Li Wenliang began warning about a new illness being encountered in Chinese hospitals.

While equity markets sold off at the end of January, they recovered and went on to make new all-time highs on February 19^th  before starting a rather sharp nearly uninterrupted decline that has continued into March.  While it appears equity markets were ignoring the warnings bond traders were signaling. Hopes COVID-19 and its economic impact would be contained mainly to China were likely behind the continued advance.  As the death toll passed through 2,000 and containment appeared more and more unlikely, equity prices globally turned lower, confirming the positive price action not only of U.S. treasury’s (lower yields mean bond prices are higher), but other safe haven assets like gold and the Japanese yen.  The severity and abrupt nature of COVID-19 clearly fits the definition of a “black swan” event, which became more readily apparent to all investors when it became a global issue.

The market decline.

Perhaps most unnerving for investors are the speed in which stocks have declined.  From its February 19^th all-time high, it took a mere six trading sessions for the S&P 500 to drop a cumulative 12% and into correction territory (a drop of more than 10%), the quickest round trip from a market peak to market correction ever. Markets have suffered greater one day drawdowns, like October 19, 1987 when the S&P 500 crashed 22.6% in one day, but no market has fallen from an all-time high as quickly as we experienced last month.  Predictably, volatility has also spiked considerably higher.  Last month we highlighted how calm the market had been, with the S&P 500 going 70 trading days without a move of more than 1%, either up or down.

Since this calm streak was finally broken on January 27^th, moves in excess of 1% have become routine with trading volume spiking higher. Algorithmic and program trading can explain part of the volatility as certain market movements, such as prices falling below a 50 day moving average, for example, can trigger a pre-programmed sales of stock, but moves of this magnitude are clearly signs of uncertainty, of which there is plenty right now.

Confident that we know we don’t know a lot about COVID-19.

The one thing we can confidently claim we know about COVID-19 is that that there is a lot we don’t know.  We are not epidemiologists, and in fact didn’t even know what the word meant (Wikipedia: the study and analysis of the distribution, patterns and determinants of health and disease conditions in defined populations) before the COVID-19 outbreak.  Everything we know has been attained from public sources (newspapers) and investment industry research (who quote various experts on the subject).

In other words, we don’t claim to know any more about the virus than the general public, which unfortunately is very limited.  For this reason, we don’t feel it’s necessary to add to the daily commentary of speculation regarding what COVID-19 may or may not be, but rather highlight what metrics are important in determining what the ultimate impact will be for global markets and economies.

The two most important metrics in our opinion are how contagious and how deadly is COVID-19?  We still don’t know the answer to either.  Based on the data available so far, COVID-19 appears to be more contagious than the seasonal flu, but less contagious than SARS or the measles.  Like the flu, COVID-19 has been shown to be contagious before symptoms appear, though we don’t have a handle on how long.  According to John Hopkins University, symptoms start showing roughly five days after infection, but other researchers have found cases where the incubation period was a short as two days and as long as 27 days.  The medical Journal of Internal Medicine put the average incubation period at 5.1 days and believes 97.5% of those developing symptoms will do so within 11.5 days.  But not everyone infected will actually have symptoms.  Some estimate the number of infected people showing mild or even no symptoms at 80%.  This is important because in order to determine the number of people requiring care will be a function not only of the percentage of people infected, but also how sick they become.

Same for fatality rates.  Based on current data, fatality rates are running around 3.4% of reported cases, but if the actual number of people infected is much higher, the final fatality rate will be much lower, likely below 1%.  According to the Washington Post, in a briefing to Congress, U.S. Health Officials disclosed that they believe the fatality rate in the U.S. will likely be in the range of 0.1 to 1.0%.  The elderly appear to be more at risk while children less so, though researchers are not sure why.  There are no vaccines or cures.  The best advice health providers can give to people at present is to keep their distance, wash their hands, and don’t touch your face.

The estimated numbers.

It’s comforting that many people who get infected will show only mild symptoms, but the math can still get pretty scary if a large percentage of the population gets infected.  According to Dr. Amesh Adalja of John Hopkins University, 20% to 60% of the U.S. population will ultimately contract COVID-19.  Based on the lower end of this estimate, that would total about 60 million Americans and 7.5 million Canadians.   If based on China’s experience 20% of cases require hospitalization and 5% end up in critical care (Italy’s experience has been worse) and we assume only 20% of the 60 million infected are even identified, that still leaves nearly 2.5 million Americans (300,000 Canadians) fighting over less than 1 million hospital beds.

Of course not everyone will get COVID-19 at the same time, and there is still the hope warmer weather will diminish the threat, like the seasonal flu, though again, nobody knows if this will be the case.  The goal of containment or social distancing is to help spread out the infections such that the healthcare system is able to cope.  Containment appears to be working in China, and if North America can delay the spread of COVID-19 as long as possible, the impact might not be as severe as seen in China, South Korea, Italy, and Iran.  Combined with the superior health preparedness of the U.S. healthcare system, fatalities could end up closer to the low end of the range, closer to that of the flu.

The economic cost of containment.

There is an economic cost to containment, however. Morgan Stanley recently outlined three different economic scenarios in which they believe the impact of COVID-19 can unfold.  The most optimistic scenario would see COVID-19 confined mainly to China and contained by the end of March with little impact to the U.S. economy.  Under scenario 2, more geographies are impacted, but disruption to the global economy is limited to the first half of 2020.  Scenario 3 is the most pessimistic, with the impact of COVID-19 extending into the second half of the year and escalating risk for a global recession.  Given the spread of the virus, we would suggest scenario 1 can unfortunately be ruled out and the best we can hope is scenario 2 becomes the most likely outcome.  Backing up this forecast, the OECD recently downgraded global growth by 0.5% in 2019 but we still see total 2020 GDP growth of 2.4%, in line with Morgan Stanley’s scenario 2.

While Morgan Stanley doesn’t quantify the market’s reaction to the various scenarios, we would associate scenario 2 to what RBC strategists Lori Calvasina classifies as a “growth scare”, which have historically seen equity market corrections of 14-20%.  The S&P 500 was down just over 8% in February (the S&P/TSX was -5.9%) but has fallen as much as 18.9% from its February 19^th high in early March, so within the ballpark of typical growth scares.

If scenario 3 and a recession develops, Calvasina reports the last 12 U.S. recessions have seen the S&P 500 fall on average 32%, though the median drawdown has been only 24%.  So far the S&P 500 is still discounting a scenario 2 growth scare style correction rather than a recession (spoiler alert for next month, equity markets have fallen into bear market territory and are signaling a recession).  The bond market, however, is another story.  Under scenario 2, Morgan Stanley penciled in a 25 basis point cut in overnight rates by the Federal Reserve, but the Fed made an emergency intermeeting cut of 50 basis points on March 3^rd after the 3 month versus 10 year yield curve inverted earlier in February.  Intermeeting cuts are rare, with the last one taking place during the Lehman Brothers crisis in 2008.  In each of the six previous cases the Fed cut rates between regularly scheduled meetings, they lowered rates again at the next policy meeting.  Futures markets are presently suggesting this time won’t be any different and the Fed will follow up with an additional 50 basis point cut, or a total of 100 basis points.  Under Morgan Stanley’s recessionary scenario 3, they assume the Fed would cut 75 basis points.

The Fed isn’t the only one acting like a recession is the most likely scenario, bonds yields have plummeted to all-time lows.  At one point in early March, the entire U.S. yield curve traded below 1%.  We don’t expect nominal US treasury’s to trade into negative territory like nearly 25% of the global bond market, but real 10 and 30 year treasury yields (nominal yield less inflation) have sunk below zero.

So who is right, equities or bonds?  Recession or growth scare? 

A lot will depend on how severe the containment measures in the U.S. will be.  China’s economy virtually shut down and only now is slowly recovering.  Current U.S. economic numbers are virtually useless given they are based on the pre-virus economy.  The economy was already slowing, and at the very least is now likely to be dangerously close to stall speed.  Bloomberg Economics Probability of Recession, which uses a range of financial market and real economy indicators to gauge the risk of a recession within 12 months, has currently spiked to just above 50%.  According to JP Morgan, the decline in equity markets suggests a 50% chance of a recession while credit markets are discounting odds of about 35%.  The key is likely to come down, to the U.S. consumer.  Consumer confidence remains high, but according to Goldman Sachs, its Twitter sentiment index has broken lower.

