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Welcome to It’s Personal Finance Canada. I’m Christine Conway and I’m Cameron Conway and this podcast is a very personal look for personal finance in Canada.
Christine: Hi Everyone, and welcome back to It’s Personal Finance Canada. This is Christine and I’m sitting here with my husband, Cameron, and we hope you had a wonderful holiday season.
Cameron: Yeah, it’s been a quick three week break for us, but we finally finished de-Christmas-ing, putting all the kids toys together and getting cleaned up, and now we are ready to talk about what we think the markets and the outlook is going to be for the first bit of 2022. Christine:
Christine: That’s right, it’s January and with the New Year comes a new outlook for 2022. So what we do, a big part of what we do over at my company, Braun Financial, is we have the incredible privilege of getting updates from an incredibly vast think tank of economic power houses. We get reports on a regular basis from Manulife, Canada Life, our RBC, Sun Life, IA Financial and the list goes on and on. So for the first part of each quarter we spend a good amount of time going through these reports looking for consensus, trying to figure out what the top economists are thinking, what the portfolio managers are doing in the different portfolios. How they’re positioning portfolios for the year to come or for the quarter to come. And sometimes for three to five years to come. So we try and consolidate all that information and come up with our own house view. Which is just what do we think they got right, What do we think could be improved on and where do we want to position our investors for the beginning of 2022.
Cameron: Yeah, it really gives us a good advantage to try and talk to our clients to kind of give them a general idea of what the markets are shaping up to be. So it helps us to determine their risk factors, what they want to do with their money and where they can get the best bank for their buck, so to speak. Whether you want to go equities, GIC’s or other things where you can just go back to our little RRSP/TFSA talk a couple weeks ago. We use these information packets and these webinars so we can help people understand where their money is going and how it can grow in the best way to meet their needs.
Christine: So let’s start by taking things back to this summer of last year, so summer of 2021. That was the point where we had all kind of felt a little bit break of a break in this covid pandemic. There was that light at the end of the tunnel that seemed closer, maybe closer than it actually was. But at that point in time restrictions were being loosened people households that had been sitting on a whole bunch of money, because we’ve all been in our houses and in our own little bubbles. People are starting to get out there and spend and get out there and participate in the economy again. So at that point in time, so last summer, we saw a really good uptick in economic activity.
Cameron: Yeah, we had that little narrow window between the primary strains and the Delta wave come through and the taps started to open up, so to speak. People were starting to get out of their house again, they’re doing some more discretionary spending. The markets all just shot up, either on the TSX, Dow and NASDEQ and there’s that bit of optimism before the crushing depression came back in September.
Christine: That’s right, but a lot of people are looking at it with the Omicron strain now, at what they’re calling the peak or coming up to the peak at this stage
Cameron: Varying by region, UK, South Africa, they seem to hit their peak. They’re calling for us in Canada and probably another week, one to two weeks.
Christine: Right, but that might be a little bit of foreshadowing of things to come. Where households have been sitting on a lot of cash, people are ready to get up and go see their friends again. Enjoy a nice meal, go to a bar, go to a pub, who see a movie, reintegrate into society and just feel human again.
Cameron: Actually see real humans?
Christine: Actually see real humans beyond our very limited social circles at this point in time, and I mean that’s a change not just for you and I sitting at home here today, but for businesses across different sectors as well. This, this whole coronavirus recession, has been very sector specific in terms of how the impacts have played out. With of course, the customer facing and the front-line workers and the people in service in the service industry being the most impacted and potentially, and rightly so, maybe the most reluctant to return to that type of environment. Where, well, the risk is still present, you are in front of people who may or may not have the virus.
So let’s take a look at what we’re seeing right now what the consensus is. So, with that peak that we saw happen over the summer, a few things happened. Valuations in the stock market, and I mean of course this is this is relative. This is a very general statement, as different portions, different sectors perform differently, but generally speaking, valuations were on the higher or more elevated level. So that means that typically, when your valuations are high, there’s a little bit of a risk or pressure to the downside, that if these corporations that are generating these profits aren’t generating new orders or generating that demand side. You can look at that and say, okay, maybe they’ve run up a little bit, but we still think that there is room to grow.
