2015 Market Outlook. John Nicola Chairman & CEO. Rob Edel Chief Investment Officer. Introduction by David Sung President

Transcription

1 2015 Market Outlook Rob Edel Chief Investment Officer & John Nicola Chairman & CEO Introduction by David Sung President

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3 20 Year Market Chart

4 The More Things Change

5 Nicola Wealth Management Canadian Equities Foreign Equities Bonds Foreign Bonds High Yield Bonds First Mortgages Second Mortgages Real Estate Private Equity Preferred Shares Alternative Strategies

6 Rob Edel Chief Investment Officer John Nicola Chairman & CEO

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8 2015 Market Outlook Rob Edel Chief Investment Officer

9 Our Agenda U.S. Economy Bizarro World Playbook Two Speed Economy Deleveraging Currency War

10 U.S. Economy Employment Nonfarm Payrolls Average 200,000/mo 2014 Average 260,000/mo Q , Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15

11 U.S. Economy Employment

12 U.S. Economy Consumer Spending Consumer Confidence 2014 Retail Sales +4.0%

13 U.S. Economy Housing Housing Starts Existing Home Sales Million million First Time Buyers only 33% Fewest since 1987

14 U.S. Economy Housing Household Formation Business Insider Jan 29, 20

15 GDP +1.7% GDP +2.7% U.S. Economy GDP

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17 Bizarro World

18 Bizarro World Inflation - CPI Bizarro Terms Opposite of Stagflation Groflation, Lowflation, Coldgrowth? Bad Deflation 1. Due to weak growth/demand 2. Sticky Wages 3. Deflationary Spiral Good Deflation 1. Due to falling import prices 2. Technological advances 3. Increased purchasing power

19 Bizarro World Interest Rates (10 Year Gov t Bond Yields)

20 Bizarro World Interest Rates (2 Year Gov t Bond Yields)

21 Two Speed Economy U.S. versus the World 2015 versus 2016

22 Two Speed Economy Interest Rates (10 Year Gov t Bond Yields) Low yields in Eurozone keeping U.S. yields low GDP % % % GDP % % %

23 Deleveraging U.S. vs the World Deleveraging is a drag on GDP Growth Global Debt Q $87T or 246% Total Debt/GDP Q $142T or 269% Total Debt/GDP Q $199T or 286% Total Debt/GDP McKinsey Global Institute Debt and (Not Much) Deleveraging Decrease Debt/GDP Need GDP to grow faster than Debt WSJ Oct 1, 2014

24 Deleveraging Gov t Debt/GDP - U.S. vs. Italy 4.5% Interest Rate Deficit Real GDP Inflation 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2 Yr Bond 0.6% -0.5% Inflation 1.6% 2014 Deficit to GDP 2.8% 2014 Real GDP 2.4% 2 Yr Bond 0.3% 2014 Deficit to GDP 3% 2014 Real GDP -0.3% Inflation 0.5% Debt GDP Debt GDP -1.0%

25 Deleveraging Productivity + Past 50 Years: 1.7% Next 50 Years: 0.3% Past 50 Years: 1.8% Next 50 Years:? McKinsey Global Institute Global Growth: Can Productivity Save The Day in An Aging World?

26 Deleveraging Productivity - Eurozone

27 Deleveraging Productivity - Eurozone World Bank Ease of Doing Business Indicator 2010 vs. 2015: Country Ranking Relative to Germany Eurozone Retail Sales January % MOM +3.7% YOY (highest Aug 2005) Manufacturing PMI Mar Germany, Italy, Spain above Portugal Spain Italy Greece

28 Deleveraging Productivity - Eurozone May 2015: United Kingdom Oct 2015: Portugal Dec 2015: Spain Jun 2016: Greece April 2017: France (Presidential) Fall 2017: Germany Feb 2018: Italy Business Insider Feb 17, 2015

29 Currency War U.S. versus the World U.S. Exports 13.5% of GDP Net Exports -1.2% impact on Q4 GDP China Yuan weakened 4% since October But overall effective rate +11% in 2015 GDP Growth slowing, Debt increasing Cut interest rates twice in 4 months

30 Currency War Canadian Economy CIBC Forecast 35% drop in oil 0.5% drop in real GDP Lower C$ Stronger U.S. Economy Lower oil price McKinsey Global Institute Household debt may be unsustainable in seven countries: Netherlands, South Korea, Sweden, Australia, Malaysia, Thailand & Canada Q to Q Debt to +22% since Q WSJ Dec 11, 2014

31 Playbook S&P/TSX and S&P & YTD Returns 2014 S&P +13.7% YTD S&P +1.0% 2014 S&P/TSX +10.5% YTD S&P/TSX +2.6%

32 Playbook Equity Valuations versus Bonds U.S. Equities Bull Market 6 years old Past 85 Years 26 Bull Markets o Fourth longest Mar 9, 2009 o +206% versus 106% average Barron s Oct 18, 2014