COVID-19 could cost Trump the White House.

Markets are keenly watching which way the economy breaks, but perhaps no one is more focused on the direction of the economy than President Trump.  It’s hard to beat an incumbent President seeking re-election.  It’s nearly impossible if the economy is strong.  The economy is typically listed as the number one issue for voters, followed by healthcare.  COVID-19 could negatively hit both and cost Trump the White House.  If the U.S. economy slips into recession, Trumps chances of being re-elected decline. Trump needs to down play the risk of COVID-19 so the negative hit to consumer confidence is minimized.  If COVID-19 turns out to a bigger issue, however, and Trump is perceived to have been too slow to react, he could be blamed for the negative consequences that will result from an overloaded and unprepared U.S. healthcare system.

Already his popularity is tracking below where other Presidents have been given how low the unemployment rate is.  It was always going to be a tough election, likely coming down to a few key States like Wisconsin, Pennsylvania, and Michigan, now the balance maybe shifting away from Trump.

But if not Trump, then who? 

The markets weren’t really focused on the Democratic nominee because they assumed Trump would win.  A Bernie Sanders Presidency would be a catastrophe for the market, but it was always assumed Trump would crush Sanders if he became the Democrat’s chosen one.

The belief a Sanders nomination would in fact increase Trump’s chances of being re-elected likely helped push markets higher.  Once odds makers began discounting a recession and a Trump loss, however, markets began taking Sanders’ lead in the Democratic nomination more seriously.  Most of the market correction in early March was due to news that COVID-19 had spread beyond China, but some was due to the realization that Bernie Sanders could actually win the whole shebang and become and become President.

Joe Biden’s big win on Super Tuesday (March 3^rd), in which 12 State primaries were up for grabs with Biden taking 9 of them, not only resurrected his campaign but positioned Biden as the new odds on favorite to take the nomination.  Michael Bloomberg, despite spending north of half a billion dollars on his campaign, and Amy Klobuchar withdrew and joined Pete Buttigieg in endorsing Joe Biden.  Elizabeth Warren suspended her campaign, but has declined to endorse Sanders or Biden for the time being.  It’s not over. Biden is prone to fumbles and missteps and doesn’t excite the more progressive elements of the Democratic Party.  Also, Sanders is a good debater and the upcoming March 15^th one on one debate with Biden could be his last stand.  Markets would view a Biden victory as neutral to positive, finally some good news.

An industry desperately in need of some good news is the oil industry. 

Earlier in the year, before COVID-19 fears took over headlines, the growing belief that climate change is a major threat to the global economy was causing capital to shift out of sectors tagged with being big carbon emitters, like energy, and into sectors and industries deemed to be part of the solution, like utilities.

Utility sector investors, in fact hit the trifecta in that not only were they associated with green energy, by they tend to have high dividend yields (appealing in a world where bond yields are very low) and were one of only two sectors (REIT’s being the other) spared from potential damage from Bernie Sanders’ campaign promises.  In early March, oil completed its own trifecta, though it was a losing one.  Oil was hit by ongoing environmental concerns, as seen in Canada with the rail disruptions and pipeline demonstrations, global demand has been slashed given the COVID-19 containment measures, and finally the coup de grace, Saudi Arabia announced production increases and price cuts after failing to gain Russia’s cooperation in collectively cutting production to halt the decline in the price of crude.  The Saudi’s made their move over the weekend and oil promptly fell 24% Monday morning, the largest single day crash since the 1991 Gulf War.

This was obviously bad news for Canada and the Canadian dollar, but also an issue for the U.S. given shale oil drillers have dominated U.S. capital spending in recent years.  It used to be lower oil prices were good form the U.S. economy, this is no longer the case.  Russia knows this is likely being opportunistic in their timing, targeting the U.S. producers, as well as the U.S. government that levied sanctions against Russia last year.

Let’s end the commentary as we started with COVID-19.

So lots of moving parts, and believe us, they continue moving as we write.  As promised, let’s end this commentary as we started, with COVID-19.  It’s not the only factor behind the markets recent correction, but it is definitely the largest contributor.  Without clarity on the duration of the severity of the outbreak, it’s very difficult for the market to properly discount the ultimate impact.

Expect continued volatility until infection rates stabilize and turn consistently lower, globally.  Could we see a global recession?  Not our base case but a definite possibility, in which case markets could have further to fall.  A lot of the damage has already been done, however, and we don’t see the same financial imbalances present before the 2008 recession.  Perhaps the recovery will take a bit longer if containment measures are more drastic, but they will recover.  We base our asset allocations for the long term and use events like this as opportunities to rebalance when warranted.  Perhaps a more important question is whether there will be any longer term implications.  Will COVID-19 permanently change supply chains and our view of globalization?  Could it impact not only the 2020 U.S. election, but future elections as populism gains an even greater footing?  What about inflation?  Lower economic activity (demand) and lower oil prices point towards deflation in the short term, but supply disruption and a shift towards de-globalization could lead to higher inflation in the future.

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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KELOWNA, British Columbia, March 17, 2020 – Nicola Wealth Real Estate (NWRE) along with development partner PC Urban Properties recently completed the first new Industrial Strata project in Kelowna, BC branded as IntraUrban Enterprise. The partnership purchased the 10-acre parcel in January of 2017 and sold two-thirds of the site to Kelowna Ford for a new state of the art auto dealership.  The remaining third of the site was developed as “IntraUrban Enterprise” comprising two buildings totaling 66,000 square feet (sf)  designed specifically for small bay industrial users. The property is centrally located at the prime intersection of Dilworth and Enterprise in one of Canada’s fastest growing cities.

The project offers strata units ranging from 2,000 – 3,900 sf featuring large front-load garage doors, built-in upper mezzanines, and natural light from a modern design with attractive glazing. The units were primarily acquired by owner-users for general industrial use with retail and office components. This project also attracted savvy investors seeking an opportunity to acquire brand new product for investment purposes.

“Kelowna is welcoming a new wave of business owners and investors to the city but the industrial supply here is constricted,” says Steve Laursen, broker with Royal LePage Kelowna.  “IntraUrban Enterprise adds much needed supply to the marketplace. We’ve sold six units to investors who are now receiving leasing offers only a couple weeks after closing on five-year terms starting at $16.50 per square foot.”

Across Canada, industrial real estate is in high-demand in all major markets with minimal new supply coming on stream; Kelowna is no exception. With centrally located industrial and commercial strata opportunities in short supply, ownership is becoming the preferred choice of businesses looking to future-proof their location in a climate of rising rents.

Industrial vacancy rates are low across the province and Kelowna in particular has seen vacancy rates declining with figures currently below 1%. Due to Kelowna’s limited supply and the high land prices net lease rates continue to increase; 8.6% according to Colliers Thompson Okanagan Industrial Market Report Q3 2019.

Demand for new quality small bay industrial product is expected to remain strong as the population of Kelowna is projected to continue to grow at an average annual growth rate of 1.34% over the next 20 years*.

“There is an opportunity here for owner-users and investors alike,” comments Senior Asset Manager, Stephanie Marshall. “Owning real estate has proven to be a good long-term strategy given the current market conditions across Canada and locally in Kelowna. IntraUrban Enterprise has proven to be a popular product and we are happy to have been a part of the success.”

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

* City of Kelowna 2018 Population & Housing Report

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.

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By John Nicola, CFP, CLU, CHFC

Question: When is the glass half full?

Answer: When it is half empty

I am writing this on March 24, 2020 and much has happened since our last message to you. As this crisis unfolds it is quite easy to make a case for the glass being half empty and half full – two different perspectives of the same reality. I will admit there is often a little Pollyanna in me (minus the pigtails, of course). I see most problems and challenges as issues that require solutions that will, with the right amount of commitment and cooperation, arrive. I also fully accept that our experience between our current reality and the end will prove painful and unpleasant, as all measures of change naturally are.

What I’d like to do today is look at where we are from glass-half-empty and half-full perspectives, giving you the opportunity to draw your own conclusions.

