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Clément Gignac Senior VP, Chief Economist and Chair, Asset mix committee 17 / 03 / 2016 Economy and capital markets March 2016 webinar
Clément Gignac
Senior VP, Chief Economist and Chair, Asset mix committee
17 / 03 / 2016
Economy and
capital markets
March 2016 webinar
2
Disclaimer
Opinions expressed in this presentation are based on actual market conditions and may change without prior warning. The aim is in no way to make investment recommendations. The forecasts given in this presentation do not guarantee returns and imply risks, uncertainty and assumptions. Although we are comfortable with these assumptions, there is no guarantee that they will be confirmed.
Industrial Alliance Insurance and Financial Services Inc.
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A look at the main conclusions from the December 2015 webinar
• World: Despite the slowdown in China, global growth
should reach 3% in 2016
• U.S.: We remain optimistic for growth of about 2.5 to
3.5% in 2016
• Canada: A gradual recovery expected with a change
in leadership towards central Canada
• Interest rates: The Fed will keep proceeding towards
the normalization of its monetary policy, no changes
in Canada
• Canadian dollar: A return to an expansionary fiscal
policy combined with higher oil prices should help
push the CAD higher
• Equities: Less enthusiastic towards the U.S. Market.
An overweight position on Canadian equities is
favored
• Acceleration in some countries such as India and the
U.S. should keep global growth above 3% in 2015-16
• Despite recession fears earlier this year from some
pundits, the U.S. economy remains quite dynamic.
• Recent data confirm that net exports are contributing to
growth
• The Federal reserve used a more dovish tone at its last
meeting, suggesting a very gradual hiking cycle
• After a difficult start to the year, equities rebounded
soundly and the Canadian market outperformed its U.S.
counterpart, in local currency and in $CAD
• After falling as low as 68 cents, the loonie rebounded
sharply along with the price of oil and rumors of a very
expansionary Federal budget
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›› A look at the economic landscape
5
Global economy: A gradual shift is under way
Source: iA Economics, data via lMF and Bloomberg
-1
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005 2010 2015
World: Growth above historical mean according to the IMF
Forecast
Mean since1980:
3,48 %
0
2
4
6
8
10
12
14
16
1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Growth in India is about to outpace China's Real GDP Growth, %
China India
6
India: A country that should contribute more and more to global growth
Source: Canaccord Genuity and iA Economics, data via Bloomberg
Japan1%
China30%
India15%Other EMs
28%
United States12%
European Union
9%
OtherDMs5%
Source: Canaccord Genuity estimates, IMF WEO (October 2015 estimates)
ESTIMATED CONTRIBUTION TO 2016 GDP GROWTH
-5
0
5
10
15
20
25
30
35
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
China: A two-tier economy... % change in growth, YoY
New economy Old economy
7
Euro zone: New measures from the ECB are lending a hand to the credit cycle
Source: NBF Economy & strategy Source: iA Economics, data via Bloomberg
-5
0
5
10
15
20
2001 2003 2005 2007 2009 2011 2013 2015
Eurozone: Credit cycle is back to positive Loans by Monetary and Financial Institutions, YoY % change
Non-financial
corporations
Consumer
credit
8
›› Oil:
An update of the situation…
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Oil: The most significant factor in the last year
10 Source: iA Economics, data via Bloomberg and US DOE
Oil price: Is the worst behind us?
25
35
45
55
65
75
85
95
105
115
01/14 05/14 09/14 01/15 05/15 09/15 01/16
West Texas Intermediate, $ / barrel
14Q4 72.94
15Q1 48.72
15Q4 42.11
16Q1 32.25
Change in
OPEC strategy
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
01/12 09/12 05/13 01/14 09/14 05/15 01/16 09/16 05/17
United States: Daily crude oil production Millions of barrels/day
FORECAST
11
Oil market: A story of supply, not demand
Source: iA Economics, data via Bloomberg and IEA
80
82
84
86
88
90
92
94
96
98
2008 2009 2010 2011 2012 2013 2014 2015
World: Crude oil production and demandMillions of barrels/day
35.8% 33.6% 33.2%
33.9% 33.7% 32.4%
32.0%32.7%
64.2% 66.4%
66.8%
66.1%66.3%
67.6%
68.0%
67.3%
NON-OPEC % of productionOPEC % of production Total Demand
12 Source: iA Economics, data via Bloomberg
Oil: India’s demand growth has caught up with China’s in 2015 !!!
