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2020 Vancouver Strategic Outlook Presentation

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2020 Vancouver Strategic Outlook Presentation

  1. 1. Welcome
  2. 2. 2020 Strategic Outlook David Sung, President
  3. 3. • Ebola • SARS • Coronavirus • Terrorism • Fear Politics • Climate Change
  4. 4. • Bitcoin • Cannabis • Tesla
  5. 5. “I could calculate the motions of the heavenly bodies, but not the madness of the people.” - Sir Isaac Newton
  6. 6. Bubbles and The Madness of Crowds • The Roaring 20’s Bubble • Dot-Com Bubble • 2008 Global Housing Bubble
  7. 7. HAVE A PLAN Where You Are Now Where You Are Trying To Go
  8. 8. The “All Weather” Portfolio
  9. 9. ^ This is a blended benchmark of 4 indices minus 1% management fee: Citi World Government Bond, FTSE TMX DEX Universe Bond, MSCI World, S&P TSX Composite $0.00 $500,000.00 $1,000,000.00 $1,500,000.00 $2,000,000.00 $2,500,000.00 $3,000,000.00 $3,500,000.00 $4,000,000.00 $4,500,000.00 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Nicola Wealth vs. The Marketplace Nicola Core Performance (net of fees) S&P 500 (CAD) 60/40 Model Portfolio (minus 1% management fee) MSCI World (CAD) 6.97% 4.19% 5.56% 4.57% ^ Past 20 Years • Tech Bubble • Sept 911 Attack • Iraq Invasion • Mad Cow • SARS • 2008 Credit • Ebola Outbreak • Brexit Vote -2.78%
  10. 10. Last Week: The Numbers Mon Tue Wed Thu Fri 1 Week Drop% Year-To-Date The Dow Jones Nicola Wealth Core Portfolio 1000, 900, 125, 1200, 350 = 3,500 - 10.76% $CAD - 7.43% $CAD - 2.82% $CAD - 0.77% $CAD
  11. 11. SENSATIONALIST
  12. 12. 2020 Strategic Outlook Rob Edel, Chief Investment Officer
  13. 13. Our Agenda 2021 and Beyond 2020 Outlook2019 in Review Investment Lineup
  14. 14. 2019 in Review – Global Markets 2019 vs 2018 S&P 500 31.5% 22.8% 27.7% 19.8% 18.6% 2.3% 7.1% 3.0% 13.3% 14.5% 14.3% 8.6% 13.1% 6.1% 0.3% 34.5% 18.3% -0.9% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% U.S. Canada Europe Asia-Pacific Emerging Markets Treasury bills Treasuries German Bunds EM sovereign dollar U.S. investment-grade U.S. high-yield U.S. leveraged loans EM dollar bonds European i-grade European high-yield WTI crude Gold Industrial metals -8.9% -4.4% -10.3% -13.1% -14.3% 1.9% 0.9% 2.4% -4.2% -2.5% -2.1% 0.4% -1.9% -6.3% -8.2% -24.8% -1.6% -18.1% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% World U.S. Europe Asia-Pacific Emerging Markets Treasury bills Treasuries German Bunds EM sovereign dollar U.S. investment-grade U.S. high-yield U.S. leveraged loans EM dollar bonds European i-grade European high-yield WTI crude Gold Industrial metals
  15. 15. 2019 in Review – 10 Year Global Markets vs Luxury Index (Knight Frank) S&P 500 13.5% 6.9% 8.7% 6.6% 4.0% 0.6% 3.1% 3.6% 6.7% 5.5% 7.6% 5.0% 6.3% 2.3% 5.4% -2.1% 3.3% -1.8% -5.0% 0.0% 5.0% 10.0% 15.0% U.S. Canada Europe Asia-Pacific Emerging Markets Treasury bills Treasuries German Bunds EM sovereign dollar U.S. investment-grade U.S. high-yield U.S. leveraged loans EM dollar bonds European i-grade European high-yield WTI crude Gold Industrial metals -3.5% 5.0% 5.1% 7.2% 7.4% 9.2% 9.4% 11.2% 11.3% 20.4% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