The Case for Glass Half Empty

• Globally reported cases will pass 400,000 today with more than 17,000 deaths (more than a third of them in Italy).
• The U.S. is now at almost 50,000 cases with almost 600 dead. Dr. Neil Ferguson, a British Epidemiologist, is suggesting a worst case result for the U.S. will see their death toll reach 2.2 million and at best 1.1 million (Dr. Ferguson has just been found to have the COVID-19 virus).
• As of March 23^rd, U.S. equities had lost US$12 trillion in value and the global total is estimated to be US$26 Trillion . That is approximately a drop of 35% since the peak five weeks ago.
• Governments globally are trying new measures to lock down their populations and reduce the spread of the virus. The drop in economic activity has been huge. This will virtually guarantee that 2020 will be a recession year and estimates for the drop in Q2 activity range from 10-20% (more than any single quarter during the Great Recession of 2008/2009).
• The closure of schools and businesses has meant that parents are often trying to work remotely while managing both their children and their own parents.
• Oil prices have dropped by almost two-thirds in the last year (partially exacerbated by a production feud between Russia and Saudi Arabia). The impact on Canada has been significant. Our dollar has dropped more than 10% this year from about US$0.77 to $0.69. Lumber prices are also down more than 30% in the last few weeks.

In searching headlines, one could easily add further negative  outcomes medically, economically and financially to this list. However, let’s consider those things that help make the glass half full.

The Case for Glass Half Full

• Peter Diamandis has been named by Fortune magazine as one of the World’s Top 50 Leaders . A few days ago he wrote a list of 15 different COVID research projects and models that are showing promise in the battle to end this pandemic. The link is here: https://www.diamandis.com/blog/good-news-covid-19
• Several countries in Asia including China, Korea, Hong Kong, Singapore and Japan are also seeing a large reduction in new cases and deaths. In the case of Japan, which has almost twice the population of Italy and has a higher median age ( 47.3 vs. 45.5 as of 2018), the number of infected people is less than 2% of Italy’s and less than 1% of the deaths.
• As we have written before, this may be the first time in recent history where governments through their actions to halt this disease have intentionally created a significant recession. This is also the reason why most governments are responding with massive monetary and fiscal stimulus to mitigate the pain of shutting down those economies.
• We see signs of people pulling together to help others in their community. Not everyone is being impacted by COVID-19 the same way. The elderly and those with mental health issues or who are homeless are particularly vulnerable. Others are helping in any way they can. Below we have included a list of some of the local organizations that are looking for help.
• As of the close of U.S./Canadian markets on March 24, 2020, stocks have had a small lift of 9.38% for the S&P 500 and 11.96% for the S&P/TSX.
• Wall Street Journal – “I’m Scared. And That’s a Reason to Buy.” This article points out that as the crisis worsens, stocks will become cheaper.  Being a contrarian and buying at times like these always feels uncomfortable, but it’s important to recognize that there is opportunity despite difficult times.

Any crisis creates opportunities if you are willing to look for them and recognize them when you see them. Below is a list of opportunities we are looking at right now or that we have already acted on.

1. Lower interest rates: We have just completed financing on two new residential apartment buildings with the Canada Mortgage and Housing Corporation (CMHC). The average rates work out to 1.7% over five years. That is about 1% less than we budgeted for in January of this year. The savings from these lower rates will mean an additional $4 million for our investors over five years. We are looking at all of our assets with the possibility of refinancing and have identified four more U.S. buildings where refinancing would save US$3 million net of costs over the next five years. We will look through our entire portfolio and report back on what the final results will be.
2. Over the last few months, a number of asset classes have seen drops in excess of the overall equity markets and in the examples given here all of them pay substantial yields in the form of distributions, interest and dividends. I asked two of our best analysts, Ben Jang and Russil Lea, to write up a summary of relative performance and value in three sectors: preferred shares, high yield bonds and REITS. The report is here, but their key observations include the following:
   • Investment grade preferred shares in Canada have yields currently in excess of 8% with capital appreciation potential over time. That is equivalent after tax to bonds paying an 11% coupon.
   • High yield bonds are now paying more than 10% over government bonds of the same duration. Ben has looked at this in some detail and noted that in the 45 times this spread exceeded 8%, investors earned a profit 44 times within two years.
   • Last but not least, Russil has put a table together of a number of Canadian REITs that are currently all trading well below the underlying value of their real estate assets. As a result, in most cases their yields have doubled in the last year.
3. We are also seeing opportunities in private debt and equity for those who have cash resources to buy. We also believe gold is a good defensive investment in this environment, especially as central banks ramp up their printing presses.  Gold was up nearly $134 since Friday’s close, or about +9%.  As of today, our funds have collectively over $700 million in cash or short-term deposits that can be deployed. As most of you know, our exposure to long-only equities was only 35% at the beginning of the year and we have kept it between 30% and 40% for many years. Our clients have seen the value of their portfolios fall during 2020. On average it has been just over -8% at a time when equities have dropped -35% and balanced funds with a 60% stock and 40% fixed income mix have dropped -18%.

So I still believe that the case for the glass being half full is more compelling. Of course, we will see more challenges over the coming year, but I have faith in both the human condition and our overall ingenuity and creativity. In the meantime, there are a lot of well deserving organizations who need our help and compassion now more than ever. Given social distancing and the need to stay home, it may not be practical to help in person, but consider what a gift of cash might do. Here are just some of the groups we have spoken with and who we are providing additional support to now:

• Kids Help Phone is working to increase its ability to manage 2000 daily calls with young people needing to speak with someone who can assist them with their mental health and stress issues.
• Covenant House has kept young people off the streets and helped them rebuild their lives for decades. In a time such as this their services are more critical than ever
• Union Gospel Mission provides food and shelter for homeless people on the Downtown Eastside. The DTES is very susceptible to COVID 19 because it is almost impossible to get individuals to practice social distancing in that area of the city.
• The Food Bank has already seen a sharp increase in the need for supplies. They can maximize their ability to deliver food by using a financial donation rather than a food one.
• Take a Hike has been an incredibly effective program for high school kids who have a combination of mental health issues and or challenging family environments. These kids feel it even more when our schools are shut down.

This is an ideal  time to give support to one of these organizations or some other group within your community if you can.  This is when it will matter the most.

I admit I am guilty of overusing positive metaphors and sometimes at risk of being sentimental. On Sunday  my wife Claire and I were enjoying our self-isolation watching a movie about Winston Churchill. We all know Churchill could write a speech and deliver it as no other. He had to lead Britain through its’ most existential crisis. Perhaps my favourite quote from him is this one:

Let us therefore brace ourselves to our duties, and so bear ourselves that, if the British Empire and its Commonwealth last for a thousand years, men will still say: ‘This was their finest hour

I am willing to bet that when this is all over, we will be able to say that about a number of people who made the difference during this crisis.

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. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. 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 post When is the Glass Half Full? When it is Half Empty. appeared first on Nicola Wealth.

Given the pace at which the global economic environment is changing as a result of the spread of COVID-19, we’ve found there is an increased interest in up-to-date insight on the economy and the markets. With volumes of information out there, we aim to cut through the clutter by summarizing the week’s events by producing this brief written by Chief Investment Officer, Rob Edel,  published every week. 

The Recap

The Markets last week suffered their worst week since October 2008 with the S&P 500 down 15.0%.  The S&P/TSX was off 13.6% but are down 34.0% from their February 20^th peak.  The S&P 500 is down a similar 31.0%.  Markets remain exceptionally volatile, with only Thursday, March 19^th avoiding more than a 4% intraday move in the market (either up or down).  Overall, it was a week in which all assets were weak and volatile.

Below we outline some insights on the market events over this past week.

1. Bonds were volatile, 10-year US Treasury yields rose in the first half of the week before falling back below 1% by market close on Friday. The 10-year yield has swung in a 50 basis point range over the past three weeks in a manner not seen in the past two decades.  Friday’s 0.85% closing was down 0.30% from Thursday’s close, the largest one day decline in 10-Year Treasury yields since 2009, and moving closer to March 9^th all-time low of 0.31%.

The rise in rates earlier in the week is unusual given bond yields are usually positively correlated with the market.

2. Gold acted counter to expectations, rather than rising as equity indices fell, gold fell as bond yields rose. The US dollar was one of the only assets moving up most of the week, as traders scrambled for liquidity and safety, selling everything they could, even gold and Treasuries.  Also, with interest rates at near-zero and inflationary expectations plummeting, real interest rates actually turned higher, which has traditionally been bad for gold.  3 Month T-Bills ended the week with negative yields, so unless we have deflation, we would expect gold to again gain favor over the coming months.
3. Equities, fixed income and commodities were under tremendous pressure, mainly from the sell-side. Oil was particularly weak, with WTI crude falling as low as $20.37 on March 18^th and Western Canadian select falling below $10 a barrel before rebounding later in the week.  Increased supply from Russia and Saudi Arabia added to oil’s woes, but concern and uncertainty over plunging demand from containment measures inflicted by COVID-19 were behind the volatility in most markets.

