Weighing The Risks

On Monday the Bank of Canada issued its Spring 2019 Business Outlook Survey (BOS). The chart above tells the story: "suggesting a softening of business sentiment". In other words, Canadian businesses are expecting economic slowing. 

Confidence is down, which means that businesses will postpone investing until they see a better outlook. 

The Canadian consumer has been in retreat as well:

Retail sales fell steadily through January. We shall see the February data tomorrow (not sure why Stats Can cannot be more current), it is supposed to show signs of growth. 

But clearly, the Canadian consumer has been postponing purchases. At best the Canadian economy is in stall mode. No doubt the result of higher interest rates squeezing households and geo-political trade issues putting businesses on the defensive.

Slower economic growth on a global scale has (as I have stated in previous blogs) has put central banks around the world on alert: Both the Bank of Canada and US Fed stopped raising interest rates.

The big question in front of us: will it be enough?

Some stock market participants want you to grasp that as a resounding yes. The stock market "cheerleaders" have recovered their voices.

When it comes to my money, I am not convinced. I remain invested in stocks, of course (as do our High Rock private clients, who are invested in the exact same assets, although their allocations may differ according to their Wealth Forecasts). However, it will take significantly more than sentiment from stock market enthusiasts (momentum) to convince me to be more fully invested. Show me the value first, before I take the risk. 

Earnings are looking soft, with barely any expected growth over the next year and the relationship between prices and earnings over that period make stock prices (at current levels) look expensive:

Without strong economic growth, it is difficult to see how paying high stock prices is not an overly risk filled situation.

For our purposes, as stock prices rise, without economic growth, it actually makes more sense to take risk off of the table. Or find alternative asset classes that offer better risk / reward value. 

We are very fortunate, at High Rock to have one of the best portfolio managers in High Yield in the country (top performer over multiple years with the Canadian High Yield fund that we manage for Scotiabank, AHY.un ) and our ability to offer this same competency to our private clients becomes full of added value, especially when they can get access to this asset class at wholesale cost (i.e. no additional fees).

Less risk, more value. Better risk-adjusted returns over longer periods of time, without the very high potential for volatility that is inherent in stock markets.

Always able and willing to discuss this further.