33 Playbook Equity Valuations versus Bonds RBC Capital Markets Investment Strategy Playbook March 2015

34 WSJ Jan 30, 2015 Playbook U.S. to Raise Interest Rates

35 Playbook U.S. to Raise Interest Rates Fed Funds Rate Dec Fed 1.13% versus Market 0.50% 2016 Fed 2.50% versus Market 1.35% 2017 Fed 3.63% versus Market 1.84% Fed Funds Rate March Fed 0.63% versus Market 0.47% 2016 Fed 1.88% versus Market 1.24% 2017 Fed 3.13% versus Market 1.79%

36 Playbook Equity Valuations versus Bonds Stocks are not cheap But they are cheaper than bonds TINA Trade There Is No Alternative Bonds H.Y. Bonds U.S. Stocks JP Morgan Equity Strategy Feb 2, 2015

37 Playbook Equity Valuations versus Bonds Morgan Stanley Cross Asset Strategy Mar 8, 2015

38 Playbook Equity Valuations versus Bonds Business Insider Feb 24, 2015

39 Playbook Equity Sectors Buy America Health Care Consumer Industrials Financials

40 Summary Two speed recovery to continue Favour U.S. Volatility to increase Interest rates to increase But slowly Capped by deleveraging, currency wars Equities over bonds Diversification!

41 2015 Market Outlook John Nicola Chairman & CEO

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43 When I m 64 Who would believe it

44 Overview Interest Rates Investor Behaviour Demographics Oil Depression? Volatility

45 Rising Interest Rates The impact on returns

46 10-Year Bond Yields 3.0% 2.5% 2.7% 2.57% When are they going to rise? 2.0% 1.5% 1.91% 1.29% 1.74% $100 Annual interest 1.0% 0.91% 0.62% 0.5% 0.22% 0.11% 0.29% 0.0% Then 12/13 Now AMERICA Then 12/13 Now CANADA Then 12/13 Now GERMANY Then 12/13 Now SWITZERLAND Then 12/13 Now JAPAN

47 10-year U.S. Bond Rates and CPI Since % 4% 3% Real Yield Average real return since 1950 =3% Average real rate on bonds =1.4% 2% 1% 0% -1% -2% 12/1/1999 7/1/2000 2/1/2001 9/1/2001 4/1/ /1/2002 6/1/2003 1/1/2004 8/1/2004 3/1/ /1/2005 5/1/ /1/2006 7/1/2007 2/1/2008 9/1/2008 4/1/ /1/2009 6/1/2010 1/1/2011 8/1/2011 3/1/ /1/2012 5/1/ /1/2013 7/1/2014

48 How Can We Add Value to Investment Portfolios? 5.4% 3.6% 3.4% 6.0% Diversify Private debt Manage credit risk 1.7% 1.8% 2.0% 3.9% 5.4% Returns to Feb 28, year GIC NWM Primary Mortgage NWM Balanced Mortgage 1-year 3-year 5-year Fund returns have been reduced by 1% to simulate account level fees.

49 Demographics are destiny?

50 30% of all people over the age of 60 Overall increase in over-60 s in the developing world will be 3x today s level

51 % over 60 More Saving Median age Is this deflationary? Less Spending Peak Spending Age 50

52 The Oil Depression The Bad Deflationary Alternative Energy North American oil and gas Geopolitical risks (Iran, Russia, Nigeria, Venezuela etc.) The Good Windfall for consumers globally Low Inflation Manufacturers Transportation US Trade deficit

53 Supply and Demand How long before balance? Almost 1.5 Million barrels per day surplus

54 Where Is The Problem? Annual Change in U.S. Oil Production ( ) 200% Increase equals 3M Barrels /Day

55 Who s The Swing Producer Now?

56 Who s Paying The Bills? Russia Current price

57 Equal to a massive tax decrease

58 Who Wins With Low Oil Prices? Break even price relatively low. Impact of technology? Imports are still 6M B/D. Current price reduces trade deficit by $100B Production will rise 700,000 B/D in 2015

59 Lose money $1.60/barrel In the 1920 s $25/Barrel In 2015

60 It s All a Matter of Balance

61 Investor Behaviour Can the right asset allocation and modelling improve financial behaviour? We are the enemy

62 4%/yr. less than the market Source: Dalbar 4 major reasons 1. Prospect Theory: Pain equals twice gain 2. Over-Optimism: The gifted program 3. Cognitive Dissonance: Find facts that agree with you 4. Gambling with House Money: No Risk because it is free

63 He just keeps repeating himself "in six months" even though the original six months has passed. Reminds me of the "end of the world" prediction minister who was wrong twice and then said he would stop.