  16. 16. 2019 in Review – S&P 500 S&P 500 Monetary policy Trade War
  17. 17. S&P 500 East 16 Teams Duke #1 West 16 Teams Gonzaga #1 South 16 Teams Virginia #1 Midwest 16 Teams North Carolina #1 F I N A L F O U R F I N A L F O U R National Championship Virginia
  18. 18. ??? ??? 1. Phase One Holds 4. Phase One Falters 2. Tariffs Lowered 3. Trade War Europe 1. Trump Re-Elected 4. Biden Elected 2. Bernie Elected 3. Bloomberg Elected 1. Slow Recovery 4. Strong Growth 2. China Recession 3. Recession 1. On Hold ??? 4. Negative Rates 2. More Cuts 3. Raises Rates Trade War US Election Global Growth The Fed
  19. 19. S&P 500 US China Trade War 2020 Outlook – US/China Trade Deal WSJ – Jan 17, 2020 Tariff Relief • Cut in half 15% on $120 B • Postpone 15% on $160 B Tariffs still in effect • 7.5% on $120 B • 25% on $250 B 1. Phase One Holds 4. Phase One Falters 2. Tariffs Lowered 3. Trade War Europe 1. Phase One Holds 1. Phase One Holds 2. Tariffs Lowered
  20. 20. Evaluation Phase One - After US election Phase Two Industrial Subsidies - After US Election S&P 500 From 2017  US increases from 9% to 17% Share of Chinese imports WSJ – Jan 16, 2020 2020 Outlook – US/China Trade Deal +$78 billion +$32 billion +$52 billion +$38 billion
  21. 21. 2020 US Election RBC Capital Markets The Mood of the Market Dec 17, 2019 Do you think Trump will win the White House in the 2020 election? 2020 Outlook – US Election March2019Survey June2019Survey September2019Survey December2019Survey 1. Trump Re-Elected 1. Trump Re-Elected 1. Trump Re-Elected 4. Biden Elected 2. Bernie Elected 3. Bloomberg Elected 2. Bernie Elected Since 1900 only three incumbent presidents have lost re-election in past 100 years: Herbert Hoover, Jimmy Carter, HW Bush All 10 who have sought re-election without recession have won Gallup Feb 2020 poll: 63% back Trump’s handling of the economy. Highest in 20 years. However, in past 30 years only 2 presidents have won by more than 4%
  22. 22. 2020 Outlook – US Election The RBC Macroscope – Jan 6, 2020 Strategas – Feb 19, 2020 Washington Post Sanders spending plan, $51 trillion over 10 years • WSJ, up to $97.5 trillion
  23. 23. S&P 500 2020 Outlook – Global Economy RBC Capital Market 2020New Year Preview Global Macro - Jan 20, 2020 1. Slow Recovery 1. Slow Recovery 1. Slow Recovery 4. Strong Growth 2. China Recession 3. Recession Global Economy 2. China Recession
  24. 24. S&P 500 McKinsey – China Brief: The State of the Economy Intentional reduction in Credit Growth Credit Growth Less than Nominal GDP GrowthWSJ – Jan 17, 2020 2020 Outlook – Global Economy Credit growing faster than GDP
  25. 25. 3. Raises Rates 2020 Outlook – The Federal Reserve & Monetary Policy U.S. M2 Money Stock (YoY%, LHS) U.S. Fed Funds Target Rate (YoY, RHS) Fed Raised 9 times 4 times in 2018 2019 Cut 3 times Money Supply rises Powell Pivot 1. On Hold 1. On Hold 1. On Hold 4. Negative Rates 2. More Cuts 3. Raises Rates The Fed 2. More Cuts
  26. 26. 2020 Outlook – The Federal Reserve & Monetary Policy U.S. Personal Consumption Expenditure Core Price
  27. 27. 2020 Outlook – The Federal Reserve & Monetary Policy U.S. Personal Consumption Expenditure Core Price PCE Core Price Index
