The past few weeks have been a tumultuous period for our equity markets, and this week was no different. Some of the culprits are readily known, namely Greece and China, however this week our Governor of the Bank of Canada was added to that conversation.
The Bank of Canada reduced the overnight key benchmark interest rate for the second time this year as lower oil prices continue to weigh on the economy, which actually modestly contracted over the first half of the year. During the press conference, Governor Stephen Poloz stated “The lower outlook for Canadian growth has increased the downside risks to inflation, and that Canada’s economy is undergoing a complex adjustment.” The bank also said that the economy is not expected to return to its full capacity to keep inflation at 2% on a sustained basis until the first half of 2017; however the underlying trend of inflation is between 1.5% and 1.7%.
When speaking to the Bank of Canada’s growth forecasts, Governor Poloz does foresee some near-term weakness; however the forecast remains positive at 1.1% for 2015 and 2.3% for 2016. The central bank expects the rebound to be led by non-energy exports with the non-resource track for growth beginning to dominate in the third quarter, where policy makers are forecasting that the Canadian economy to expand by about 1.5%. So despite today’s headlines maybe not looking so robust, the Canadian economy is far more diverse than it once was and should be expected to be just fine.
Just a brief note on Greece this week, as we did finally see negotiations move forward and the Greek Government voting to accept austerity measures that we in fact tougher than what was previously rejected, in order to receive bailout funding to keep the lights on. Now this certainly does not solve the problem, rather merely extends the lifeline that keeps the country afloat while more extensive reforms can be worked on. The key point is that fears of a financial contagion spreading throughout Europe have been greatly lessened.
A big news maker over the past few weeks has also been China, with the wild swings in their capital markets and the subsequent government intervention. We are not invested within the Chinese markets, nor would we suggest anyone try it on their own, as the Chinese market is highly manipulated and controlled. Therefore we cannot honestly manage your money in a market that cannot be understood or trusted to be fair.
For a bit of history, the Chinese stock market has been on an incredible hot streak for the last year, essentially doubling over the past 12 months. Primarily due to millions of people borrowing substantial amounts of money from the banks as the state-owned media urged people to buy stocks, loudly proclaiming that the markets were the place to put their money. To make a long story short, stock price in China rose too high too fast against the backdrop of a slowing economy, and on June 26th this all came to an end.
Just as the markets sharply rose on “greed”, they fell just as sharply on “fear”. The Chinese markets dropped 7% on that day alone, and between June 26 and July 9 investors saw an incredible 30% decline.
But where this story take a turn towards “crazy town”, is that the Chinese Government’s reaction to this was to enact a slew of policies that ordered the 20 largest brokerage firms to buy stock (and borrow to do it), dramatically curb margin lending for retail investors, put a near ban on short-selling, halted trading of nearly 2/3rds of the equities that had fallen the most, and placed mandatory trading holds on insiders. To us this is the definition of manipulation and why we have said that the Chinese markets cannot be trusted and should not be invested in.
All this drama in Europe and China serves as a useful reminder of why the basics of investing are so important; to never invest emotionally, to not rely on the media, and never invest what you don’t have. In the end, our advice has always been to understand the “what” and “why” of any investment held, and to not waste time fearing the “what if”.
While political, economic and financial events will continue to dominate the world news, we will continue to monitor the global markets and never stop educating ourselves and rest assured that you will hear from us promptly, should any of these events affect you.
We received the following notice from Crowe Mackay LLP, a local accounting firm, that we felt was important to forward to all our readers.
Beware of Fraudulent Communications
In light of continued reports that taxpayers are receiving fraudulent emails and aggressive phone calls purporting to be from the Canada Revenue Agency, please remember the following:
The CRA will not send emails containing any links.
The CRA will not request personal information of any kind from a taxpayer by email or text message.
The CRA will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.
The CRA will not send emails in English or French only: all communications are in both official languages.
The CRA will not leave any personal information on an answering machine.
We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group