0
200
400
600
800
1 000
1 200
1991 1995 1999 2003 2007 2011 2015
World: Crude oil demand in China and India Annual variation, in millions of barrels/day
China India
13
›› United States Recession fears earlier this year turned out to have been unfounded
14
Current risks for a U.S. recession are close to non-existent
Source: FRED
0
10
20
30
40
50
60
70
80
90
100
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
Odds of a U.S. recession, %
15
U.S.: The economy goes as consumption goes!
Source: iA Economics, data via Bloomberg
Consumption
Private investment
Government
Net exports-10
0
10
20
30
40
50
60
70
80
90
100
The U.S. consumer accounts for about 70 % of GDP
8
10
12
14
16
18
20
30
40
50
60
70
80
90
100
110
120
2004 2006 2008 2010 2012 2014 2016
U.S.: Consumer confidence boosting auto sales Conference Board confidence index and auto sales (millions, 3-months M.A.)
Consumer confidence (lhs) Auto sales (rhs)
16
U.S.: The labour market in great shape
Source : iA Economics, data via Bloomberg
2 000
2 500
3 000
3 500
4 000
4 500
5 000
5 500
6 000
2001 2003 2005 2007 2009 2011 2013 2015
U.S.: Highest jobs openings since 2001 JOLT survey, jobs openings, 000s
0
50
100
150
200
250
300
350
2014 2015 2016
Monthly change in Non-Farm Payroll Employment 000s
Change in Non-Farm Payroll Employment
Six month average
17
-1
0
1
2
3
4
2012 2013 2014 2015 2016
The Fed is looking at inflation... %
Core PCE PCE Core CPI CPI Median CPI
U.S.: Inflation is not a threat… for now
Source : IA Economics, data via Bloomberg
2% target
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Fed: A very gradual normalization of monetary policy is expected by the market
Source : iA Economics, data via Bloomberg
0
1
2
3
4
5
6
7
8
9
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
U.S. Fed funds and 2-year rates
Fed funds 2-year
Yields (bps)
Day before rate hikes Fed funds 2-year Spread
Feb. 3th, 1994 300 428 +128
Jun. 29th, 2004 100 281 +181
FOMC Dec.15th, 2015 25 96 +71
Actual (March 16th) 25 85 +60
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›› Canadian economy A transition is underway
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Canada: A change in regional leadership
Source : NBF Economy and Strategy
Full time employment
96
98
100
102
104
106
108
110
112
114
116
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Index
2007=100
AB
NFL
QUE
ONT
BC
21
80
90
100
110
120
130
140
150
2000 2002 2004 2006 2008 2010 2012 2014
Canada: Exports are starting to take over Real final domestic demand, GDP and exports Index, 2000=100
Real final domestic
demand
Real GDP
Real exports
Exports are back to being an engine of economic growth
Source : iA Economics, data via Bloomberg
22
Canadian dollar: the pullback had gone too far at the turn of the year
10
30
50
70
90
110
130
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
2004 2006 2008 2010 2012 2014 2016
CAD/USD vs WTI relationship
CAD/USD WTI
Source : iA Economics, data via Bloomberg
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Canada: Fiscal policy of the newly elected Federal government to the rescue in 2016 !!!
35
40
45
50
55
1980 1985 1990 1995 2000 2005 2010 2015
Canada: Total Government Spending % of GDP
Source : iA Economics, data via Bloomberg
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The new Federal government will come to the rescue in 2016! Aiming for an important fiscal deficit?
