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2019 Nicola Wealth Toronto Strategic Outlook

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2019 Nicola Wealth Toronto Strategic Outlook

  1. 1. 2019 Strategic Outlook David Sung, President
  2. 2. Pop Culture
  3. 3. 1994-2019
  4. 4. Nicola Wealth, 25 years
  5. 5. The Path Less Traveled
  6. 6. On The Contrary, Real Estate
  7. 7. Contrarian Investment Cottonwood Mall, Chilliwack, BC  Acquired – February 2019  Partnership with PCI Developments  248,000 sf enclosed mall  Vacant 92,000 sf former Target store  Remainder of Mall was 94% leased  Tenants include London Drugs, Dollarama, Earl’s Restaurant, TD Canada Trust, Burger King & Starbucks.  New lease with Save-On Foods to backfill former Target  New free-standing Pad/Store to be constructed  Strong store performance despite retail landscape  Projected IRR: >20%
  8. 8. Empire  Analysts despised the name and rightly so as the company had had a difficult time integrating the Safeway acquisition and the investment community lost further faith in management’s ability to turn Safeway around after they wrote down half the purchase price.  On December 14, 2016 the company announced their quarterly results and they were much worse than analysts had anticipated.
  9. 9. Empire • Dec 14, 2016 - Same-Store-Sales declined 5.1% in Western Canada. • The stock dropped over 20% over the next 2 days and that is when we started to invest. From: Sean Oye Sent: Thursday, December 15, 2016 12:11 PM To: PM Team Email Subject: Re: EMP/A “Quarterly results worse than expected. SSS declined 5.1% in the West and 2.6% overall. The stock is down over 16% this morning. Overall, this could be an ideal name to write Put options on. THI CDN could write the April Puts; which would provide ~17.74% annualized premium….”
  10. 10. Empire ANALYSTS IN 2016  No one was “shopping” for Empire stock at the end of 2016  End of 2016 – Stock Market Analysts negative on the stock  Public investors negative on the stock  We found the valuation of the company was very compelling—it was trading well below our very conservative estimate of its Net Asset Value  Overall, we felt that the short-term issues were transient, the introduction of a new CEO would be positive and that Safeway would get fixed  In essence, we update our Empire sum-of-the-parts model and decided the current share price didn’t make sense from a Net Asset Value perspective  So what has Empires performance been since that fateful reporting period?
  11. 11. Empire ANALYSTS TODAY  What a difference 1 year makes ... Everyone loves it now! Analysts and investors over the past year have been back “shopping” the stock.  For us, being contrarian and timing this investment against market sentiment has made a significant difference to the returns in our Nicola Tactical Cdn High Income Fund.  Since Dec 16, 2016, Empire’s returns have crushed both the S&P/TSX return and the two other major Grocers since!