Cameron: And this is actual growth. It’s not that fake growth when they just cut expenses to make the net look higher. This is a demand sided growth that a lot of sectors are looking at and hoping for. We can even see that energy prices are starting to creep up, food prices starting to creep up where you kind of have this double edged sword where what’s best for your wallet on a day to day basis and what’s best for you as an investor? We have to kind of find the medium ground between the two. For the market look is there is a hope for demand to come back, despite what we’re seeing with some of the inflation numbers down South and up here. There is hope that a lot of these companies should start to normalize and if you start tracking something edge of individual stocks, you start seeing that play out. Even companies like Microsoft or Cisco or up like crazy, falling the work from home. But on the TSX, a lot of energy companies are starting to creep back up on a year to year basis. So there is some growth and we’re hoping that there isn’t the same kind of stagnation going forward.
Christine: And a lot of these companies really did go through the exercise of having to cut costs through the pandemic because we were all in the situation where cash flow was down. People just weren’t spending money, so we had to look for ways, or companies in general had to look for ways to make the machine seen run a little leaner and run a little smoother. So the idea is if some of those changes can carry forward, that can be good for the bottom line. And like Cameron was saying, we’re hoping that there’s enough demand.
There’s plenty of studies in research done showing that households in North America, so that’s here in Canada and our friends down in the states as well, that they’ve actually increased their savings considerably over the pandemic. And you don’t want to count out the consumer. If there’s any one thing that’s kind of consistent, it’s people like to spend money and I think especially after this period of history that we’ve had, people are certainly ready to spend some money.
Cameron: Well, exactly a lot of people. They’ve got kind of two years of sitting on their hands at home. They want to kind of undo that emotional strain. So why, people are just going to go out and do as much as they can despite some of the restrictions, depending what province you’re on or even know here in BC. But people, there’s that desire to kind of go back to normal and any little corner and crack they can find they’re just rushing to it.
Christine: Yeah, and when we’re looking at other parts of the economy as well. So here in Canada we’re obviously looking to the oil sector because that’s a significant portion of our economy here.
Cameron: Yes our economy is based upon real estate, finance and energy, and if you think it’s something other than that you’re not paying attention.
Christine: Yeah, and so the oil prices. What did you say it was today? It’s about eighty three bucks for WTI?
Cameron: WTI is eighty three right now.
Christine: That’s right. And so that, of course, is tied to our Canadian dollar, which is around.
Cameron: Seventy nine and a half cents.
Christine: Seventy nine and a half cents. So better for spending, maybe not as good for exports. So we’ve got to keep that in in our mind as well in terms of our ability to it’s goods.
Cameron: It’s a delicate balancing act. We don’t want the dollar too high, otherwise we can’t export our goods out. Or even, okay, we live in around Vancouver in the lower mainland, and the whole TV and film ministry thrives off that lower dollar. So it’s thousand job there. So these all these little things where a one side we want a parity of the dollar again so we can go to the states and buy cheaper groceries and gas. But the same time we can go too far and that a lot of companies will just leave.
Christine: That’s right. And if you’re turning your eye to the manufacturing sector as well, I mean the Purchasing Managers Index. That’s something that we keep an eye on as well. That’s essentially people that are making buying decisions in the managing sector, sorry in the manufacturing sector. There essentially surveyed on a regular basis and they answer the question how are their orders going? Are they positive, are they optimistic, or are they going to be cutting some spending? And we’ve been seeing a positive trend. Certainly not neutral there. It’s to the positive and that can be to backfill some of these demand issues that we’ve been talking about already, but it can also be I mean, think of all of the goods that are produced right. They’ve got to be produced somehow.