Source: NBF
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
1985 1990 1995 2000 2005 2010 2015
Deficit as a % of GDP
Assuming a
$18B deficit
28
32
36
40
44
48
52
56
60
64
68
72
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Net debt as a % of GDP
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›› Financial markets in 2016 Investors’ nerves are put
to the test
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Equities: Beyond volatility
Source: JP Morgan
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There are always good reasons not to invest in equities
Source : iA Economics, data via Bloomberg
10
100
1000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
United States: S&P 500 historical since 1960Log scale
Cuban missile crisis
Vietnam war
Freeze inwages and
prices
Energy crisis
Interest rate hikes
Debt crisis
Black Monday
Record budget deficit in US
Gulf war
Asian crisis
Tech bubble
Businessaccounting
scandal
Subprime crisis
Eurozone crisis
Chinese devaluation
fear
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The U.S. stock market should « normally » post positive returns in the coming months
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Canadian stocks outperforming so far in 2016
-10%
-5%
0%
5%
10%
15%
20%
25%
Annualized mean 2012-2015 Since 2016
S&P 500 vs TSX : A shift in momentum since the beginning of 2016 As of March 16th
S&P 500
S&P 500 (CAD)
TSX
S&P 500
S&P 500 (CAD)
TSX
Source : iA Economics, data via Bloomberg
30
TSX vs S&P 500: The largest spread between dividend yields in over 20 years
Source: iA Economics, data via Bloomberg
0.5
1.5
2.5
3.5
4.5
Dividend yield, TSX vs S&P 500
S&P 500 TSX
-2.0
-1.0
0.0
1.0
2.0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Spread between dividend yields TSX vs S&P 500
Largest since 1993
31
Asset allocation: The canadian stock market offers a dividend yield well above the 10-year rate on federal bonds !
Source: iA Economics, data via Bloomberg
3.17
1.29
0
2
4
6
8
10
12
14
16
18
56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
Canada: Dividend Yield and 10-year bond yield
Dividend yield 10-year bond yield
32
Risk factors
0.15
0.16
0.17
110
115
120
125
130
135
2014 2015 2016
Yuan: Will we see a new yuan depreciation ? Value of 1 Yuan vs trade weighted basket (lhs) and USD (rhs)
Trade weighted vs USD
Presidential elections: Who will be elected to the White House?
Source : iA Economics, data via Bloomberg
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iA Diversified funds: Value added from our active management relative to neutral positioning
Source : IAIM and Bloomberg
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
2% 3% 4% 5% 6% 7% 8% 9%
Retu
rn (
annualiz
ed)
Standard Deviation (annualized)
iA Diversified funds: Active management vs Neutral policy Gross returns, 3-year period ending February 2016
DIVERSIFIED (FU040)
SECURITY (FU240)
OPPORTUNITY (FU250)
SECURITY (POLICY)
DIVERSIFIED (POLICY)
IA CLARINGTON MONTHLY INCOME
(MF711)
OPPORTUNITY (POLICY)
IA CLARINGTON MONTHLY INCOME
(POLICY)
BONDS (TMX UNIVERSE) TSX
+ 230 bps
+ 194 bps
+ 259bps + 200bps
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Investment strategy – March 2016
• Asset allocation: Despite a volatile start to the year, we remain overweight stocks within our Diversified mandates with a strong bias (since December 2015) towards Canadian equities
• Equities: More enthusiastic towards the Canadian market as its valuation is more attractive, our view on the global economy is more positive and we see a more balanced oil market
• Bonds: Despite some weakness in corporate bonds early in 2016, we continue to overweight high quality names and provincial bonds
• Canadian dollar: The rebound in the price of oil and the return to a very expansionary Federal fiscal policy lead us to be quite confident that the secular bottom is in for the Canadian dollar. Our exposure to the U.S. Dollar is completely hedged in all of our funds
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›› Thank you!
