Markets Start the Year with Some Hefty Goals to Tackle


By Rob Edel, CFA

Highlights This Month   

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The NWM Portfolio

Returns for NWM Core Portfolio declined 1.5% for the month of January.  The NWM Core Portfolio is managed using similar weights as our model portfolio and is comprised entirely of NWM Pooled Funds and Limited Partnerships.   Actual client returns will vary depending on specific client situations and asset mixes.

The Canadian yield curve shifted lower last month, with 2-year Canada yields decreasing from 0.49% at the beginning of the month to 0.42% at the end of the month; while 10-year Canada’s fell from 1.39% to 1.22%.  The U.S. yield curve also declined, with 2-year treasuries starting the month at 1.05% but finishing at 0.77%, while 10-year treasury yields ended the month at 1.92%, down 35 basis points.  NWM Bond under performed in this environment, down 0.3%, as credit spreads widened.  The PH&N Short Term Bond Fund was up 0.2%, reflecting gains from the decline in interest rates; however, two of our three alternative managers lost ground.

Wider credit spreads also impacted high yield bonds, which were weaker in November with NWM High Yield Bond -1.2%.  The weak Canadian dollar helped returns as unhedged U.S. dollar positions received a 1% currency boost.

The weak Canadian dollar also continues to help global bonds, with NWM Global Bond up 0.2% in January.

The mortgage pools continued to deliver consistent returns, with NWM Primary Mortgage and NWM Balanced Mortgage both returning 0.4% in January.  Current yields, which are what the funds would return if all mortgages presently in the fund were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.5% for the Primary and 5.7% for the Balanced.  Due to two new loans, flat subscriptions and no loan repayments, the Primary ended the month with negative cash of $2.9 million, or -1.8%, meaning the fund was into its bank line.  NWM Balanced ended the month with $18.5 million in cash, or 4.9%.

January was another difficult month for preferred shares with rate resets down 13.7% while NWM Preferred Share was down 11.4%. The main driver of returns was from the new issuance market as both TD and National Bank came to market. National Bank issuing a new preferred share was a surprise as they just did an equity raise at the end of last year; causing the market to slide down with the concern of over supplying looming if regulators force the other banks to issue more preferred shares. The market continues to trade at attractive yields with approximately 5% interest equivalent yield premium to corporate bonds, and although rate resets are already pricing in a 25 basis point cut in interest rates, volatility in preferred shares may persist with continued interest rate volatility.

Canadian equities were weaker again in January, with the S&P/TSX down 1.4% (total return, including dividends).  NWM Canadian Equity Income and NWM Canadian Tactical High Income declined 3.9% and 4.5% respectively last month.  The NWM Canadian Equity Income established a new position in Great Canadian Gaming Corporation and added to its existing positon in Shaw Communications.  As for NWM Canadian Tactical High Income, new short put positions were written on Great Canadian Gaming, Canadian Western Bank, and Westjet.  No new long only positions were established, but we did add to our existing position in KP Tissue.

Foreign equities were also weaker in January, even when translated back into a weaker Canadian dollar.  NWM Global Equity was down 4.4% compared to a 4.6% decline in the MSCI All World Index and a 3.6% fall in the S&P 500 (all in Canadian dollar terms).  Of our external managers, Value Invest  led the way, down only 0.1%, followed by BMO Asia Growth & Income -1.2%, Pier 21 Carnegie -5.1%, Lazard Global Small Cap -6.5% and Edgepoint -7.4%.

NWM U.S. Equity Income was down 6.6% in U.S. dollar terms and NWM U.S. Tactical High Income declined 2.8% versus a 5.0% decrease in the S&P 500 (all in U.S. dollar terms).  In NWM U.S. Equity Income, we trimmed our positions in Ford, Ingersoll Rand, and United Technologies, and added to existing positions in Walmart and Delta Airlines. As for NWM U.S. Tactical High Income, we added a new short put position in the Cheesecake Factory and sold our position in United Technologies.

Real estate was relatively flat in January with NWM Real Estate up 0.2% while the iShares REIT ETF increased 0.7%.