Cameron: Well, not only do they have to be produced, they have to be sourced. I worked in manufacturing not long out of high school and the vast majority of the resources we need to make the goods all came from the States. Everything got shuttled up by truck across the border and then we just assembled everything in Canada and shipped it out. So that’s something to take in consideration too.
Christine: So now if you move on to the banking sector, which is a major part of even the indexes here in Canada, there has been quite a bit of talk from the Bank of Canada here and the Fed down in the states about the interest rate and the interest rate policy over the next couple of years. So this this is kind of a two pronged thing. So from a banking point of view, the idea of raising interest rates is hugely positive. If I’m a bank, I’m going to have better margins, I’m going to have the ability to lend out more money at a greater capacity. But if I’m the Bank of Canada, this actually is falling in one of the risks that we see for this coming year.
So let’s talk a little bit about the risks to the economy that that we see at this point in time, and I think to point at the obvious. This inflation is a major, major one. Cost of everything going up and this interest rate policy or this conversation about increased interest rates that that we’re starting to have, and they do go hand in hand. So let me explain. The idea is the Bank of Canada has kept and so is the Fed. They’ve kept interest rates, or the overnight rate is at a record low right now it’s just a quarter of a percent, and it was expansionary monetary policy. What that means is if you keep interest rates low, you’re trying to encourage economic growth. So, especially because we were going through a hard time, they wanted to make it so that businesses that might have cash flow constrained in other ways, ie. Consumers not coming to their door because they’re stuck at home. They wanted to give them the ability to borrow money. So that’s part of why interest rates went as low as they did and stayed as low as they did. But I mean, if you if you zoom back out on the chart, we’ve actually been a in a downward trend in the interest rate field for quite some time now.
So it’s well and good time to start interest rate increases, the hikes in the interest rates, but that does come with some impact. So when you increase the interest rate, there’s a bit of a side effect of as borrowing costs go up, people will may not be as likely to borrow money. So that could be individual households in terms of purchases that they might make. So discretionary like a vehicle or a major decision like a house, which is tied to your mortgage, is going to be tied to the interest rate, as well as your credit score, among other things. But if you raise rates too much too quickly, it kind of has this this effect of putting the brakes on the economy. So you’re kind of hitting the brakes a little bit every time the interest rate goes up. And that being said, the talk is to do gradual, small increases at this stage in time and of course the Bank of Canada can change this at any point in time, but for the time being that’s where we are.
Cameron: Well, part of this too is the Bank of Canada is kind of forced to keep up with what the Fed in the states do. Like I’ve seen some projections where the calling for like five to six increases in the states over the next year. And if the Bank of Canada doesn’t keep up to a certain degree and keeps our interest rate even lower, that’s going to drive away investments, going to drive away growth. So if they stall out a times it’s better for a homeowner but if they don’t do it they can hurt the overall economy because a lot of this it’s a tug of war really between an average person and the investor economy as a whole.
Where if interest rates go up even I saw one project and if it goes up a quarter percent, you have a $500,000 dollar mortgage. That’s an extra $100 a month out of your pocket. So if you’re a homeowner, you don’t want the extra $100 a month. But if you are investor, if you have individual stocks, if you have SEG funds RRSP’s or TFSA’s, you want the bank to get that extra hundred dollar because you get a better dividend out of it. It keeps your portfolio growing. So it’s hard to find the middle ground here where interest rates can go up at a stable level, where it doesn’t hurt your pocket too much, but it also protects your retirement and protects your investments going forward. We kind of have to have both sides be benefited and both sides be hurt a little the same time. So there could be an overall growth. So it’s not too far on one side and not too far on the other.
