Whats New At Mapledene Financial
I hope this letter finds you well. As we enter 2018, I would like to take the opportunity to provide you with an overview of financial market results in 2017, and to offer insights into some of the investment themes that may influence your investment portfolio over the coming year.
After a particularly strong recovery in 2016, Canada's S&P/TSX Composite Index lagged for much of 2017, weighed down by low energy prices and underrepresentation in areas that outperformed, such as technology and health care. However, the Canadian equity benchmark staged a rebound in the final quarter of the year, buoyed by solid results in the financial services sector and a recovery in prices for oil and other commodities. The index finished with a gain of 3.76% for the quarter and 6.03% for the year.
Most global equity markets registered healthy results in the fourth quarter of 2017, capping off a strong showing for the year as they responded to encouraging economic data, low interest rates, tepid inflation and expanding corporate activity. The MSCI World Index, which measures equity results in 23 developed markets around the world, added 5.6% in U.S. dollar terms for the quarter, and an impressive 23.1% gain for the year. The S&P 500 Index, a broad measure of U.S. stocks, was up about 6.0% for the quarter, and finished with a solid increase of 19.4% for the year. Overseas equities also performed well, and were generally up for the quarter and 12-month periods. Emerging markets strongly outperformed through 2017, with the MSCI Emerging Markets Index adding 34.4% for the 12 months in U.S. dollars.
When looking at the results for markets outside of Canada, however, the value of the Canadian dollar was an important consideration in 2017. The loonie rose sharply in value relative to the U.S. dollar during the summer months (higher energy prices have a tendency to increase our oily Canadian dollar). Our dollar finished the year at $0.7953 US$, which was 6.9% higher for the year 2017, having the effect of reducing gains for Canadian investors in assets priced in U.S. currency.
In the fourth quarter, central banks around the world continued to weigh options for scaling back monetary policies designed to stimulate the economy. The U.S. Federal Reserve Board announced a quarter-point increase in its benchmark interest rate in mid-December to a range of 1.25 to 1.5%, citing a strong labour market and healthy economic activity. After making two increases earlier in 2017, the Bank of Canada, however, opted to keep its overnight lending rate unchanged at 1.0% in the last quarter of 2017 (but did announce another increase of 0.25% in January 2018).
In this environment, government bond yields in many regions rose modestly in the fourth quarter, reflecting the expectation of higher global interest rates. The yield for 10-year U.S. Treasury bonds was up for the quarter, and finished the year little changed at about 2.4%. Canadian 10-year government bond yields declined through the quarter, but finished the year higher at about 2.0%. The FTSE TMX Universe Bond Index, which measures Canadian government and corporate bond results, returned 2.0% for the three-month period and was up 2.5% for 2017. That is a much lower return than people holding bond portfolios are likely used to, but that is typically what happens with rising interest rates. If you hold a balanced portfolio or balanced mutual funds the weaker results in the bond markets should have been offset by the stronger results in the equity portion of your portfolio.
Many of the conditions that have supported market advances over the past year remain in place, including favourable business conditions here and around the world, positive economic growth, relatively low inflation and relatively low interest rates for corporations and consumers. However, investing is never without risk. I believe that a diversified portfolio tailored to your individual investment objectives will allow you to participate in the potential for further gains while helping to protect your investments in the event of market disruptions.
If you can stomach the risk and have not yet reached retirement, it should be more beneficial at this time to add to your equity positions than bonds. However I would be cautious about adding too much to your Canadian stock holdings. Canada accounts for only 3 to 4% of the world's investable companies. Our stock exchange is heavily weighted in 3 sectors (Financials, Energy and Materials). Changes in world demand and therefore prices for our energy and commodities already make the Canadian stock market relatively volatile. We may also see increased volatility in Canada with possible changes to the North American Free Trade Agreement. If you have any questions about your portfolio, or would like to discuss any changes, my team and I are more than happy to help. RRSP & TFSA As a reminder the RRSP contribution deadline is March 1, 2018 (this is for RRSP contributions you could use to offset income taxes payable for 2017). And with the New Year there also comes a new $5,500 contribution amount for your Tax Free Savings Account (TFSA). If you have not opened a TFSA here at Mandeville Private Client, you are missing out. Call me and I can go through your TFSA investment options, whether you are comfortable with low to medium to high risk and if you want to receive monthly tax free income or long term tax free growth. We have choices and I will guide you through all of them. If you have never opened a TFSA, then you could potentially shelter $57,500 from the taxman, forever. No need to hire a lawyer in Panama for that tax shelter!
I have attached an excellent checklist compiled by the Tax & Estate Planning Team at Mackenzie Investments that highlight the responsibilities of an Executor of an Estate. The duties of an Executor are to gather in estate assets, confirm the values, protect assets, handle the taxes due by the deceased and the estate and clear the estate and distribute the assets. The services of your financial advisor can help you ensure you complete your duties in an efficient and timely manner. I hope you find this checklist of use, and I encourage you to share this with your family, friends, co-workers and hopefully, and most importantly, the Executor of your estate.
I would like to close by wishing you a very happy, healthy New Year and to thank you for the continued opportunity to work with you as your financial advisor.
Mark McConnell, BA (Economics), DipBIS
Senior Investment Advisor