  28. 28. 1. Phase One Holds 1. Fed On Hold 1. Phase One Holds 4. Phase One Falters 2. Tariffs Lowered 3. Trade War Europe 1. Phase One Holds 1. Trump Re-Elected 1. Trump Re-Elected 1. Phase One Holds 1. Trump Re-Elected 4. Biden Elected 2. Bernie Elected 3. Bloomberg Elected 1. Slow Recovery 1. Slow Recovery 1. Slow Recovery 4. Strong Growth 2. China Recession 3. Recession 1. On Hold 1. On Hold 1. On Hold 1. Fed On Hold 4. Negative Rates 2. More Cuts 3. Raises Rates Trade War US Election Global Growth The Fed 2. Tariffs Lowered 2. Bernie Elected 2. More Cuts 2. China Recession 2. Bernie Elected 2. Tariffs Lowered 2. China Recession 2. More Cuts 2. Bernie Elected 2. Global Recession
  29. 29. 2020 Outlook – COVID–19 & Global Growth (Morgan Stanley) Containment by March China normalizes by end of March Global GDP: 2.5% Q1(from 2.9%) US GDP: Q1 Weakens relative to 1.7% China: Q1 4.2% but Q2 6.0% Fed - On Hold New Geographies & into Q2 Peaks in Q2, production disruption Q2 Global GDP: 2.4% 1H2020 US GDP: 1H2020 near stall speed China: Q1 3.8% but Q4 6.4% Fed – 25 bps cut 2Q 2020 Persisting into Q3, rising recession risk All large economies impacted Global GDP: 1Q-3Q20 weak US GDP: 1H20 close to zero, Q3 soft p/u China: Q1 3.5% but Q4 6.1% Fed – 125 bps cuts by Q320 Scenario 1 Scenario 2 Scenario 3 RBC Strategy Spotlight (Feb 27, 2020) Correction (SARS, 9/11) – 10% from 2020 High Recession – 24-32% from 2020 High Growth Scare (2H 2018) – 14-20% from 2020 High
  30. 30. Inequality Fiscal & Monetary Policy US / China Decoupling Climate Change
  31. 31. S&P 500Business Insider – Dec 4, 2019 WSJ – Aug 29, 2019 2021 & Beyond – US China Decoupling Bloomberg – Feb 14, 2020 Nancy Pelosi agrees with Trump on threat posed by Huawei technology “I tell you, unequivocally and without hesitation, be very careful when you go down this path unless you want to end up with a society like China.”
  32. 32. S&P 500 Franklin Templeton – Rising Global Risks, Excessive Risk-Taking and Exhaustive Policies – Jan 2020 China building own supply chain & customers $1 trillion in infrastructure spanning more than 60 countries 2021 & Beyond – US China Decoupling 5G WSJ – Huawei benefited from as much as $75 billion in state-backed financial assistance Helped charge 30% less for equipment US looking at preventing GE JV from selling jet engines US looking at preventing China access to Chip technology
  33. 33. S&P 500 NY Times – Jan 28, 2019 2021 & Beyond – Inequality NY Times – Feb 24, 2019 GDP per capita Income Growth of the 1.0% Income growth of the .01% Top marginal tax rate has been high But average effective tax rate constant Income of top 10% the “upper middle class”
  34. 34. S&P 500 NY Times – Jan 27, 2019 2021 & Beyond – Inequality Millennials Zero cumulative increase in income since 1975 Fat Cat Boomers!
  35. 35. S&P 500 Threat of Climate Change • Economic cost of climate change • Cost of mitigating global warming • Implications for capital markets 2021 & Beyond – Climate Change “You say you love your children above all else, and yet you are stealing their future in front of their very eyes.”