So this is why it’s very delicate to manage all the stuff and you can’t just flip a switch and push up interest rates a couple percent or go backwards at the same time, because interest rates to go up, your loans go up, your HLOC’s go up, your mortgages go up. But at the same time, if they don’t go up, and then a lot of the investment money is going to leave the country and then that devalues the currency, that devalues the goods and services. So this is why it’s a tricky subject and there is no like one trick, one solution that either there the Bank of Canada, federal government or any government in the states can just say, all right, we’re going to fix this problem instantly all of a sudden inflation is gone, interest rates are okay, everyone’s thriving, everyone’s happy. There’s always a price to pay with no matter what decision you make here. And part of these market outlooks is trying to show you kind of the good, the bad, the ugly for you as an individual for you as an investor, so you can figure out how to prepare yourself going forward, either as in a cost you more to live, as it costs you less to live or you’re going to have less in retirement or you can have more in retirement. This is all part about the planning structure, so you can just be ready to adjust your own life to what all this myriad and all these different things that are happening.
Christine: Yes, so now that you’ve gone over the interest rate increase side, let’s take a look at the flip side, which is inflation. So if the Fed or the Bank of Canada here does not do anything, or does not increase interest rates or even puts them lower, we could be in a situation where inflation is running rampant. And we’ve already seen massive increases, both reported and not reported, because there’s a little bit of a stickiness there between the official numbers and what we actually feel in our pocket books. But interest rate increases do check inflation and that’s been proven historically. That was a big contributing factor through in the late 70’s and the 80’s when they had the stagflation situation, which was the stagnant economy and rampant inflation. That’s something that we’re actively trying to avoid at this point in time. People are quick to point out both these similarities and the differences from these periods in time. But the bottom line is inflation hurts the growth of the economy because you and I suddenly have less money to spend. If that extra hundred dollars a month now has to go to my mortgage, being most of us in Canada were in five-year fixed mortgages, so there could be a delay of up to five years before that type of increase hits your pocketbook. But during that point in time it might not have just been the one or two percent point interest in interest rate increases that they’re talking about now. We could be much further down the road in terms of interest rate increases. At that point in time.
Cameron: Well, that ties in, like your food prices are going up, or even when I was driving to work a couple days ago, gas is up to $1.76 per liter, and then all these other little areas where inflation is creeping in. So rather than one are two places taking more of your pocketbooks, you’ve got about twenty or thirty place to take you more out of your pocket. So you have less to invest, you have less to pay down your debt, your debts with, and it is just trying to scrimp and save. I guess even saw one report where even meat consumption in candidates down significantly just because of the costs.
Christine: And that brings us to the amount of debt that the Canadian household is holding, and that’s an incredibly important conversation to be having, because that debt will be impacted at some point in time by these interest rate increases and the capacity of a household to constitute, to continue to service its debt is something that’s going to be very, very important.
I mean, I know in my own practice I’ve seen a lot of people where the banks have already convinced them to re extend their mortgage to the twenty-five year maximum to get lower rates or to have lower payments. But when people have done that already, there’s kind of nowhere to go right. So one of the tricks for people that are having trouble making mortgage payments is they might try and get a longer amortization period. They might have to use some of the equity in their home.
Cameron: They put up a tree house in the back and rent it out.
Christine: Yeah, they’re trying to prevent the scenario where they have to sell the house. But a lot of people have used this period of time, and we’ve seen this not just in these past few years with covid but before as a trend where, with low interest rates, people were borrowing huge sums of money for discretionary purchases and also for their households, right, purchasing a home, purchasing vehicles.
Cameron: Well a lot of those loans were tied to people’s houses, people who did have equity, they burned through all that equity wagging either lines of credit or h locks, and that’s all. That’s all coming home to roost to speak.
Christine: Well, it was the idea of cheap and easy debt right, and the conversation now is, will that cheap and easy debt remain or for or how long will it be cheap and easy or is it going to be a lot more difficult because of the housing affordability crisis? Among other things, there is a review by the Ministry of Housing Right now where they’re looking at the amount that people can borrow from their homes, from their home equity, line of credits for the purchase of second properties and things like that, specifically investment properties. So there may be new rules coming down the road.