NWM Alternative Strategies was up a 0.6% in January (these are estimates and can’t be confirmed until later in the month).  Of the Altegris feeder funds, Winton, Brevan Howard, and Millenium, were up 4.7%, 1.7%, and 0.5%, while Citadel was down 1.0%.  Again, the decline in the Canadian dollar helped these managers last month, as did the negative trend in equities and generally positive trend in bond prices. The performances of our other alternative managers were generally negative in January, with RP Debt Opportunities -1.4%, MAM Global Absolute Return Private Pool -1.6%, and RBC Multi-Strategy Trust -2.6%.  Polar North Pole Multi Strategy was the only non-Altegris manager in the black, +0.3%.  Precious metals had another good month, with NWM Precious Metals up 5.1%, with bullion increasing 6.4% in Canadian dollars.

January in Review

While markets rallied strongly in the last couple of trading sessions in January, global equity indices ended the month firmly in the red.  Canadian stocks actually more than held their own, for once, with the S&P/TSX falling 1.4% compared to the 5.0% decline in its U.S. counterpart, the S&P 500.

Things were even tougher in Europe and Japan, with the STOXX Europe 600 falling 8.2% and the Nikkei 225 down 8.0% (all in local currency terms).  The big loser, however, was China, with the Shanghai Composite down 22.6%.  By mid-month, U.S. stocks had actually fallen 10% from recent highs, thus technically hitting “correction” territory.  More ominously, this was the second time in the last six months stocks had dropped 10% (the first being in late August of last year), a feat only duplicated three times in the last 100 years, 1929, 2000, and 2008.

Also setting a bearish tone for the market was short interest, which moved to its highest level since 2012, and trading volume with more shares changing hands in January than any other month since August 2011. According to Bank of America Merrill Lynch, of the 45 major country stock indexes they follow, 35 had retreated into bear market territory by falling 20% or more.  Over the past 28 years, in fact, the MSCI World Index has only suffered a larger one month decline on twelve occasions and half of those were associated with a major market crisis.

U.S. stocks appear headed for a similar fate with fewer and fewer stocks still in an upward trend.  The reason why traders are so bearish?  Oil and China.

MMC1

The price action in oil is particularly perplexing.  Crude continued on its downward path last month though, like equities, rallied at month end.  In fact, oil and stocks have been moving in almost perfect “harmony” in 2016, with a correlation of 0.96, the highest in 26 years.  This might make sense if oil demand were plummeting because the global economy was heading into a severe recession, as the correlation between oil and stocks has historically increased during recessions. However, over supply, not lower demand, has been the reason crude is weak.

The economy has slowed, but is hardly signaling a recession or crisis.  J.P. Morgan’s Jesse Edgerton estimates recent economic indicators are handicapping the odds of a recession in the next 12 months at 21%, while capital markets are currently implying a 30% to 40% probability.  Cheap oil should be a windfall for consumers, with a rough rule of thumb equating a 10% fall in oil prices to a 0.1 to 0.5% increase in global growth.  Confidence is everything, however, and continued weakness in the capital markets is making people nervous, and nobody likes spending money when they are nervous.

Slower economic growth might not be the cause for the fall in oil prices, but the negative sentiment being created due to falling oil prices could result in slower economic growth.

MMC2

And then there is China, the global epicenter of negative sentiment right now. The World’s second largest economy is slowing, but no one really knows by how much.

Officially, China grew 6.9% last year, just missing its 7% target.  The glass half-full crowd will point out that the miss shows China isn’t making up the numbers and 6.9% growth is still pretty good.  I mean, if they were making up the number, wouldn’t they have at least hit the target?  On the other hand, the glass half-empty crowd will claim things must be really bad if Chinese leaders couldn’t even get the fudged numbers to hit the target.

Economics professor Xu Dianquing from the Beijing Normal University and the University of Western Ontario estimates growth was really only between 4.3% and 5.2% while Wang Baoan from China’s National Statistics Bureau recently told reporters China’s economic data was “valid and reliable” and the methodology of their calculations were “in line with global standards”.  Unfortunately, Mr. Wang is no longer available for comment as China’s antigraft agency has announced he is under investigation for alleged violations of discipline.  In fairness, it is not clear that the investigation is related to his day job.

Even if growth is closer to 4% than 7%, should global markets care? (The answer, of course, is yes!)  Trade plays a relatively small role in the U.S economy, with exports making up only 13% of U.S. GDP, and only 7% of that makes its way to China.  Based on these estimates, if U.S. exports to China went to zero, the negative impact to U.S. GDP would be less than 1%.  Of course, the collateral damage to some of the U.S.’s larger trading partners would mean the negative fallout would be much greater, but the real pain would be, and is being felt, through the financial markets.

MMC3

Capital is fleeing China at a disturbing pace.  According to Bloomberg, capital outflows from China topped $1 trillion in 2015, and even with foreign exchange reserves of nearly $3.4 trillion, if capital continues to flow out at this pace, China will quickly run out of money.