  36. 36. S&P 500 2021 & Beyond – Climate Change (Economic Cost) Federal Reserve Bank of Dallas – Long term Macroeconomic Effects of Climate Change: A Cross-Country Analysis Percent Loss in GDP per capita by 2100 Abiding by the Paris Agreement Percent Loss in GDP per capita by 2100 - No Climate Change Policies ~ +1.0 °C over 85 years GDP per capita -1.07% -1.68% -1.88% -0.45 °C -13.08% -10.52% -4.35% ~+3.5 °C over 85 years GDP per capita -7.22%
  37. 37. S&P 500 2021 & Beyond – Climate Change (Cost to Mitigate) Electrical System €2.4 tn Heating €3.20 tn Electric Mobility €1.40 tn New Technologies €1.20 tn €7.1tn The European Green Deal • Zero net emission by 2050 • €7.1 trillion over for 30 years Goldman Sachs – Top of Mind – Investing in Climate Change – Jan 30, 2020 US Green New Deal • 100% renewable in 10 years • ClearView Energy Partners: • $2.9 trillion to make US 100% renewable power • Nearly one year’s tax revenue UBS: OECD estimates more than $90 trillion needed for infrastructure alone to meet Paris Climate Agreement Global Energy Challenge Balance the need for cheap and reliable energy needed for economic growth with the damage and contribution to climate change
  38. 38. S&P 500 2021 & Beyond – Climate Change (Implications for Capital Markets) Goldman Sachs Credit Strategy – Bonds go green: Benefits for issuers, no harm for investors Feb 11, 2020 Global Sustainable Investment Alliance: Jan 2018 - More than $30 trillion invested in sustainable +34% Jan 2016 Jefferies White Paper – Nov, 2019 Growth of ESG investment “could” define the next decade for Western fund management industry Sustainable Investing Goal: Companies rated on their carbon emissions Increase the cost of capital for companies with high CO2 emissions
  39. 39. S&P 500 WSJ – Dec 9, 2019WSJ – Dec 9, 2019 Normal recession Cut rates 500 bps Deficit/GDP 12 months ending Jan 2020 -4.9% Already at recessionary levels 2021 & Beyond – Fiscal & Monetary Now at 175 bps Modern Monetary Policy • Combining monetary and fiscal policy • Can’t go bankrupt if issue debt in your own currency • No limit to how much debt you can issue • Social needs determine government spending not budget • Won’t interest rates go up? Not if Fed buys bonds (QE) • Won’t the Fed’s money printing result in inflation? Not if economy running below capacity • When economy running beyond capacity (inflation) – Increase taxes
  40. 40. S&P 500 WSJ – Jan 11, 2020 When will we start to feel the Bern? BCA Research – US is moving to the left • Led by Millennials Green New Deal Medicare For All Free College Tuition Questions: Can politician efficiently allocate capital? When we get inflation, will politicians react quickly? If taxes have to increase, who will pay more? 2021 & Beyond – Fiscal & Monetary
  41. 41. REAL ESTATE Canadian US Development Global PRIVATE MARKETS Private Equity Private Debt Infrastructure Mortgages ALTERNATIVE Hedge Funds Precious Metals FIXED INCOME Bonds Global Bonds Pref. Shares High Yield EQUITIES Canadian US Foreign Alt Energy Power Forward Centre Small Forward Point Guard Shooting Guard
  42. 42. S&P 500 Bridgewater Associates Ray Dalio 1975 $160 billion AUM Build models to systematically allocate capital based on their timeless view of world and asset flows Barron’s – No one was better prepared for the global market crash Investment Strategy– Lineup Three Iconic Case Studies 1. US 2007-2011 2. US 1928-1937 3. Germany 1918-1924 48 other case studies over the last 100 years
  43. 43. S&P 500 Renaissance Technologies • Jim Simons 1982 • $75 billion AUM • Mathematician & Cold War Code breaker • Widely regarded as the “most secretive and successful hedge fund of all time” • Market inefficiencies are so complex they are in a sense hidden in the market code • Build computer models to identify and profit from patterns in the market Investment Strategy– Lineup
  44. 44. S&P 500 Fed and easy monetary policy to dominate 2020 Equities over Bonds Returns more moderate Global assets over US Asset Look to build defensive positions Investment Strategy– Lineup (the 6th Man)
  45. 45. 2020 Strategic Outlook John Nicola, Chairman & CEO
  46. 46. BC Budget 2020 Tax Rate Changes for 2020 • Personal from 49.7% to 53.5% > $220,000 taxable income • Eligible Dividends from 31.4% to 36.4% • Ineligible dividends from 43% to 49% • Capital gains from 24.85% to 26.75%
  47. 47. 49.8% 31.4% 24.9% 44.6% 53.5% 36.5% 26.8% 48.8% 43.7% 25.8% 21.9% 33.7% 22.4% 41.5% 22.4% 44.9% Salary/Bonus Eligible Dividends Capital Gains Ineligible dividends 2019 2020 2013 Increase 2013-2020
  48. 48. 48% 47.5% All other provinces between 50.4% and 54% 54.2% 42.6% 40.6% 53.5% 36.5% 26.8% Salary/Bonus Eligible Dividends Capital Gains 1998 2020
  49. 49. Customized approach based on your situation
  50. 50. $477,000/yr.