So let’s pivot really quickly to supply chain issues, because we all need to have access to the goods that we want to purchase and if you can’t access them, you can’t buy them kind of thing right. And this has been an incredibly difficult year for a lot of reasons. Here in BC we’ve had some flooding. With the flooding came a massive loss to both agricultural and livestock in terms of the production that we usually see come out of BC. It was it was devastating time.
Cameron: Not to mention all of our land access to the rest of the country got cut off for a few weeks there.
Christine: right, and there’s policies. I mean there was recently a policy announced in the news from the federal government where they’re not wanting unvaccinated truckers to be crossing the border. Things like that all have an impact on distribution of goods and Cam also had been touching on the higher price of gasoline. I mean, if I look out my window today at the nearest gas station, it’s about a buck seventy and when you think about the gas price, it hurts my wallet at the pump, but it’s also hurts the price of pretty well, everything you buy, because most of our goods at this point in time are, at least at some stage in the supply chain, shipped by truck. Pretty well everything, right?
Cameron: It’s either long haul or short haul, like even a couple of the restaurants by us they’re serviced by like Sisco, and they pay their truckers. They got to cover their gas and they got to pay someone else. You move stuff by their truck. So something that’s sitting on your local shelf at a grocery store, or retail store is, probably been about four or five different trucks and possibly a barge as well.
Christine: Yeah, and the price of that includes the price of fuel, because things like this are always passed down to the end user. So that’s to the consumer, and when that happens it has an inflationary effect as well. We’re talking about inflation for different reasons. There’s inflation because of the added monetary the added money in the system, so that’s from the covid benefits. But there’s inflation because of the additional cost of production and shipping of goods, and then there’s, honestly, just some increases because it’s been harder to get certain goods and people are capitalists and companies take advantage of that.
Cameron: Yes, for better for worse, but we have to be aware of that. This is just how it happens. Like even a day or two ago there was a big quote from Jim Pattison, one of the big business guys out here, in BC which who flat out just said just pass on all these costs of the consumer. It’s how a lot of businesses think can operate. So we have to be ready to respond to that as both as a consumer and both as an investor. So these supply issues, they can have a bit of an impact on the overall market outlook, but I don’t know if it’s going to be as big as it was over the last two years because mostly in the movement of goods that’s being affected right now and not as much the production side. Even something like semiconductors and chips for computers. I saw in NVIDIA they said they should have most of their issues cleared up by the middle of this year. So a lot of companies, manufacturers are starting to get over the supply issue. It could still be know the six months, but at least we’ve kind of started to turn around. As long as we can keep things moving at a good rate, we should have some benefit going forward and won’t be the same con sort of slog and drag we’ve seen before. But all these things have an overall impact on how your discretionary spending, goes and how your investments go.
So the question I have for you is, what kind of action items can we take as both a individual and an investor, going through all these expectations we’ve seen for the next three four months?
Christine: Sure, so let’s tie it all together and just kind of summarize the overall investment outlook for this period of time and I think across the board we’re seeing, and you know this is no one’s favorite to say, it’s fairly neutral with some upside to the equities. So we are encouraging people to invest in the markets at this point in time if your risk profile allows it. One of the largest risks is going to be risk to the bond market, the fixed income side of it. So typically people will use fixed income or bonds in their portfolio as kind of the steady Eddie sure thing, and in a normal environment bonds do just that. They pay their coupon. If interest rates are good, you’re making more of interest rates aren’t great than you’re not. But the big problem in a rising interest rate environment is that suddenly there will be new bonds on the market in the very new future that are going to pay a higher amount than the bonds that we all hold today. So when that happens, the bonds that you hold today will actually drop in value and when they drop in value that can have the bond portion of your portfolio have negative returns and of course a negative return is something that no one wants to see.
Cameron: Yeah, exactly really, unless because even with us we only really see bond holders with people who have RRIF’t their RRSP’s and are relying on it as retirement income. But it could be a hard sell right now where who wants a half a percent or a one percent bond? We can get eight to twelve on the stock market or you get thirty, forty percent with a house.