The Bank for International Settlements estimates Chinese companies, who took advantage of low U.S. interest rates and borrowed over $1 trillion in U.S. dollars, have been frantically repaying the loans before the Fed raises interest rates and the dollar appreciates more against the Yuan.  In doing so, they are effectively selling Yuan and buying dollars, thus resulting in a negative capital outflow. This is likely part of the reason Chinese foreign exchange reserves declined so much in 2015.

The Institute of International Finance believes Chinese companies could have nearly $700 billion left to go.  Even worse, if just the wealthiest 1% of Chinese individuals decided to convert their $50,000 annual limit of Yuan into another currency (likely U.S. dollars), nearly $370 billion in capital would flow out of the country.  Clearly China is faced with an unsustainable situation.

Referred to by Nobel-winning economist Robert Mundell as the “impossible trinity,” China cannot manage its exchange rate, control its monetary policy, and allow for the free flow of capital all at the same time.  If China wants to fix the Yuan (meaning manged it’s exchange rate), it has to either increase interest rates in order to attract capital, or prevent capital from leaving the country.  Alternatively, if China wants to lower interest rates in order to stimulate the economy, they either have to accept a decline in the Yuan, or stop capital from leaving the country.  If it is the free flow of capital that is the priority, they have to let the Yuan depreciate, or increase interest rates in order to attract capital.  They can do two of the three, but not all three.

Most countries opt to let their currencies trade freely.  Canada, for example, allows the market to determine the level of the loonie, which resulted in a nearly 20% decline in the Canadian dollar last year. As a result, Canada is able to keep interest rates at low levels to stimulate the economy, and Canadians are able to take their money out of the country any time they want.  Welcome to free markets China.  How are you liking it so far?

It’s not clear which course of action China should choose.  They don’t want to lose control of monetary policy and be forced to raise interest rates because this would just result in more defaults and bankruptcies.  It would also be counter to their desire to increase consumer spending.  This leaves either devaluing the Yuan or capital controls.  Hedge funds are betting China will opt to devalue the Yuan.  Hayman Capital’s Kyle Bass believes China has a massive bad debt problem and the central government will eventually need to re-capitalize the banking system.

Autonomous Research’s Charlene Chu believes that nearly 22% of the Chinese financial system’s assets will be non-performing by the end of 2016, or a staggering $6.6 trillion.  She believes $4.4 trillion could need to be written off.  If this is the case, and China’s central bank bails them out, their balance sheet will need to massively expand, thus weakening China’s currency. In the mean-time, China is doing everything they can to stabilize the currency, and has even warned legendary manager George Soros against shorting the Yuan, saying “Soros’s war on the renminbi and Hong Kong dollar cannot possibly succeed – about this there can be no doubt”.  Talk about waving a red flag in front of a bull.  Soros, or of course, is famous for shorting the British Pound in 1992 and “breaking” the Bank of England, earning $1 billion on the trade.

China’s reputation would take a hit if they do devalue, and would likely be interpreted as a sign the Chinese economy is worse than believed.  Also, it is likely a Chinese devaluation would just result in similar moves by their trading partners, resulting in no net gain.  On the other hand, capital controls are tough to enforce and could hinder China’s goal to become a reserve currency.  Tough choices.

According to Japan’s central bank governor, Haruhiko Kuroda, China should go the capital control route and stem the flow of capital out of China in order to stabilize the currency.  Some unbiased friendly advice?  Perhaps not. A week after making this comment, the Bank of Japan stunned global markets with a decision to start charging 0.10% interest on excess bank deposits at the Central Bank.

In making the leap to negative rates, Japan joined the likes of Sweden, Denmark, Switzerland, and the European Central Bank and brings the percentage of global GDP governed by counties with negative rates to nearly 25%. In addition, the Bank of Japan is maintaining its ¥80 trillion (about $670 billion U.S.) a year quantitative easing program, which has so far swelled its balance sheet to about 75% of GDP versus only 35% when the program was initiated in 2013.

By comparison, the U.S. Federal Reserve, which was the first to get into the bond buying business in 2009, has seen its balance sheet level off at 25% of GDP.  The Japanese are quick learners.  The decision by the Bank of Japan’s policy board to move to negative rates caught many Bank of Japan staffers off guard and passes with a narrow 5 to 4 majority.  The Japanese Yen immediately declined 2% on global currency markets, which was probably the goal all along.  Capital flowing out of China was finding its way to Japan and bidding up the Yen, which was likely why Japan was anxious to see capital controls in China.  By moving to negative interest rates and helping depreciate the Yen, however, the Bank of Japan has put even more pressure on China to devalue the Yuan.  Domo arigatou Kuroda san!