  51. 51. Not Public or Private, but Public and Private The Tyranny of the ‘Or’ Vs. The Genius of the ‘And’
  52. 52. December 2000 to June 2019 Return Value of $1M Invested S&P500TR: 6.7% $3,540,000 R3000TR: 7.0% $3,740,000 PRIVATE EQUITY: 9.1% $5,460,000
  53. 53. -56% decline in 20 years
  54. 54. $700 Billion in share buybacks in 2019. Where is this money going?
  55. 55. +$4.5 Trillion Share Buybacks 2009-2019 = $5 Trillion
  56. 56. Private = 7.5% of public markets
  57. 57. 40% more since 2009
  58. 58. 0 5 10 15 20 25 30 35 40 45 50 2000.01 2000.05 2000.09 2001.01 2001.05 2001.09 2002.01 2002.05 2002.09 2003.01 2003.05 2003.09 2004.01 2004.05 2004.09 2005.01 2005.05 2005.09 2006.01 2006.05 2006.09 2007.01 2007.05 2007.09 2008.01 2008.05 2008.09 2009.01 2009.05 2009.09 2010.01 2010.05 2010.09 2011.01 2011.05 2011.09 2012.01 2012.05 2012.09 2013.01 2013.05 2013.09 2014.01 2014.05 2014.09 2015.01 2015.05 2015.09 2016.01 2016.05 2016.09 2017.01 2017.05 2017.09 2018.01 2018.05 2018.09 2019.01 2019.05 2019.09 2020.01 Cape Shiller Index 2000-2020 130% more since 2009 PE Ratio = 14 PE Ratio = 32
  59. 59. 41%
  60. 60. • 6M business with employees • 98% with fewer than 100 • 120,000 with more than 100 employees • Less than 3% publicly traded By The Numbers in the U.S. Publicly Traded
  61. 61. Less than 25% of global stock buybacks Average approx.$200B/year • Patient capital • Simpler compliance • Partial liquidity events • Strategic partners
  62. 62. +50%
  63. 63. 6%/year since 2000 -40% Twice
  64. 64. Liquidity: Show Me The Money
  65. 65. World’s Largest Private Companies Home Sweet Home The Smile
  66. 66.  Diversify  Manage Costs  Evergreen  Waterfalls Managing Private Asset Risk
  67. 67. • 2% on committed capital for five years • If 80% of committed funds invested average fee is >5% /year • Performance fees of 20% • 1.5% on invested capital for five years • Offer co-invest opportunities • Blended fee can be under 1%/yr. • Performance fees 15% • About 75% lower overall first five years Fees: Committed vs. Invested Capital
  68. 68.  Managers  Vintages  Geography  Industries  Asset Classes (equity, debt, infrastructure, real estate) Nicola Wealth Private Equity  $275M AUM – 21 Funds  12 managers assets  Global companies  14 direct / co-invest Diversification
  69. 69.  Significant minimum investment  5-year funding period 10-14 year fund  Liquidity when assets sold  Investor responsible for “Dry Powder”  Small minimums  No other capital commitment  1-3 year minimum hold  Liquidity periodically (monthly / quarterly, annually)  Add new capital when available Closed End vs. Evergreen Funds
  70. 70. 0 2 4 6 8 10 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 CapitalInvested Time in Years No distributions Fewer assets Diversified and Cash Income High diversification Income – less risk
  71. 71. Co-Investments • Much lower fees than traditional funds • Review each investment for suitability • Decide on amount to be invested
  72. 72. $3400 $770 Equity ($Billions) Debt ($Billions )  Less Risk  Lower Returns  Shorter Duration  Current Income  RRSP/ TFSA and Foundation Eligible US Private Asset Markets 2018 (Preqin)