Christine: Well, and who knows how long that’ll be sustainable for. I mean interest rate increases won’t fix the supply issue with housing, but it will change the affordability structure, so how much people can borrow, which should have a flow through effect to a certain degree on the pricing of housing.
But back to fixed income, it is an important part. You’re mentioned retirees, but people of all ages do, for different reasons, keep fixed income in their portfolios. If they have shorter time horizons for a specific portion of their money, so that money is earmarked for a purchase, like, say, someone is saving for that down payment, they may want a higher bond content just because they don’t want the ups and downs of the stock market.
Cameron: But the same time you’d probably be good to talk about shorter terms for those bonds. Like not a lot of people are going for the three and five your bonds anymore. They’re going for like the one year or even shorter they can get it.
Christine: And this is what we’ve seen the portfolio managers do. They’ve shortened what you’ve just described as called duration. They’ve shortened the time, the duration of the bond portfolio, so the number of years that you’re holding that bond for. So shorter bond duration is less risk to a portfolio overall, because the risk is really the spread. It’s the difference between the one that you can get tomorrow versus the one that you have today. So in the bond market a lot of people also look to corporate bonds because a lot of the risk or a lot of the portions of a bond portfolio that will immediately feel the impact is government held. So either provincial or different levels of municipal or federal bonds. Those would have a more direct correlation to an interest rate increase. So people might be looking, like you said it, shorter durations in their bond portfolios. They may be looking at utilizing more corporate bonds as holdings, just because of corporate will usually pay a higher percentage than a government issued bond will. So you’ve got more of a spread to begin with and if these interest rate increases are pretty small, you might not get to that spread. So it could still be a net positive holding for you.
Our portfolio managers are also recommending that people look internationally for higher rated bonds. There are some. If you look at the Moody’s or the Finch’s, like the different bond rating agencies, there are some good bonds coming out of places like Singapore and Hong Kong. But I mean that’s kind of very quite a bit and a good amount of analysis has to go into vetting these bonds, these debts. Where they coming from? What are they supported by? Who’s backing them? That kind of thing as well. There’s also a greater appetite. I don’t necessarily agree with this for everyone, but it’s happening. So it’s worth the comment for maybe a bit of a higher yield bond, and what that means is a lower quality bond. So sometimes people are saying to get a higher rate on my bond, I’m going to decrease the credit rating that this bond has. So just keep an eye on that. If you have an actively managed bond portfolios, sometimes that gets added in there and you just want to make sure that you’re monitoring and controlling how much of that is in your portfolio.
Cameron: Yeah, something to say. Well, those higher yield ones, it’s because of the risk. It means there’s a greater risk that you won’t get your money back.
Christine: That’s exactly it. And if people want to be completely safe, so no loss whatsoever. There’s always GIC’s. A GIC is very different than a bond in that a bond is actively traded every day, which is why the bond prices can fluctuate immediately with changes. I mean even with the interest rate announcement. So nothing has happened yet, but when the Bank of Canada announced that it would be increasing interest rate, it actually dropped bond prices on the market. So that’s something that always has to be watched. Where on the flip side, if you buy a GIC, yes, the interest rates are very low and yes, you’re locking yourself in for whatever period of time you’ve selected, but there is no risk of loss. I mean, you’d want to see who you’re borrowing from, of course, so like a government issue, G see or you want to go from someone credit worthy that you know will repay the GICE, but it’s a much more secure investment at this time in that it’s not going to change overnight. So what you’ve agreed on is what it will be.
So we encourage people to take this time to review their investment portfolios and take a look at what your personal goals are for this year. That can be if you have short term or long term goals, or if you have other objectives. How does your current investment allocation align with that? Have you taken steps to manage the risks in your portfolio, whether that’s market risk, currency risk or interest rate risk? And if you’re not sure, feel free to give us a call. You know we’re always happy to meet new people. Talk about all these things and with COVID restrictions and things like that, we’re happy to meet over the phone or through video as well. So there really is no restriction and we’re happy to talk to you. So, until next time, take care and all the
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