Mackenzie Cundill Team
Market Review, Outlook & Strategy
- The dispersion between the performance of growth and value is at its highest level in years while value is at its lowest. Trends do not continue forever but the key is to know the catalyst that could alter that trend.
- Historically, value has had a high correlation to rising interest rates. We think inflation numbers will surprise to the upside, pushing long bond yields up. Higher rates could snap the growth outperformance over value.
- The Year 2017 ended with the signing of the Tax Cuts and Jobs Act by President Trump. We believe this is stimulative to the US economy. Apart from lifting the valuation of some equities due to corporate tax cut, capital expenditure could be stimulated as businesses can expense fully the cost of certain equipment purchased before Jan 1st, 2023. This policy adds stimulus at a time when the US economy and its employment situation are already in very decent shape. It's likely that we could see upside surprises to inflation emerge in 2018, which could pressure bond yields upwards in the long end.
- The pro-growth and pro-business policies in America are echoed in Europe as newly elected French president Macron is pushing through reforms to make the labour market more flexible, cut public spending and cut taxes. There is some talk of looking at corporate tax cuts in a coordinated fashion possibly with Germany. Such policy will undoubtedly take a long time to cement, and it's too early to know whether it will bear fruit.
- Europe's economy continues to do well. Employment continues to improve. For example, Portugal has just printed an unemployment rate of 8.4% in October, the lowest in 12 years. European consumers are in fine shape, judging from the latest release of retail sales data from Eurostat. Sales rose by 2.8% year-over-year in November, led by non-food products. Economic confidence across the Eurozone has hit its strongest level in more than 17 years, according to the European Commission's headline economic sentiment indicator for December.
- In October, the ECB decided to cut the level of bonds it purchases every month, starting in January this year, but extended the length of time that its stimulus program runs. We believe the ECB wants to remain supportive of the current recovery, but there is likelihood of further "tapering" of asset purchases later this year.
- Brexit negotiations continue with the focus on a transition period. Recent developments showing Britain's desire to continue to be regulated by EU authorities in medicines, chemicals and aviation highlight how the UK government and industries are pushing to improve certainty and maintain trade relationships in a post-Brexit world. We continue to believe that businesses will have time to manage this transition.
- Over in Asia, there are further signs that China continues to deleverage the economy. However, Chinese household sentiment remains high and the service sector is growing at the fastest pace in three years according to the Caixin-Markit PMI in December. Meanwhile, Japan's manufacturing sector ended 2017 on a high note, growing at its fastest pace since 2014 in December as output continues to benefit from pick-up in global demand.
- Continuing strong synchronized global growth should be good for the Canadian market given its strong resource makeup. Commodity prices are responding to a general lack of investment reducing supply while at the same time demand remains strong. Of course, just as the best remedy for weak prices is weak prices, as the saying goes, the reverse is also true. Strong commodity pricing should attract capital to resources and lead to increased supply, serving to reduce pricing and profitability as the cycle plays out. However, it remains early innings for the energy sector, which had been out of favour for a few years. Investors had shifted capital from energy to technology and some of this capital flow may reverse. Canadian energy companies have used the downturn to reduce cost structures and high-grade assets, which should serve them well in a higher commodity price environment. Furthermore, as valuation multiples had contracted, the potential exists for both improved profitability and multiple expansion.
- Despite political uncertainties such as separatist sentiments in Catalonia, Spain and the upcoming Italian election, we are in a period of global synchronized growth and we believe there are potentials for upside surprises in both global GDP and inflation in 2018. We believe this is a good environment for value investing and we are excited about the opportunities in our portfolio as well as in our research pipeline.