64 Managing Volatility Can you reduce risk and increase returns?

65 Remember 1970

66 Just because I am paranoid does not mean the market is not out to get me % 60.00% 40.00% 20.00% 0.00% % % % 80 months (15% of the time) 12 month return <-10% 120 months (23% of the time ) <0% 12/1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/2014

67 Price Return vs Total Return S&P 500 ( $100,000 initial investment) Average dividend yield of 3% Increases wealth by a factor of 4 $9.500 M Dividends Reinvested 10.1%/yr. 7.1%/yr. $2.421 M Price Only $100,000 invested

68 Annual Dividend Income on $100,000 Invested in S&P 500 in 1970 Price Dividends Volatility 4.4% 1.1% Trailing Month <-10% $45,800 $26,500 $19,500 $13,800 $3,700 $7,

69 Actual real estate transactions Per IPD data TSX REIT index less fees Better returns with less than half the volatility 50.0% 10-year Annual Returns to % -2.0% 9.0% 8.1% -42.0% Best year Worst year

70 Price vs Total Return ($100,000 invested) Rents = 85% of return $1,050,000 $167,000 Actual real estate transactions Per IPD data

71 Returns Dec 31, 2014 $100,000 Invested Since Inception $240,000 $220,000 $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $231,766 SPIRE LP 9.7% Return since inception 1Yr Return 8.4% Dec 31 st $ Distributions for % of NAV and 4% maximum SWP paid monthly $100,000 Invested Since Inception $160,000 $150,000 $140,000 $130,000 $120,000 $110,000 $100,000 Q Q Q Q Q Q Q Q $156,580 Q Q SPIRE US LP 9.4% Return since inception 1Yr Return 11.2% Dec 31 st $ (USD) Distributions for % of NAV and 4% maximum SWP paid monthly SPIRE US was setup in July 2007 but opened to investors in June All returns are calculated from June Returns are net of LP level expenses. Past performance is not a guarantee of future performance.

72 Recent Acquisition SPIRE RE LP Joshua Creek Corporate Centre Phase N. Service Road, Oakville, ON Closed: December 2014 Purchase Price: $34.4 M ($288 psf) Going-In Yield: 6.5%. 2.97% for 7 years Asset Class: Single-Storey Office Year Built: 2013 Rentable Area: 119,575 sf Major Tenants: Kiewit, Ipex, Skura, Bennington Financial Deal Type: Off-Market

73 Recent Acquisition SPIRE US LP Belterra Apartments Dallas (Fort Worth), Texas Closing: February 2015 Purchase Price: $30.4 M ($105,556/unit) Asset Class: Multi-Family Size: 288 units Going-In Yield: 5.1% Projected IRR 12.65% Year Built: 2005

74 SPIRE Value Add LP - UPDATE 22 East 5 th Avenue Vancouver (Mount Pleasant) Meeting with planning department in March so design drawings can be advanced to a formal Development Permit submission (April). Construction anticipated to commence in early Responded to several RFPs for office space for businesses relocating to Mount Pleasant. Marketing materials will be launched in coming weeks. Projected IRR: ~18.5% Prepared for internal use only.

75 Tiger 21 Asset Allocation 44% Retired Business Owners $10M+ investable assets Want independent advice

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78 Balanced 60/40 Custom Benchmark TSX NWM Core Composite 10-Year Returns (to Dec 31, 2014) Volatility Worst Year 18.7% 4.8% 6.4% 6.2% 8.1% 6.4% Reduced volatility = better Investor behaviour -7.4% -13.8% The right asset allocation, well managed, can reduce risk and increase returns -34.0% Notes: 1) The Balanced 60/40 Custom Benchmark and TSX returns have been reduced by 1% annually to simulate a 1% account level fee. 2) The Balanced 60/40 Custom Benchmark is made up 24% ishares Cdn Universe Bond, 16% Citi World Govt Bond, 24% MSCI World and 36% S&P/TSX Composite 3) The NWM Core Composite returns represent the total returns of Cdn. dollar denominated accounts of all fee-paying portfolios with a NWM 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 money-weighted client returns net of fees and is presented before tax. The NWM inclusion policy is based on clients weights at calendar year end and only clients with a full year performance are included. The composite returns are asset-weighted based upon ending calendar year market value. The NWM 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.

79 2015 Market Outlook THANK YOU Next Event TORONTO Thursday, May 7 This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Information contained in this document was obtained from sources believed to be reliable; however, Nicola Wealth Management does not assume any responsibility for losses, whether direct or consequential, that arise out of the use of this information. 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. NWM fund returns are quoted net of fund level fees and expenses. 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 advisor for personalized advice based on your unique circumstances.

80 Question + Answer