Economic Considerations

In the span of mere weeks, economic forecasters have shifted from believing the fallout would be contained mainly to China to now believing a recession is all but inevitable. 

The speed of this shift and the depth of the analyst cuts in GDP growth has been breathtaking, with markets scrambling to keep up.  China led the way, announcing a 13.5% contraction in industrial production in the first two months of the year and a 20.1% decline in retail sales.  For the US, Morgan Stanley now believes Q2 GDP could contract 30.1% versus only a week ago forecasting -4.0%.  Goldman Sachs sees Q2 GDP falling 24%, while JP Morgan is only calling for a 14% contraction and Bloomberg a mere 9% decline.

The huge variance can be attributed to uncertainty around COVID-19 and the nature and duration of containment measures that will be needed. According to some models, the infection rates show the US tracking on the same path as Italy (8 days behind?), rather than China or South Korea.  Hopefully social distancing measures have yet to show up in the data but expect the numbers to get worse as testing ramps up.  The ultimate solution is a vaccine, and while several candidates have been identified and Phase 1 safety trials prepared, a broad rollout is likely 12 to 18 months away, and a vaccine won’t help the economy in the near term.  Because there is so much we don’t know about COVID-19, it is hard to forecast its impact on the economy.  We also don’t know how successful Western society will be in breaking the cycle of transmission like has happened in China and South Korea.  There are best-case scenarios and worse case scenarios.

In a best-case scenario, rapid response testing, isolating the sick, tracking contact, and measured social distancing like has taken place in Singapore can keep the virus at bay and enable the economy to begin to return to normal before a vaccine is finally rolled out.

In the worst-case scenario, current measures, or worse, could remain in place for more than a year, which isn’t realistic. Development of antivirals for fighting the virus is a better near-term prospect than a vaccine in that current drugs are already proven to be safe and efficacy trials can start sooner and are much shorter.  Many are already in trials and chances of them shortening the hospital stays of those infected will change the way we fight the virus.

The only thing scrambling to keep up with the markets have been central banks and governments.

They will have to come up with new monetary and fiscal policy measures to help bridge the inevitable gap left as huge parts of the global economy shut down.  The US Federal Reserve has effectively lowered interest rates to zero and appears poised to ensure banks and companies have adequate access to capital.  As for fiscal policy, a stimulus plan of over $1 trillion has been floated, with the Trump Administration potentially targeting upwards of $2 trillion. The goal appears to ensure companies and their employees are made whole.

Execution, of course, is the key.  Making sure money gets into the right hands quickly will determine how successful they ultimately will be.  If they fail, demand will not rebound after the virus and a recession could turn into a depression.  The stakes are big, and luckily the market will provide an ongoing barometer of how they are doing.

The Outlook

So what can we expect in the coming weeks?  Some of the volatility has been due to large algorithmic program trading strategies, such as risk parity, that target volatility levels and are programmed to deleverage when volatility rises.  Hopefully most of this should be unwound by now.  Watching new infection rates in Italy will be something the market will be focused on.  Evidence containment is working in Europe will help give North America confidence the same will happen here.  Government stimulus programs will also be important, both in magnitude and timing.

Have we seen the bottom?  We are not market timers.  Barring a depression, which we believe unlikely, economic growth will recover over the next couple of years.  Some positive news could deliver a nice relief rally in the short term, but it is also possible things get worse from here, drawing the market even lower in the short term.  Quality assets will weather the storm and investors should look for opportunities as their comfort levels and risk tolerances allow.  The market is an uncertain beast at the best of time, and never has it been more uncertain than now.

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. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. All values sourced through Bloomberg.

The post Weekly Market Brief by CIO Rob Edel appeared first on Nicola Wealth.

By Tara Deschamps

View original version online | read pdf version

Emily Rae was busy from the moment the novel coronavirus started sickening hundreds throughout Canada and sent stocks plunging.

The Halifax-based senior financial planning adviser at Assante Capital Management Ltd. was being peppered with questions from clients about what they should do given how companies were laying off thousands of employees and markets were plunging.

But for some, the virus and the gloomy economic situation might have provided a tantalizing question: With markets at five-year lows, is it a good time to borrow money to invest?

The answer is complex and depends on how much of a financial cushion and a risk tolerance one has, said experts.

“I have this strict criteria when I talk to clients about it or if they happen to be interested in the concept and usually by the time we get to the end of it, the criteria has eliminated almost everyone,” Ms. Rae said.

She believes borrowing to invest is only a good idea if you have maximized your Registered Retirement Savings Plan and have no carry forward, have a strong cash flow, are in a high tax bracket, have a high-risk tolerance and have a long time frame for investing and knowledge of the practice.

“You wouldn’t want to do this as a first-time investor, but if somebody’s been through a couple of market corrections and they understand you have to be patient and they have met all of that criteria, we talk about the individual risk of what they want to invest borrowed money in and what can happen if it drops in value substantially,” Mr. Rae said.

Over in North Vancouver, Money Coaches Canada financial planner Annie Kvick said borrowing to invest “does not make sense at all” for most people.

“If you’re worried that you might lose your job or your business is going to struggle, this is not the time to invest,” she said. “If you were to invest, you really need to know that this is money you’re willing to give up. We don’t know where the market is going to go.”

However, there are some people who can stomach the risk and still live more than comfortably, who might find it an opportune time, she said.

“If you are someone who’s been sitting on cash for a long time just waiting for something to happen of course today is better to invest than it was three or four weeks ago, but you need to have a well thought plan no matter when you invest,” she said.

Part of that plan should include diversifying by not investing all in one stock, so you are a bit more protected if a particular sector is ravaged by the virus.

Ethan Astaneh, a Vancouver-based financial planner at Nicola Wealth, agreed.

While it’s an uncertain time right now, he expects large established companies with sound financial positions to weather the storm and perhaps will even lead the country back to all-time highs eventually.

“It’s probably that segment of the stock market that would be the safest rather than some more unknown small and microcap companies for example,” he said.

You don’t have to look hard to find companies struggling amid the crisis, but Mr. Astaneh predicts companies involved with finances, powering homes, communicating and technology to be a bit more resilient.

But borrowing cash to buy those stocks will put some investors in very different positions, which is why you have to be careful with this strategy, he warned.

“If you’re in a position where you have cash, and you’re just choosing to borrow to invest even though you’ve got the cash, that’s a much different proposition than your only option being to tap a line of credit or a loan in order to invest,” he said.

“In one instance, the person has the capital available to pay off the debt if they so choose. Whereas in the other instance, they don’t, and so even though you’re buying the exact same companies, you’re actually taking two different forms of risk.”

The post Borrowing to invest makes sense for few people amid market volatility: experts appeared first on Nicola Wealth.

Municipalities, the B.C. government and Ottawa could make industrial work space more accessible and affordable

By Mark Hannah

View original version online 

Industrial vacancies in Metro Vancouver fell to an all-time low of 1.4 per cent in the third-quarter of 2019. | CBRE Research, Q3 2019

The post Industrial evolution? Governments could ease stress on sector appeared first on Nicola Wealth.

CEO tells clients that with a truly diversified portfolio and a focus on cash flow, there are ways through this crisis

By James Burton

View original version online | view pdf version

The post Why the glass remains half full for investors appeared first on Nicola Wealth.

Given the pace at which the global economic environment is changing as a result of the spread of COVID-19, we’ve found there is an increased interest in up-to-date insight on the economy and the markets. With volumes of information out there, we aim to cut through the clutter by summarizing the week’s events by producing this brief written by Chief Investment Officer, Rob Edel, published every week

The Recap

Markets broadly rallied last week, with the S&P 500 gaining +10.4% and the S&P/TSX +7.2% in the best week for stocks since March 2009.  Trading remained volatile with daily moves routinely in excess of 1% in both directions.  Tuesday, March 24^th stood out in particular, with the S&P 500 up over 9%, on its way to a cumulative three day gain of 17.6% after hitting its bear market low on Monday.  The Dow actually rallied 21.3% over the same time period, in theory signaling the start of a new bull market.  The S&P/TSX was just behind the Dow, with a 19.1% gain.