  12. 12. Looking at Things Differently
  13. 13. Up Next…
  14. 14. 2019 Strategic Outlook Ron Haik, Senior Financial Advisor
  15. 15. Our Agenda An Inconvenient Truth 2018 in Review Four Season Investing The Perfect Storm
  16. 16. 2018 in Review S&P 500 2018 S&P 500 -4.4%First Correction in 2 Years -10.2% Dec 24, 2018 -19.8% Bloomberg – Feb 22, 2019
  17. 17. 2018 in Review S&P/TSX Bloomberg – Feb 22, 2019 July 12, 2018July 12, 2018 2018 S&P/TSX -8.9% Dec 24, 2018 -16.8% -8.0%
  18. 18. 2018 in Review BEAR-o-meter – Global Equity Markets Bond Yields & S&P 500 Both Move up Bonds Prices and Stock Prices Negatively Correlated S&P 500 -19.8% -18.8% -27.2% -23.6% -16.8% -22.8% -34.0% -22.3% -18.2% -16.4% -23.4% -18.5% -26.4% -21.1% -25.8% -30.8% -23.3% -16.2% 20.6% 19.0% 21.5% 24.8% 16.8% 9.8% 29.6% 36.7% 15.0% 10.5% 11.0% 16.4% 17.8% 10.7% 18.2% 25.4% 7.4% 18.6% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% S&P 500 Dow Industrials Russell 2000 Nasdaq Composite S&P/TSX Mexico IPC Argentina Merval Brazil Bovespa Stoxx Europe 600 FTSE 1000 Germany DAX France CAC 40 Italy FTSE MIB Nikkei Hang Seng Shanghai Composite Kospi Bombay Sensex Max Drawdown Recovery
  19. 19. 2018 in Review Canadian and U.S. Yield Curves Jan 1, 2018 Yield Curve Dec 31, 2018 +60 bps +69 bps Yield Curve Jan 1, 2018 Dec 31, 2018 +28 bps +18 bps -8 bps
  20. 20. 2018 in Review BEAR-ometer – Fixed Income & Real Assets -3.2% -5.1% -17.7% -9.5% -5.5% -5.9% -17.3% -12.3% -15.1% -12.7% -41.5% -44.3% -76.8% -13.6% -16.2% -23.6% -53.3% -81.2% -46.1% -46.5% 6.4% 4.4% 21.6% 8.6% 5.4% 6.6% 4.6% 20.1% 20.8% 20.1% 33.9% 41.4% 277.9% 10.1% 5.7% 14.3% 18.4% 29.0% 53.7% 62.1% -100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% US Agg Bond US TIPS US Leverered Loans US HY Global Agg Bond Global HY Cdn Preferred Shares Cdn REIT's US REIT's Global REIT's Brent Oil WTI Oil WCS Oil Gold Commodities Copper Lumber Bitcoin Horizons Marijuana ETF N.A. Marijuana Index Max Drawdown Recovery
  21. 21. Four Season Investing S&P 500 Winter Recession Rate cut Min Risk Summer Expansion Rate hikes, Max Risk Fall Slowing Growth High Inflation Reduce Risk Spring Recovery Low inflation, Add Risk
  22. 22. 2009-Current 1990 – 2000 1949 - 1956 1957 - 1961 1982 - 1987 2002 - 2007 1974 - 1980 1962 - 1966 1970 - 1973 1987 - 1990 1966 - 1968 1946 - 1948 10% 15% 20% 25% 30% 35% 0 2 4 6 8 10 12 Return(CAGR) Years S&P 500 Historical Bull Markets Barron’s – July 2, 2018 Fortune – August 2018 The Economist – October 11, 2018 Bloomberg Businessweek Aug 2018 Four Season Investing – Investor Sentiment Sir John Templeton: Bull markets are born on pessimism Grow on skepticism Mature on Optimism Die on euphoria
  23. 23. S&P 500 Four Season Investing – Consumer Sentiment (temperature) Mar 2000 – 11 mo. 13 Month Average Apr 1978 - 22 mo Nov 1980 – 9 mo. Feb 1989 – 18 mo. Aug 2007 – 5 mo.