MMC5

Japan’s move not only puts more pressure on China, but also shines the spotlight on Mario Draghi and the European Central Bank (ECB) to up the ante on their monetary easing program.  Draghi has been talking the talk, saying the ECB would do “whatever it takes” and claiming the ECB has “the power, willingness and determination to act,” but so far has disappointed traders with a mere 0.1% cut in deposit rates in early December when the market was expecting an expanded quantitative easing program.  All central bankers are pointing towards stubbornly low inflation rates as the catalyst for their increasingly adventurous monetary policies, but we suspect currency is the real driver.

MMC6

And where does this leave the U.S. Federal Reserve?  With Japan and the Euro-zone battling it out for the title of who can have the loosest monetary policy, the Fed is saying they want to actually raise interest rates four times in 2016 with overnight interest rates forecast to hit 1.5% by year end.  According to the World Bank’s 2016 GDP forecast, the U.S. economy is expected to grow 2.8% this year versus 1.8% in the Euro-zone and 1.7% in Japan.  Higher, but not significantly so, especially since most analysts are likely to revise their U.S. growth estimates lower.

As in Japan and Europe, inflation continues to come in well below the Fed’s 2% target;  add in the global liquidity problems created by an imploding energy sector, and a capital-starved China, and the Fed’s plan to increase rates looks more and more remote this year, with some, including former Fed chairman Ben Bernanke, postulating negative interest rates could even be an option for the U.S. at some point.  I guess this would be good news?

MMC7

The markets are tough right now.  Oil and China top the list of investor concerns, and both are very hard to handicap. 

Oil is massively over supplied, but a deal between OPEC and non-OPEC producers to cut production would change the outlook over night.  It seems remote, given OPEC is as dysfunctional an organization as you’ll find, dominated by regional rivals Saudi Arabia and Iran.  Just getting the Saudis, Iraq and Iran to agree to a deal would be a significant achievement.

And no one trusts the Russians, who reneged on a production cut deal with OPEC in 2001 and 2008.  For their part, the Russians are wary of Saudi Arabia’s motives, believing they were in cahoots with the Americans in the 1980’s and intentionally drove oil down in order to help bring about the demise of the former Soviet Union.  However, as Oxford Institute for Energy Studies’ Robert Mabro wrote in 1998, the last time an OPEC deal was brokered, “changes in policy are always possible, even likely, when significant losses are at stake.”  And they are!  The situation in China is similar to oil in that it is also very hard to analyze.

No one knows how fast, or slow, China’s economy is growing and how big a credit problem China has.  Both oil and China have the potential to impact global liquidity and tighten global credit; oil, not just through reduced capital investment, but also as a result of massive corporate defaults and bankruptcies.

Even some countries, like Venezuela for example, are at risk. Bankruptcies and credit are issues for China as well, as is liquidity with capital fleeing the country.  In fact it’s not just China; capital is leaving the emerging markets overall.  China and oil producing countries are also sponsors of the world’s largest sovereign wealth funds, which are responsible for providing liquidity and support to global markets over the past several years.  These funds are likely now selling and raising cash, further reducing global liquidity.  To a large part, these issues are what’s really behind the increase in market volatility.

The U.S. Economy

MMC8

The U.S. economy grew 0.7% in the fourth quarter, driven by a 2.2% increase in personal consumption.  For 2015, GDP increased 2.4%, matching last year’s result, and a little better than the 2.1% average since 2010. Consumer spending was up 3.1% in 2015, its strongest advance since 2005.

For next year, the International Monetary Fund (IMF) is forecasting American economic growth at a slightly higher 2.6%, which is down 0.2% from their prior forecast and far below the 3.6% average that the U.S. GDP grew in the second half of the 20th century.

Instead of asking why growth has lagged, however, more and more analysts are starting to wonder if growth could head even lower.  According to the Baltic Dry Index, an indicator used by many forecasters as a bellwether for the global economy, growth could be set to take a turn for the worse.  The Index, which measures the cost of shipping “dry” commodities around the world, has been generally moving lower over the past five years, but is off a dramatic 84% since late 2013.