Other markets also showed progress last week.  Fixed income markets exhibited more liquidity, with 2-year U.S. Treasury yields falling seven basis points to 0.31% while 10-year yields dropped 17 points to 0.68%.  Same for credit markets, with investment-grade credit and high yield spreads tightened as shown by the iShares iBoxx Investment Grade Corporate Bond Fund and high yield corporate bond ETF’s +14.8% and +10.4% respectively. A more liquid bond market was also evident in currency markets, as demand for U.S. dollars eased with the U.S. dollar weakening just over 4%.  The Canadian dollar gained 2.6%. Gold gained 8.1% and oil (WTI Crude) increased just over 3%. For Canadian energy producers the news was less encouraging, with Western Canadian Select dropping 50% to just over $5 a barrel, an all-time low, and literally cheaper than water.

We believe there were three main drivers for markets last week, namely economic forecasts, fiscal and monetary policy, and COVID-19 and efforts to contain the outbreak. We believe this was the case last week and will be the case for the foreseeable future.  All are important and will be discussed, but COVID-19 tops the list so we will leave it for last.

Economic  Considerations

Economic numbers are going to get ugly.  Forecasters are slashing their estimates for Q2 GDP with Morgan Stanley being the most pessimistic, estimating a 30% contraction.  U.S. consumer confidence as measured by the University of Michigan hit a three-year low and unemployment claims soared a record 3.28 million, four times the high watermark set in 1982, though better than the whisper number of more than 4 million.  Canadian claims hit nearly 1 million, or 5% of all employees. These are scary numbers, but not unexpected given the virtual shut down of the service industry in the U.S. and Canada.

A recession is largely a given, the real question is how deep and how long?  Will it be  V-shaped, U-shaped, or L-shaped?  The market needs to know how much the economy will ultimately contract and how steep the forward demand curve will be going forward.

We believe the market is starting to discount a U-shaped recovery, but it is the L-shaped, or depression scenario that most fear, but don’t expect.  Given the dramatic shut down of much of the economy, a negative feedback loop is possible even if the pandemic is short-lived.  If sound and financially viable companies are forced into insolvency and unemployed consumers are unable to pay their bills, a long drawn out downturn could result.  Fortunately, much of this risk was taken off the table, for now, with both the Federal Reserve and the Federal Government taking swift action last week.

Lessons learned during the 2008 Financial Crisis enabled U.S. monetary authorities to quickly roll out programs addressing liquidity issues in the global financial system.  In a mad dash for cash, and greenbacks, in particular, longer-term interest rates started moving higher, credit spreads widened, and the U.S. dollar moved higher.  The Fed quickly cut rates to zero, signaling their intention to buy at least $700 billion in Treasury’s and Mortgages, and introduced five new lending facilities over the course of a week to help ensure corporations and businesses have access to capital.  The Federal Reserve balance sheet is expected to swell to over $5 trillion, larger than the $4.5 trillion reached during the Great Financial Crisis, as the central bank commits to doing whatever it takes.  They also understand that the demand for liquidity is global, and being the World’s reserve currency carries a responsibility to ensure foreign central banks also have access to US dollars.  By re-kindling cross-currency swap lines with 15 foreign central banks, the Federal Reserve helped ease a global shortage of dollars.  All these actions helped bond yields, credit swaps, and the US dollar decline last week, which is a good thing.

The speed in which the Fed took action was important in helping ease concerns that markets were headed for what Mohamed El-Erian (ex PIMCO Co-CIO) recently referred to as a “self-feeding vicious cycle of accelerated economic and financial deleveraging”, but they needed help from Congress in the way of fiscal policy.  By the end of the week, a deal was done with Congress approving a record $2 trillion stimulus package intended to provide relief to both Wall Street and Main Street.  At approximately 10% of U.S. GDP, the package won’t prevent a recession, but it should ensure businesses and consumers will be able to get back to work once the economy is restarted.  If the shutdown lasts more than two or three months, Congress and President Trump appear more than willing to throw additional funds at the economy to help bridge the gap.

Markets rallied most of the week in anticipation of the stimulus package being approved, but now the focus becomes almost entirely centered on the Virus and efforts to contain its spread and “flatten the curve”. Most traders are typically focused on the financial markets with screens fixated on the tick by tick move in asset prices and yields. Now COVID-19 dashboards, like the one produced by John Hopkins University, and infection model curves, as produced by the Financial Times have become their main focus.  As quoted by U.S. Director of the National Institute of Allergy and Infectious Diseases Dr. Anthony Fauci “You don’t make the timeline, the Virus makes the timeline”.

In order to determine how long social distancing measures need to remain in place, signs new infections have peaked and are starting to decline will be necessary before forecasters can become more confident in predicting an end to the recession and start determining the trajectory of the recovery.  Italy will be a key barometer, and while it appears growth rates have slowed, new infections continue to rise despite stringent containment measures in place.   Unfortunately, the U.S. appears to be following on a similar path.

While it’s true we don’t set the timeline, we do have a role in influencing the timeline.  The form and compliance of the containment measures put in force play a large part of the ultimate efficacy in terms of duration and ultimate fatality rate of the outbreak.  The success of both China and countries like South Korea and Taiwan appears based not just on social distancing, but aggressive testing and quarantining those infected.  The U.S. appears slow to do both.  Hopefully Canada is more proactive. Short of a break-thru in finding effective treatments to shorten hospital stays, the U.S. could find current containment measures will be needed for longer, and certain hot spots, like New York, could face a very tough decision in terms of who gets care and who does not.

Last week President Trump appeared to try and set out a timeline for America getting back to work by Easter.  Largely denounced by the medical community, there is an economic argument that the cure could become more costly than the virus itself if the economy is shut down for too long.  President Trump argues “the U.S. isn’t built to be shut down” and argues, as do others, more lives could be lost to suicide due to social distancing and the economic fallout.  The reality is this isn’t really Trump’s call.  State Governors and city Mayors will decide when businesses are able to open, and consumers will decide when they want to go back to their normal routine.  Both are likely to take longer than anyone wants.

The Outlook

The rally last week was encouraging, as was action taken by central banks and governments.  Pension fund rebalancing likely helped increase the demand for stocks and could continue to do so through month-end but volatility remains high.  We wouldn’t be surprised if markets turn lower again over the next few weeks and test the lows.  It’s what bear markets do, and negative reactions to what will undoubtedly be some horrific economic releases and higher infection rates could lead to eventual capitulation, which we have not seen yet.  Perhaps the hardest part will be feeling like we are being held in a prison, waiting at home watching the infection numbers and hoping for parole when the promised turn and flattening occurs.  As stated by Red (Morgan Freeman) in the movie Shawshank Redemption, “prison time is slow time”, but so far it hasn’t felt that way.  Markets and news reports 24/7 have captivated our attention and elevated our stress levels.  A little slow time could be good for all of us.

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. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. All values sourced through Bloomberg.

The post Weekly Market Brief by CIO, Rob Edel: March 27 appeared first on Nicola Wealth.

Nicola Wealth President David Sung, joins a panel of personal finance experts to answer financial questions in regards to COVID-19 on CBC’s The National.

View the full video here: https://www.youtube.com/watch?v=KCa6aNrE4Vk

The post Managing personal finance during the COVID-19 pandemic appeared first on Nicola Wealth.

Given the pace at which the global economic environment is changing as a result of the spread of COVID-19, we’ve found there is an increased interest in up-to-date insight on the economy and the markets. With volumes of information out there, we aim to cut through the clutter by summarizing the week’s events by producing this brief written by Chief Investment Officer, Rob Edel, published every week.

The Recap

Markets were mainly weaker last week, though selling appeared more orderly.  The S&P 500 fell 2.1%, while small-cap stocks (Russell 2000) dropped just over 7%.  Volatility, however, continued to move lower (though well above the historical average) and average trading volume in the stocks moving higher increasingly exceeded volume of stocks moving lower as the week progressed (Arms or Trin Index moved lower). Selling was less indiscriminate, with traders differentiating between winners and losers.  In Canada, the S&P/TSX actually gained 2%, led by a rally in oil and gold.