  24. 24. Feb 1989 - Aug 1990 18 months Mar 1997 - Apr 2001 49 months June 2006 – Jan 2008 19 months Average 29 months Four Season Investing – Wage Growth (pressure)
  25. 25. December Spike Four Season Investing – Credit Spreads (speed)
  26. 26. Four Season Investing – Historical Patterns 2018 4.5 Point PE Decline S&P 500 -4.4% S&P 500 EPS +24% 2018 GDP +3.1% S&P 500 Forward P/E Multiple
  27. 27. Four Season Investing - Historical Patterns – 1984 & 1994 Bernstein US Economics – Jan 8, 2019 1984 GDP +7.3% Earnings +21% P/E – 2 pts 1994 GDP +4.0% Earnings +19% P/E – 3 pts S&P 500 + 6.3% 1985 S&P 500 + 33.0% 1995 S&P 500 + 37.1% S&P 500 + 0.3%
  28. 28. The Perfect Storm – Donald & Jerome S&P 500
  29. 29. The Perfect Storm – Hurricane Donald New York Times Op Ed – September 2018 I am part of the resistance inside the Trump Administration “Americans should know that there are adults in the room. We fully recognize what is happening. And we are trying to do what’s right even when Donald Trump won’t.” Betting Odds Trump will be Impeached In his first Term (PredicitIt – Mar 25, 2019) Business Insider – Dec 31, 2018 • March 25 Close – 22% • Pelosi – “He’s not worth it” • Mueller Investigation • No collusion
  30. 30. The Perfect Storm – Hurricane Donald S&P 500 South China Morning Post WSJ – Feb 19, 2019 USA: 25% tariff on $50 billion, 10% Tariffs on $200 billion (increasing to 25% by end of 2018) China: Proposed or imposed tariffs on $110 billion by December 2018 The Deal (we think) • Easy • China buys more US goods • Harder • Protection of Intellectual property • Reduce government subsidies to Chinese SOE’s • End technology transfer from U.S. companies • Hardest • Enforcement Mechanism – Unilateral? • Existing Tariffs WSJ – Feb 19, 2019
  31. 31. The Perfect Storm – Donald & Jerome S&P 500 Goldman Sachs Financial Conditions Index & Federal Funds Rate Fed 2018 - Four increases in Federal Funds Rate
  32. 32. The Perfect Storm – Hurricane Powell S&P 500 Double Line Raising Rates Webcast – Feb 26, 2019 Hedgeye Cartoon of the Day – Feb 21, 2019
  33. 33. The Perfect Storm – Hurricane Powell December 2018
  34. 34. The Perfect Storm – Hurricane Powell S&P 500 Hedgeye Cartoon of the Day – Jan 14, 2019 Barron’s – Mar 23, 2019 Three Times in 2019 Once in 2020 Twice in 2019 Once in 2020 No increase in 2019 Once in 2020 One Decrease in 2019
  35. 35. S&P 500 The Perfect Storm – Hurricane Jerome Unemployment recently touched it’s lowest level in 49 years (Dec 1969) WSJ: Current census estimates only 50,000 jobs/month needed to keep employment stable Current Gap -1.0%
  36. 36. The Perfect Storm S&P 500 – 2001 Recession (dotcom bubble) Apr 2000 3.8% Apr 2000 5.2% Natural Rate of Unemployment -1.4% 2001 Recession 8 months GDP -0.3% S&P 500 -47.4%
  37. 37. The Perfect Storm S&P 500 – 1973 – 1975 Recession Unemployment Rate Mar 1969 3.4% -2.4% Natural Rate of Unemployment 1973-75 Recession 16 months GDP -3.6% CPI +12.3% S&P 500 -45% Mar 1969 5.2%
  38. 38. S&P 500 WSJ – Jan 10, 2019 Fed looking at letting inflation run above 2% The Perfect Storm – Hurricane Powell
  39. 39. The Perfect Storm Bear Markets & Recessions S&P 500
  40. 40. An Inconvenient Truth Debt S&P 500 U.S. Unemployment vs. US Budget Deficit as % of GDP WSJ – Mar 21, 2019 CBO US Budget deficit to exceed $1T every year 2022-29 Social Security & Medicare = 40% of all federal spending (excl. interest). By 2029 will be 50%.
  41. 41. An Inconvenient Truth Debt U.S. Unemployment vs. US Budget Deficit as % of GDP Deficit increasing while unemployment decreasing Last time we saw this: Late 60s Jeffrey Gundlach – Doubleline • Last seven recessions budget deficit increase average 4% of GDP • Last two recessions 5.8% (2001) and 8.8% (2007) • Could hit 13% next recession
  42. 42. Bond Yields & S&P 500 Both Move up Bonds Prices and Stock Prices Negatively Correlated S&P 500 An Inconvenient Truth US Debt/GDP Bipartisan lack of interest in reducing debt: • Republicans – deficit talk a ploy to roll back tax cuts • Democrats – deficit talk ploy to cut Medicare, Medicaid & social security Washington Post article: A conversation last year between the President and senior advisors took place in which a “hockey stick” spike in national debt was presented. Trump’s reaction: “Yeah, but I won’t be here.”