  73. 73. 43% Private Core Portfolio Asset Allocation (December 2019) Public Equities 32% Public Fixed Income 21% Private Debt/Mort., 13% Private Equity 4% Real Estate 21% Alternatives 9% 57% Public
  74. 74. Less Taxable Annually Private Equity 10.5% Mortgages 23.0% Private Debt 10.5% CDN Real Estate 12.5% US Real Estate 23.0% Value Add Real Estate 7.5% Global Real Estate 8.0% Infra. 5.0% 100% Taxable RRSP / IPP / TFSA Foundations Core Portfolio Asset Allocation (December 2019)
  75. 75. Private Equity 15.3% Cdn. Real Estate 19.5% US Real Estate 34.5% Value Add Real Estate 11.6% Infra. 6.7% Global Real Estate 12.4% $1,000,000 $1,658,000 $658,000 $156,450 $10,070 Starting Capital Ending Capital (before fees) Gain (before fees) Taxable Income (gross ) Tax Paid (after fees / RDTOH) Private Assets How Is This Possible? • RDTOH reduces corporate tax by 60% • Low turnover of assets • Depreciation creates return of capital • Planning fees deductible 5 Year Results (2014-2019) • Gross return before fees = 10.7%/yr • Net return after fees = 9.7% • Net return after taxes = 9.6%
  76. 76. Private Fixed Income Private Debt 32% Mortgages6 8% • Lower risk • Shorter duration • Higher liquidity • 100% taxable income • RRSP / IPP / TFSA / Donor Advised Funds • 5 year returns net of fees 4.4% • Low rates may last a long time Rates have fallen since Nov 2019
  77. 77. Take My Money – Please 10 years with no interest 1,000,000 Swiss Francs 921,000 Swiss Francs
  78. 78. Private Equity 10.5% Mortgage 23.0% Private Debt 10.5% CDN Real Estate 12.5% US Real Estate 23.0% Value Add Real Estate 7.5% Global Real Estate 8.0% Infra. 5.0% $1,000,000 $1,579,000 $579,000 $116,000 $- Starting Capital Ending Capital (before fees) Gain (before fees) Taxable Income (gross) Tax Paid (after fees / RDTOH) Private Assets How Is This Possible? • Interest income paid into registered plans • Other private assets have low tax turnover • Portfolio is balanced within private assets • Weighted cash flow 4%+ annually 5 Year Results (2014-2019) • Gross return before fees = 9.6%/yr. • Net return after fees = 8.6% • Net return after taxes = 8.6%
  79. 79. Therefore, it could be somewhat misleading and biased to translate "机" (jī) in the context of the word "危机" (wēijī) to "opportunity" instead of "a changing point" or "a confidential event" Are we at a changing point?
  80. 80. Lessons From This • Planning first: portfolio design and financial planning • Diversify • Cash flow matters • Private does not = higher risk but it does = less liquidity • How much of your returns are taxable? • What can you do about that?
  81. 81. THANK YOU
  82. 82. This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. 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. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited investors. Some residency restrictions may apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Effective January 1, 2019 all funds branded NWM were changed to the fund family name Nicola.

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