WTI crude gained over 30%, or $6.80 a barrel, while Western Canadian Select increased 136%, or $6.90 a barrel, though this was off a historically low base ($5.06 US a barrel!).  The rally in oil was based on hopes OPEC+ would reach an agreement to cut production, with a virtual meeting scheduled for Monday.  Frictions between Saudi Arabia and Russia re-surfaced over the weekend, however, and the meeting has been delayed to later in the week (April 9^th).  As for Gold, bullion was relatively unchanged, falling a little over $7 an ounce for the week.

The fixed income markets were also relatively quiet, with two-year and ten-year Government of Canada Bond yields both falling three basis points, and two-year and ten-year US Treasury yields dropping one and eight basis points respectively. Credit markets were a little more mixed, with the iShares iBoxx Investment Grade ETF falling just over 1% and the High Yield Corporate Bond ETF dropping 4.5%.  The divergence between these two credit markets can be expected given the Federal Reserve’s support in the investment-grade market.  Going forward, we would expect investment-grade spreads to normalize faster than high yield.  Overall, we saw both positives and negatives in market action last week; which makes sense given news regarding the economy, monetary & fiscal policy, and the Coronavirus.

Economic Considerations

In regards to the economy, economic releases continue to surprise to the downside.  The US jobs report, released at the end of the week, saw a decline of 701,000 net jobs in March with the unemployment rate rising from 3.5% to 4.4%.  Many believe the unemployment rate could peak at 10% or higher (Goldman Sachs sees 15% as the high and Morgan Stanley 15.7%).   The St. Louis Fed believes the unemployment rate could touch 32% over the next couple of months, depending on the extent of the lockdowns.  Over the past two weeks, roughly 10 million Americas have lost their jobs, wiping out all the gains since President Trump was elected in November 2016. Forecasts for economic growth continue to move lower, with Goldman Sachs lowering their Q2 GDP forecast to -34% from -24%,  but still believing in a Q3 recovery, with GDP +19%.  Others are losing faith in the so-called V-shaped recovery and believe a U-shaped trajectory is more likely.  Moody’s Analytics’ Mark Zandi describes his forecast more like a “Nike Swoosh” shaped recovery, expecting -25% in Q2 and +15% in Q3.   On the positive side, China’s economy looks to be ramping back up after virtually shutting down during its outbreak, though the speed of the recovery may be slower than hoped.

In line with worsening economic projections appear to be the willingness of policymakers to do whatever it takes to get the economy through what is evolving into what the UN Secretary General has referred to as the biggest challenge for the world since WWII.  Mere days after passing a $2 trillion aid package, it’s third legislative package dealing with the Coronavirus, a fourth bill is already being discussed and is said to be targeted at stimulating the economy rather than just providing relief.  Canada has been equally proactive, increasing wage subsidies to 75% from 10%, amongst other measures.  Canada has been more aggressive than the US in declaring social distancing rules and thus can expect even greater job losses in the short term.  In combination with dangerously high consumer debt, this makes Canadians particularly vulnerable.

News on the Virus itself last week revolved around progress being made globally on “flattening the curve”.  China continues to report success in containing the outbreak and has started to re-open Wuhan and Hubei provinces, the original epicenter of the outbreak.  News from Europe is more mixed, with the growth rate of new cases in hard-hit Italy and Spain continuing to slow, but new cases and deaths increasing none the less.  It is expected Europe could see a peak by mid-April.

Reports from the US are bleaker, as new case growth continues to be in the double digits and hot spots like New York reach their limits in terms of their ability to handle the health disaster.  Last week the White House released projections that between 100,000 to 240,000 Americans could lose their lives, even with current mitigation measures.  If the US had not enacted social distancing and other stay at home orders, the White House believes 1.5 million to 2.2 million Americans could have died.

Americans and Canadian are coming to the realization the current mitigation measures will have to last longer than they initially thought, possibly until July in some regions.  This is not priced into the market.  Also not discounted into the market is an understanding of what life will be like once current measures are relaxed.  It is unlikely life will return to pre-virus norms in the next 12 to 18 months, until a vaccine hopefully becomes widely available.  We expect different treatment options will become available to help shorten hospital stays and reduce fatality rates, but some restrictions and extensive testing will still be needed to ensure a second or even third wave doesn’t require future shutdowns.

On the treatment front, the FDA granted emergency approved malaria drug Hydroxychlorinequine, and early French and Chinese trial results have shown the treatment has some benefits.  These trials are very small however, and despite President Trump’s enthusiasm for the drug, anecdotal reviews of its efficacy are less than encouraging.  Anti-viral Remdesivir (an Ebola treatment developed by Gilead) is more encouraging, though it may only be effective if administered early.  Some Remdesivir trial results should become available in mid-April.  Last week probably the biggest news on the medical front was a new diagnostic test from Abbott Labs was given emergency authorization by the FDA.  The point-of-care test can provide results in 15 minutes.  It’s not a cure but could play a vital role in helping get Canada and America get back to work by determining who needs to be quarantined and who is free to re-join the workforce.

The Outlook

We suspect economic forecasts will continue to reflect a slower recovery and markets to react accordingly. A recent RBC Institutional Investor poll found 57% believe the market has yet to reach a bottom.  Economic releases will continue to be shockingly bad, but the markets will look past them if there is hope of a recovery in Q3.  The duration of the current shutdown is the key variable currently being discounted by the market, but we believe the nature and speed of how containment measures will be removed are only now starting to be discounted. The uncertainty, in regards to both duration and speed of recovery (when it begins), make it very hard for traders to take a definitive view.  Caution is still warranted.

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. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. All values sourced through Bloomberg.

The post Weekly Market Brief by CIO, Rob Edel: April 3 appeared first on Nicola Wealth.

By Mark Hannah, Managing Director, Real Estate and John Nicola, Chairman & CEO

The COVID-19 pandemic has created the most volatile global equity markets in history with equities dropping as much as 30% from their highs in only a few short weeks.  Interest rates are also at record lows. Government lockdowns are likely to cause unemployment levels that have not been witnessed since the Great Depression.  Most countries will have a significant drop in their GDP in 2020 caused primarily by businesses that have to either drastically reduce their operations or close entirely. All of this is occurring because the world needs to respond aggressively if we are to contain the pandemic of Coronavirus. 

Our commentary below will address the following questions:   

• What impact has the current crisis had on investment-grade real estate in North America? 
• What steps can real estate owners take to mitigate the short and medium-term damage that might occur? 
• Specifically, how is Nicola Wealth responding to COVID-19 with respect to the management of real estate assets for our clients? 
• What measures can we implement now, and in the future, that will improve long term returns for investors in this asset class?  

Amidst the economic uncertainty in today’s world, it is challenging to predict how real estate as an asset class will weather the proverbial storm. Real estate has been an important part of Nicola Wealth’s model portfolio for a number of reasons.  Real estate as an asset class has an ability to provide secure cash flow that can grow over time, and as a privately held asset, it is not subject to the same pricing volatility as that experienced in public markets. The current challenge is testing this investment rationale.   

The COVID-19 pandemic has significantly altered the way we go about our daily lives; not surprisingly, it also casts a cloud of uncertainty over the commercial real estate market. During these unprecedented times the Nicola Wealth Real Estate team is focusing on what is within our control which is the active, hands-on management of the assets across all three portfolios: the Nicola Canadian Real Estate LP (NCRE LP), the Nicola U.S. Real Estate LP (NUSRE LP), and the Nicola Value Add Real Estate LP (NVARE LP).  

Nicola Wealth Team’s Four Pillar Strategy is: 

1. Cash Management
2. Tactical Asset Management
3. Diversified Portfolio
4. Debt Management

Cash Management 

It’s anyone’s guess how long the current situation will continue and what lasting effects it will have on the commercial real estate market. With this in mind, we are actively monitoring the cash position of each of our funds on a frequent basis. Our goal is to make sure we have enough cash to meet our obligations to maintain properties, repay lenders, distribute to investors, and have the capacity to look at acquisition opportunities. We currently have a healthy cash balance in each fund and are in a strong position to take advantage of opportunities that will no doubt arise as the world recovers, in addition to covering our more immediate obligations. 

In order to preserve cash, we have suspended all acquisitions until we get clarity on the marketplace. There has been minimal investment activity in the marketplace as the majority of brokers have also slowed their marketing efforts. Active deals that were close to completion are still proceeding while deals in the early stages of negotiation have been put on hold or dropped completely.  It is premature to forecast how this will impact values, however we are closely monitoring the various asset types and markets.  Assessing how they weather this challenging environment will help navigate our future investment decisions. 