  43. 43. IN SUMMARY
  44. 44. Summary - Farmers Almanac (Old) NWM Forecast It’s Fall – Getting closer to Winter No Recession 2019 Economy and earnings to continue growing Fed to continue tightening 2020 • Create recession in 2020 – 2021 Equities (Dividend Paying) over Bonds • Remember 1985 & 1995 • Look to reduce risk • Diversification • Roots are strong (New) Nicola Wealth Forecast Fed keeps rates low – for too long Result: More severe recession down the road • Asset Bubble – 2001 • Stagflation - 1973-5 All asset classes under pressure Longer term – Inconvenient truth • More debt • Higher Interest rates • Less room for fiscal stimulus • Roots might get severed
  45. 45. 2019 Strategic Outlook John Nicola, Chairman & CEO
  46. 46. Where Are We Going?
  47. 47. Us vs. Them Demographics Populism The 1%
  48. 48. Baby Bust 3.8 5.7 2.4 3.7 2.5 5.9 6.4 5 1.6 1.6 1.5 1.8 1.8 2.3 5.5 2.4 0 1 2 3 4 5 6 7 Canada China Germany US Russia India Nigeria The World 1960 2016 2.1 = Break Even
  49. 49. Memory Lane – Mary Poppins circa 1964
  50. 50. Mary Poppins Returns 2018 Is 90 the new 60?
  51. 51. Humble Tweets
  52. 52. 90% higher 40% lower The 1%
  53. 53. Anywheres vs. Somewheres
  54. 54. Older = Richer ? 29.5 28.1 30 32.9 35.3 37.2 38 0 10 20 30 40 1960 1970 1980 1990 2000 2010 2018 Median Age
  55. 55. Older= Richer Older = Richer https://wallethacks.com/average-net-worth-by-age-americans/
  56. 56. Top 10% Income Share 31.4% 30.6% 29.8% 26.6% 25.7% 25.4% 25.3% 22.3% 20.0% 22.0% 24.0% 26.0% 28.0% 30.0% 32.0% China US India France Italy UK Canada Norway
  57. 57. Gini Co-efficient 62.5 48.3 47 46.5 37.9 36.2 32.4 32.1 28.7 24.9 20 25 30 35 40 45 50 55 60 65 South Africa Mexico US China Japan New Zealand UK Canada Switzerland Sweden
  58. 58. Hey Big Spender Questions What is lowest cost form of debt? How much of mortgage debt has been used to acquire assets or start businesses vs. for personal consumption ? 85%-176% since 1990
  59. 59. It’s About the Cash Flow Debt Service - P and I increase from 12-14.9% since 1990 Debt Service - Interest only decrease from 10-6.5% since 1990
  60. 60. Spendthrift Canadians? 11 11.55 12.42 13.05 12.98 1.85 1.95 2.05 2.16 2.24 9.1 9.6 10.36 10.89 10.74 0 2 4 6 8 10 12 14 2014 2015 2016 2017 2018 Total Assets Total Liabilities Net Worth
  61. 61. By the numbers Over 4 years assets have risen by $2 Trillion. Liabilities by $400 Billion. LTV rate now at 18% vs. 17% in 2014. Declining home prices and equity markets impacted 2018 numbers.
  62. 62. Asset Allocation for HNW Investors Globally Source: Capgemini
  63. 63. Multi Family 20% Commercial 11% Farm/Timber 11% Public Equities 23% Securitised Debt 33% Gold 2% 42% Global Investable Assets Why would this be 60-75% of an Investment Portfolio?
  64. 64. Our Asset Allocation CDN/US CDN / Foreign (Private & Public) Bonds Mortgages Private Debt Hedge Funds Precious Metals Real Estate 24% Equity 36% Fixed Income 35% Alternative 5% Nicola Wealth Client Composite Model March 2019
  65. 65. Issues o Illiquid asset class o Hard to diversify o Significant minimum investment o Higher fees on committed capital o Due diligence on managers o Fund of funds likely best option
  66. 66. Northleaf PE Returns vs. MSCI World Returns to June 30, 2014. Northleaf returns gross of Northleaf fees.