MMC9

Does this mean a recession for the U.S. economy?  As mentioned above, the current economic numbers are not pointing towards a recession.  Corporate profits and industrial production are weak, but consumption, which makes up the bulk of the U.S. economy, continues to plod along.

Manufacturing indices remain weak and in contraction territory, but service indices are fine.  Also, employment and the housing market continue to recover.  The concern, however, is that industrial production, which has been down ten of the past twelve months, tends to be more of a leading indicator for the economy while employment has historically been a lagging indicator.

A weak global economy could impact consumer confidence and negatively impact retail spending, like it already has for business capital spending.  On the other hand, if weak industrial activity and lower corporate profits are a result of a strong U.S. dollar and retreating energy sector and not indicative of the broader economy, the recent slow-down could be short lived.

The key remains consumer spending.  If the consumer remains strong, the U.S. domestic economy should more than make up for weakness abroad. As Franklin D. Roosevelt famously said, the only thing we have to fear is fear itself.  If weak markets impact consumer sentiment, a recession could follow. 

MMC10  

MMC11

The January job report was a little disappointing, though the underlying data was stronger than the headline numbers. The U.S. added just over 150,000 jobs versus estimates of 185,000, but the unemployment rate moved down to an eight year low and wage growth of 2.5% in December was maintained.  Interestingly, despite the weak manufacturing numbers reported above, the sector actually added jobs in January.  Overall, we would call January a neutral month for employment.

MMC12

MMC14

Inflation in the U.S. is becoming more and more bifurcated, with the price of goods falling while the cost of services moves higher.  A lot of this is due to the falling price of oil and the soaring U.S. dollar.  Import prices, in fact, declined 1.2% month over month in December and are 8% below last year’s levels.

The impact of energy can be seen in the divergence between headline CPI and core CPI, which excludes food and energy.  Year over year core CPI, in fact, finally reached the Federal Reserve’s 2% target last month.  Housing costs and medical expenses are also a factor, with the Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) Indexes using different methods and allocations to account for the increase in housing costs and medical care.

Regardless of the indicator, the Federal Reserve is mainly concerned about consumer expectations for inflation.  If the consumer becomes trained to believe prices are likely to move lower in the future, they could decide to defer consumption, resulting in slower economic growth.  A recent Federal Reserve Bank of New York survey found households expect prices to increase 2.5% over the next year and 2.8% over the next three years versus 3% for both only a year ago.  Overall, the Fed believes inflationary expectations are well anchored and recent trends caused by energy and the dollar are transitory.

MMC15

MMC16

Despite the sell-off in the equity and credit markets, consumer confidence remained stable in January, likely due to a strong job market and improved wage growth.

MMC17

Consumer spending was flat in December and retail sales fell 0.1%. Year-over-year retail sales were positive, but the 2.1% increase was the slowest since the 6-year recovery from the great recession began.  The slump was broad based, with general merchandise, clothing and accessories, groceries, and gasoline all weak.  Furniture, building supplies, garden centers, bars and restaurants, and online sales were stronger.  Also moving higher was the personal savings rate, which increased to a 3-year high of 5.5% of disposable income.

MMC18

We won’t panic yet, though the weak consumer spending numbers in December are a concern.  It’s not a bad thing that consumers are saving more, especially given a better job market and lower gasoline prices mean they have more to save.  Consumer deleveraging is a good thing.  In combination with a weaker global economy and sluggish industrial sector, however, their timing is poor and means downside risks for U.S. economy in 2016 are elevated.

MMC19

Housing starts and permits moved lower in December, which surprised economists who expected warm weather and recent job growth in the housing sector would translate into more building activity.  Housing construction still had its best year since 2007, however, and exiting and new home sales were strong in December.  With inventories of existing homes at their lowest level in almost ten years, we expect 2016 should be even better.  The recovery in the housing market may be a bit lumpy, but we still expect it to be a positive influence on growth for the U.S. economy in 2016.

MMC20

The U.S. trade deficit widened in December as a strong U.S. dollar and weak global growth hurt exports.

On balance, risks to the U.S. economy shifted to the downside last month as weaker consumer spending joined a contracting industrial sector in delivering slower than expected growth.  We don’t, however, expect this to result in a recession in 2016.  Employment growth, higher wages, and a stronger housing market should more than make up for global weakness.  The negative impact from the energy sector should also be less of a factor this year, and could actually become simulative as the benefit from lower gasoline prices finally start to filter down through the broader economy.