In addition to halting all acquisitions, we have suspended any major capital expenditure programs for all of our income properties. We will patch and repair for critical issues that arise and continue with maintaining essential life and safety building systems for all assets. 

We are also exploring the possibility of property tax deferment. This is an opportunity that is rapidly evolving. Each jurisdiction has a different schedule for the timing of payment of property taxes. Some municipalities have already launched a program allowing for the deferment of property taxes. As we learn more about this, we may elect to pursue this relief in certain municipalities and for specific properties. 

Tactical Asset Management 

With acquisitions on hold, we have re-allocated our team resources to asset management. Our asset management team is in constant contact with our third-party property managers to maintain our properties and to ensure the buildings remain safe for our tenants and their employees. There has been significant media coverage around the pandemic’s impact on both residential and retail tenants.  The retail asset class will clearly be the most impacted as many retailers cannot open for business and generate revenue.  Similarly, some residential tenants whose jobs have been adversely affected will face challenges in paying their rent.  

Not surprisingly, we have received requests from tenants seeking rent relief and/or deferment.  We are proactive in our approach with our tenants who we view as valued partners. Our team is closely monitoring all Federal, Provincial, and State relief programs currently being rolled out to businesses, individuals, and landlords so we can help guide our tenants to seek compensation to assist them in the payment of rent. 

Remarkably, there is still leasing activity in the marketplace including at our properties.  While the volume is much lower and it is challenging to tour properties, renewals and some new leasing is still occurring. Our occupancy rate was very high for both income funds (NCRE LP and NUSRE LP) before the crisis started and we have minimal exposure to lease expiries over the next 18 months. Fortunately, we significantly “de-risked” our portfolio in 2018 and 2019, completing early lease renewals for several large tenants in our income portfolios. 

Diversified Portfolio 

Our funds are well diversified by asset type and geography. Retail and hotel sectors are expected to be the most negatively impacted versus other asset types (office, industrial and self-storage). However, no asset class, geography or operator is immune.  We do NOT own any hotels and we have minimal retail exposure; 7% of portfolio net asset value (NAV) in NCRE LP and 4% of the NUSRE LP.  When we examine potential acquisitions, we analyze the potential impact on the portfolio in terms of asset class and geographic allocation in addition to other important metrics such as portfolio lease expiries, mortgage maturities, and tenant profiles. We do this in order to maintain a balanced portfolio and to help minimize the impact of an “event” such as the one we are currently experiencing. 

Debt Management (Financing) 

The use of debt is a critical part of our strategy to help provide enhanced leveraged returns for our clients. We always endeavor to have a balanced mortgage maturity profile so that we are not exposed to a significant portion of the portfolio debt expiring at any one time. Debt financing is an opportunity the Nicola Wealth Real Estate team has identified as one to capitalize on by taking advantage of the current low-interest rate environment. Our funds have low overall leverage– 39% for NCRE LP and 49% for NUSRE LP.  We have identified several properties that are either debt-free or maturing in the near future as providing opportunities to explore larger financing packages at favourable rates that would be beneficial to the funds not only this year but in years to come.  

Our outlook on real estate has been, and always will be, a long-term perspective.  The COVID-19 pandemic will eventually pass and we are confident that our hands-on approach to asset management will reap its rewards. Our decision to build a proprietary in-house real estate platform was a long-term commitment to our clients to building a portfolio of real estate that will perform over the long run and will be able to weather the storms that may arise.  

We hope all our valued clients and their families stay safe and healthy through this challenging period.   

Winston Churchill said, “It is no use saying, ‘we are doing our best’. You have to succeed in doing what is necessary”. 

The Wealth Exchange Podcast: Real Estate Investing Through Crisis.

Director of Real Estate Mark Hannah and Director of Acquisitions Alex Messina join host and Financial Advisor Mark Therriault for an in-depth discussion on what they are experiencing in the real estate markets during this period of uncertainty, addressing the most burning questions from clients.

LISTEN HERE

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. All investments contain risk and may gain or 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. Nicola U.S. Real Estate Limited Partnership was set up in July 2007 but opened to investors in June 2010. Effective January 1, 2019 Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add Real Estate LP adopted new mandates and changed names from SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.

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BRAMPTON, ON, April 8, 2020 /CNW/ – Effective today, April 8^th, the sale transaction of MDA by Maxar Technologies (NYSE: MAXR) (TSX: MAXR) to a consortium led by Toronto-based investment firm Northern Private Capital (NPC) has officially closed. This marks the return of MDA to Canadian control as a private, independent company headquartered in Canada.

Founded in 1969, MDA is Canada’s largest space technology developer and manufacturer, with over 1,900 employees across the country. Through a strong collaboration and partnership with the Government of Canada that spans several decades, MDA has delivered world-leading, iconic technologies such as the Canadarm family of space robotics for the U.S. Space Shuttle program and the International Space Station and three generations of RADARSAT Earth observation satellites for the Canadian Government.

NPC, led by John Risley and Andrew Lapham, has appointed Mike Greenley as Chief Executive Officer of MDA.  “I am very proud to lead MDA at such a pivotal moment in this great company’s history,” said Mike Greenley, CEO of MDA. “It is inspiring to be associated with such eminent Canadian business leaders who share in a vision to turn MDA into a global powerhouse.”

“MDA is truly a made-in-Canada success story with global growth potential resulting from its industry-leading technologies across multiple segments of the growing space sector,” said John Risley. “We are excited to roll up our sleeves with MDA leadership to help shape its future evolution and expansion.”

As a stand-alone company, MDA is one of the largest independent suppliers of space components and systems in the world, enabling it to be a merchant supplier to international prime contractors and partner to governments around the globe who are investing in and growing their space programs.

“We are open for business,” added Greenley. “As a space company with a big Canadian flag on our backpack and decades of experience in the space sector building first-of-a-kind space systems, our ability to partner and collaborate will be unmatched.”

The NPC-led consortium has acquired all of MDA’s operations across Canada and the UK. The transaction value was CAD$1 billion and was financed with a combination of equity and debt. Equity was provided by NPC and certain of its limited partners, as well as several leading investors including Fonds de solidarité FTQ, Jim Balsillie, Bulldog Capital Partners, Albion River, Nicola Wealth and Senvest Capital along with funds managed by Senvest Management. NPC was advised on the transaction by Bank of Montreal and Scotiabank. Scotiabank and Bank of Montreal also led the senior debt financing, and PointNorth Capital and Canso Investment Counsel provided the junior debt.

About Northern Private Capital
Northern Private Capital is a Toronto-based private investment firm focused on making opportunistic, long-term investments in partnership with great management teams. NPC invests in proven businesses with high growth potential driven by unique, proprietary technology across a broad spectrum of industries. NPC is currently investing from its inaugural flagship fund which includes commitments from world-class entrepreneurs, including a significant commitment from John Risley.

About MDA
Founded in 1969, MDA is one of Canada’s most successful technology companies and an internationally recognized leader in space robotics and sensors, radar satellites and ground systems, communication satellite payloads, antennas and subsystems, surveillance and intelligence systems, defence and maritime systems and geospatial imagery products and analytics. With a deep and diverse technology base, MDA’s global reach and heritage serving government and commercial space and defence markets with innovative and iconic solutions is unparalleled. MDA operates from locations in Brampton, Richmond, Ottawa, Montreal, Halifax and the United Kingdom. For more information, visit www.mdacorporation.com.

SOURCE MDA

For further information: Andrew Lapham, alapham@npcapital.com, 416-925-6609; Leslie Swartman, leslie.swartman@mdacorporation.com, 613-608-4845

Related Links

https://mdacorporation.com/

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By John Nicola, Chairman and CEO

As I was putting together material for this newsletter it occurred to me that I had no idea where the name “Bear Market “came from. Needless to say after less than five seconds on Google I had the answer to my questions as to why a 20% drop in equities is described as a bear and a 20% rise becomes a bull.

According to Investopedia there are two possible explanations. The first one considers how bulls and bears attack their enemies. Bulls use their horns to lift them in the air (rising) while bears use their enormous strength to swipe with their paws down (falling).