  67. 67. Where has the low hanging fruit gone? Getting harder all the time2%< historical Still expensive How low can they go? Source: Statscan https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONTH- Shiller-PE-Ratio-by-Month Source: NAREIT
  68. 68. Private debt (mortgages and corporate lending) 2%< historical Still expensive How low can they go? Asset allocation Value investing Dividend growth Private Equity Build to own Value add Modest leverage Where has the low hanging fruit gone? Source: Statscan Source: NAREIT https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONT H-Shiller-PE-Ratio-by-Month
  69. 69. Market Cycles Markets more expensive Lower probability for above average future returns Markets less expensive
  70. 70. Seven Habits of Highly Ineffective Investors
  71. 71. What if Everyone is Above Average? 2006 Survey of 300 Fund Managers 76% said they were above average The other 24% said they were average 100% were average or better?
  72. 72. The Deadly Trio Cognitive Dissonance (I agree with every fact That agrees with me) Over Confidence (a Bridge - or apple - too far) Confirmation Bias
  73. 73. Gambling with House Money Investors increase their aggressiveness when they win first. Can we up the minimum bet?
  74. 74. Loss Aversion $2 Gain = $1 Loss
  75. 75. The Emotional Investor
  76. 76. Behavioural Finance Can you sell when you are winning and buy when you are losing ?
  77. 77. 3-5% annual loss of return The Impact of Emotion in Investing 5% worse In 12 monthswww.investmentexecutive.com
  78. 78. Managing Assets More Efficiently Alternative Strategies, 15.0% High Yield Bonds, 7.3% Preferred Shares, 4.5% Canadian equitries , 17.0% Real Estate, 20.0% Mortgages, 11.0% Bonds, 9.0% Foreign Bonds, 5.4% Private Equity, 4.0% Foreign Equities, 12.1% 4.6% Re-Balance -2.3% 2.3% for 2018 (Morningstar Neutral Balanced =-4.7%)
  79. 79. Spock or Homer?
  80. 80. Vulcan Investing an Investor!
  81. 81. Know Thyself (avoid overconfidence) Embrace Uncertainty (Minsky Moments) Play the Odds (Avoid Loss Aversion) Diversification in asset classes but focus within them Accept Pain (necessary path for growth) Behaving Well
  82. 82. The 4% Rule 50% success https://www.onefpa.org/journal/Pages/The%204%20Percent%20Rule%20Is%20Not%20Safe%20in%20a%20Low-Yield%20World.aspx
  83. 83. Price is 3 to 4 times as volatile as cash flow for both real estate and equities
  84. 84. A Couple’s Tale Bob and Linda are both age 60 . In good health and considering retirement . Here are the other facts: • Bob is a lawyer and Linda a dentist. • They are both incorporated and have personal, registered, and corporate portfolios of $2M each • Bob’s portfolio is best represented by Morningstar’s Balanced Index. • Linda’s portfolio is invested with us in a Core Model • They want to know the likely impact of withdrawing 4% of their capital annually and adjusting that to inflation. • We recreate that model for them going from January 2000 to December 2018.
  85. 85. How Well Does It End? $2.0M $2.0M$1.8M $1.8M$1.7M $3.7M $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 Bob 60/40 Linda Start Income End
  86. 86. A Couple’s Tale What Happened? • Bob’s indexed income greater than his overall return. • 85% of Linda’s return from cash flow so less volatility and no need to sell assets during negative years such as 2008. • SWP have greater negative impact in losing years. • Bob has 6 losing years out of 19 with a combined loss of 28% . Linda has two losing years with a combined loss of 7%.
  87. 87. What Is Next? Real and Secular Road Bumps Ahead Behave Well We’ve Been Here Before
  88. 88. THANK YOU This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Please speak to your Nicola Wealth Advisor regarding your unique situation. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.

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