The Canadian Economy

MMC22

The Canadian economy grew in November for the first time in three months, increasing 0.3%.  Retail sales were up 1.2% and manufacturing grew 0.4%.  Wholesale trade also rebounded in November, up 1.3%, with even oil and gas production increasing 2.1%, rising for the second month in a row, though still below August levels.  Despite the rebound in November, most economists continue to revise their 2016 GDP forecasts lower as the fall-out from the decline in the energy sector and resulting pull back in investment spending ripples across the country.

Ontario and B.C. continue to be far better, with strong housing markets, retail spending, and manufacturing growth helping provide economic growth that is estimated to exceed 2% in 2016.  As bad as the correction in the commodity sector has been, it is important to remember it is relatively small and employs less than 2% of Canada’s work force.

MMC23

The real driver of economic growth over the past few years in Canada has been real estate, accounting for 12% of GDP in the first 11 months of 2015.

Even with the correction in the Canadian dollar, manufacturing was flat last year, with traditional industrial stalwart, auto production, down 5.5% to its lowest level in four years.  This is disturbing given auto production was up 2% in the U.S. and vehicles sales in the U.S. and Canada hit record levels.

Canadian GDP growth has historically mirrored that of the U.S. and we expect this relationship will continue to play out in the future.  In the short term, however, it might take some time for the Canadian economy to adjust.

MMC24

Expect near-term economic growth in Canada to remain challenged.  Longer term, the lower loonie and stronger U.S. economic growth should make up for the weak energy sector, though we worry about the negative impact from a normalizing housing sector.

MMC25

After a strong December, January’s poor job report was worse than expected, but not a big surprise.  Only Ontario added new jobs, with 20,000 new positions created, while Alberta lost 10,000 jobs and saw its unemployment rate increase to 7.4%.  Migration is likely to limit the upside in the Alberta unemployment rate as workers move to other provinces, which could put pressure on the unemployment rates in stronger provinces like Ontario and British Columbia.

MMC27

MMC28

Both headline and core CPI was negative in December, but year-over-year inflation remains strong and close to the Bank of Canada’s 2% target.  Food prices were particularly strong, up nearly 4%, with fresh fruit and vegetables up 13% from levels one year ago.  Cauliflower was particularly pricey, fetching $7 a head in some cities.

MMC29

MMC30

Canadian consumer confidence took another hit in January, which is bad news for future retail sales. November consumer spending, however, was better than expected with motor vehicle sales, sporting goods, and building and garden supplies all doing well.  The weak Canadian dollar likely helped as fewer shoppers travelled south of the border.

MMC31

MMC32

The Canadian housing market continues to be a tale of two cities, namely Vancouver and Toronto.  Both markets remain very tight with the assessed price of homes in Vancouver up about 25% over the past year in some areas.  According to researcher Andy Yan, over 91% of the detached homes in the city of Vancouver have an assessed value of over $1 million versus only 65% the previous year and 32% were valued over $2 million.

Despite the increase, CMHC believes Vancouver remains at low risk of a correction, noting only “moderate evidence” prices were overvalued. Hard to believe given recent increases, but they are the experts, I suppose.  CMHC noted construction was being driven by a tighter rental market, with the vacancy rate less than 1% in October.  Alternatively, CMHC is more concerned with the Toronto market, worrying that prices have outstretched income and population growth.  They are also concerned with the Calgary market and believe prices will fall in excess of three percent this year.  As for Canada as a whole, while they have concerns with 9 of Canada’s 15 major housing markets, they see little risk of a sharp correction.  As long as employment remains stable and interest rates are low, a major decline in prices is unlikely.  We worry about the Vancouver market and the impact any changes in Chinese capital controls could have on prices, but have no idea how big a threat this is.

MMC33

MMC34

Canada’s trade deficit narrowed in December as a broad based gain in exports produced the largest month-over-month increase since June.  This is good news for December GDP growth, which is badly in need of good news.  Non-energy shipments, which make up about 20% of total Canadian exports, have been slow to recover from the great recession as the strong Canadian dollar took a toll on the manufacturing sector.  December’s results and growth of nearly 10% in 2015 are a move in the right direction, but continued progress will take time as the Canadian manufacturing industry rebuilds.

MMC35

Near-term economic growth in Canada will remain challenged with risks to the downside in the oil producing western provinces.  The housing market looks stable and is driving economic growth.  If it were to correct, a recession would likely follow. 

What did you think of January’s economic activity?  Let us know in the comments below!

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. NWM fund returns are quoted net of fund level fees and expenses but before NWM portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value.