The second explanation is actually related to markets.  In this case, the market in bear skins. Apparently middlemen would sell the skins before the trappers had brought them to the trading post and then gamble that the actual price for the bear skins would be lower when they arrived (one of the earliest examples of short selling). Literally a “bear market” was one in which prices fell.

With that information you are now armed for bear (my apologies) for your next trivia game.

We are clearly in a bear market now and, based on history, it could easily drop more. So far the S&P 500 has dropped about 25% from its February peak. As you can see from the table below, there have been more than 25 bear markets in the last 100 years and on average they last almost one year, and from peak to trough drop more than 35%.

I decided to look at three different bear markets that were the most severe and long-lasting. My hope in this review of history is to identify the best approaches to manage the equity portion of one’s assets.

Here are the three markets I chose to look at:

1. The Great Depression / WWII – US equity markets dropped about 80% over three years and they did not fully recover on a price basis for almost 25 years (1954). Unemployment rose to 25% in the US and both GDP and prices fell a cumulative 25% by 1933.
2. 1972-1981 – The inflationary recession that started near the end of the Vietnam War and lasted until US 10-year bonds hit an unprecedented 15.5% in August of 1981. This was triggered in no small part to the fact that a year before the annual inflation rate topped 14% in the US. However as you will see below, a strong argument can be made that the bear market began in 1968 and, when adjusted for inflation, did not fully recover until 1993 (25 years, or almost as long as the great depression).
3. 2000-2013 – It may seem to many of you that I have my dates wrong. In the 21^st century we started with the Dot Com crash in 2000 and the recession that followed. A few years later we had what we now call the Great Recession (2008/2009). But when we look at the numbers more closely they meld together into one long roller coaster ride for equity investors.

Before I continue, I’d like to give special thanks to the people at Macrotrends (https://www.macrotrends.net/) who have collated a great deal of information on historical economic data, some of which you will see below. Anyone can access this material and there is no cost.

To borrow a phrase from Steven Covey, let’s “begin with the end in mind”. What does this data show us?

• Bear markets tend to take far longer to fully recover (i.e. reach their prior peak) than they do to reach their nadir or lowest point. From an investment perspective, this is a very positive reality since it gives us longer to rebalance our portfolios. It makes tactics such as dollar-cost-averaging and dividend reinvestment plans (DRIP) more effective.
• Bear markets are inevitable and frequent. Truly epic ones that encompass several mini-bear markets (such as the three we have chosen to look at) are less frequent but no less inevitable. In each case the reasons for these shifts in equity values is different, but the market response is not. Coronavirus and its impact are unprecedented but how this reflects on current equity prices is consistent with other major events in history.
• Looking at the bigger (long-term) picture. When we invest in equities (private or public) we are really investing in the economy both locally and globally. There can be no doubt that on a periodic basis the economy suffers a setback. Sometimes huge, as in the 1930’s, and sometimes relatively short and benign. If we consider ourselves to be long-term in our investment strategy then our main questions should be related to whether we feel the economy will be bigger and stronger in 10-20 years as opposed to 12-24 months. If we believe in long-term growth, then bear markets offer a great opportunity to acquire more of that future economy at a much lower price than we were paying before the markets dropped.
• This brings perhaps one of the most important lessons from this data. It is quite easy to develop a model that allows investors to prosper during bear markets provided they can control their fear and emotions. Unfortunately, behavioural finance suggests that most investors cannot, and do not, manage their emotions well (especially in bear markets). One of our roles is to work closely with our clients to manage this issue well. It is arguably the most important role a Financial Advisor can fulfil.

Let’s look at the data.

The Great Depression

By far the most devastating bear market ever. Equities dropped in value by 80% and it took more than 10 years and a World War to get unemployment back to 1929 levels. But dividends were paid every year and the yield of the S&P 500 rose to 13.4% in June of 1932. If all one did was reinvest dividends as they were earned, instead of having a 0% rate of return over 25 years, the result would have been that $100,000 invested at the peak of the market in October 1929 would be worth more than $300,000 by 1954. That is just under 5% annually (3% after inflation) in the most difficult period that investors have experienced with public markets since stocks have been traded. Note, results would have been considerably better if any disciplined rebalancing program was utilized (i.e. selling bonds in which to buy more equities).

The Seventies Inflationary Recession (1972-1980 or 1968-1993)

This is a tale of two bear markets. The official one starting in December 1972 and lasting 7.5 years until June of 1980 (peak to peak). And the hidden one. When we adjust for the impact of inflation, which was a major factor for all of the 70’s and 80’s, the second chart tells a much different tale, as it shows the S&P 500 price adjusted for the impact of inflation. When we add that factor our bear market starts in 1968 and lasts until 1993. That is almost as long as the Great Depression. While this bear market did not show the extremes of the Great Depression, dividend yields did rise. In fact, while the nominal drop in the S&P 500 was 45%, there was almost no drop in dividends paid and as a result the yield on stocks rose from 2.8% to 5.4%. If investors were relying on cash flow during this period they were well supported.

The Dot Com Bubble and the Great Recession (2000-2013)

Economists and the media have considered these two periods as distinctly separate and the reasons for each being a bear market on its own are definitely different. The Dot Com peak in the spring of 2000 saw the S&P 500 PE ratio rise to the highest in its history (significantly higher than in 1929). Technology was ascendant and all one needed was a website address and millions of dollars were yours for the taking. Investors arguably experienced nothing like this since the South Sea Bubble of 1720, which cost Isaac Newton 20,000 Pounds (at least $2Million today) and caused him to write “I can calculate the motion of heavenly bodies but not the madness of crowds.”

While the S&P 500 dropped almost 50% in two years, the NASDAQ (laden with a plethora of tech stocks) dropped about 80% or as much as the S&P 500 did in 1929-1933. It took the NASDAQ until late 2017 to get back to its former lofty peak.

The Great Recession of 2007-2009 was triggered by a combination of a bubble in US and other countries’ housing markets financed by highly levered mortgage structures that required many of the world’s largest banks to seek government bailouts. The overall impact on the economy and unemployment was greater than any other period since the Great Depression.

Why am I trying to make the case that they are really one bear market? As an investor it does not matter that much what the cause of the bear market is. What matters is how it behaves and if one can see any discernible patterns. The chart below shows the Dot Com peak in 2000 first falling 49% and slowly recovering back to the prior peak in the late spring of 2007. A few months later, in October, the 2007 -2009 Great Recession and bear market starts; it drops 57% from its peak and takes until mid-2013 to fully recover.

In effect the market price of the S&P 500 showed a 0% gain from August 2000 until February 2013, or 12.5years. It was a perfect rollercoaster ride as it came back to its 2000 peak in 2007, only to fall once more.

All of this brings us back to 2020 and the Covid-19 bear market. We are likely still in the early innings if history is any indication. If we believe that, should we not just sell 100% of all equities and wait on the sidelines for the bottom?

It is an option, but as you can see predicting the bottom and ultimate recovery in any bear market is not easily achievable. What then is more predictable and what should investors do?

• Ultimately (even if it is 25 years) a recovery occurs in equity and other markets.
• Regardless of how badly the economy performs, some companies continue to grow and do well enough to pay dividends.
• When those dividends are reinvested they in fact force us to buy more shares when prices are lower. The impact on our long term wealth is significant.
• If we can add to that model a disciplined rebalancing approach, we will lower our average cost for equities which adds to our long term returns..
• All of this requires us to be in a truly balanced asset allocation model that distributes regular cash flow from all components (interest, rents, and dividends). If an investor has the right model they can divert more monthly cash flow streams to a long-term DRIP/rebalancing strategy. In the scenario where an investor is already retired  and has a portfolio utilizing cash flow, then a 50% drop in equity prices has a much smaller impact on their wealth and almost no impact on their lifestyle.
• Investors’ normal behavioural tendencies cause them to make the wrong decisions about buying, selling, asset allocation and risk. This is where a good professional advisor can make all of the difference.

We are experiencing an unprecedented event that is having a significant impact on certain asset classes, but in a way we have seen before and that follows recognizable patterns. I have no idea when markets will recover, but I feel quite confident I know how they will recover.

Having this clarity allows us, as the stewards of your financial well-being, to build an investment model to help weather any market turbulence, and to capitalize on the opportunities that will surely present themselves.  The partners and employees of Nicola Wealth are collectively one of the largest investors in our investment model and pools, so our interest couldn’t be more aligned.

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. All investments contain risk and may gain or 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.

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