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April 15, 2018

IoT Identified As Megatrend

The Internet of Things (IoT), digital and low carbon economies, and shifts towards a multi-polar economic and political world order are some of the industry, political, and economic megatrends that will shape the 21st century through 2050, says a report from BMI Research, a Fitch Group Company. ‘Towards 2050: Megatrends In Industry, Politics And The Global Economy 2018 Edition’ examines how these trends will evolve and looks back at what has changed since the first edition of the report was published in 2016. “There will be no single paradigm to define the coming era,” says Yoel Sano, global head of political risk at BMI Research. “By 2050, we can expect to see the emergence of a multi-polar world; growing tensions between central and provincial or local authorities; new technologies that will dramatically transform the workplace, society, and warfare; climate change and resource scarcity that will make migration patterns more volatile; and the development of new ideologies in response to these challenges.” Over the next few decades, it views a shift towards a more multi-polar world order from a U.S. led order as virtually inevitable as China, India, and several middle-ranking powers will rise economically and geopolitically. The report says the biggest shift in recent years is the challenge to the idea of the omnipotence of the forces of globalization as populism takes hold. However, the proliferation of the internet will buttress its development and BMI Research does not believe that globalization as a macro megatrend will be less meaningful in the coming three decades.

Staying Put Rewards Investors

Investors in a variety of asset classes are rewarded for staying put during so-called volatility events, says research from PGIM, the global investment management business of Prudential Financial. After an extraordinarily long period of low volatility, equity markets are see-sawing and shaking investors’ confidence. However, the report finds that volatility takes only a temporary toll on the performance of stocks and corporate bonds. Its institutional advisory and solutions group examined the performance of different asset classes before, during, and after sudden increases in the VIX, an index that gauges expectations for near-term market volatility, post-peak events, which are characterized by a longer period of ups and downs that eventually return to more normal levels. It defined these spike events as a 50 per cent increase in the average VIX over two months. Over a 68-year time period with 26 volatility spikes and 25 post-peak events, it found that spikes do damage in the short term, but markets recover within a few months following the sharp uptick in volatility.

Precedent Set When Former President Attends Auction

It may have been the luxury cars, the booming stock market, or a visit from former U.S. President George Bush but, whatever the reason, ‘Auction Week 2018’ in the Phoenix/Scottsdale area was mobbed with buyers and tire kickers. Regular contributors Peter Volny and Linda Goddard were there and have a report on the various luxury cars that were on display and for sale. Total sales at the event were $248 million for roughly 2,668 cars sold with more expected to close after the auctions, a number which is down roughly five per cent over 2017. To read about the $9 million Jaguar D-Types or Jay Leno’s 2018 Corvette Carbon 5 Edition and more, read ‘Precedent Set When Former President Attends Auction,’ by Peter Volny & Linda Goddard, on the Private Wealth Canada website

Markets Bake In Pain From Tariffs

Although the announced U.S. tariffs are a “negative for the global economy, recent market moves have probably more than baked in the pain they will cause,” says Sean McLaughlin, head of capital markets research at Cambridge Associates. Moreover, it is impossible to know whether the announced measures will be implemented, be scaled back, or fuel a full-blown trade war. This means investors with thoughtfully diversified portfolios, which incorporate sufficient liquidity, should stay the course amid today’s trade tensions, he says. Most mainstream economists believe that tariffs do more harm than good. Trade only occurs if it brings mutual benefit, allowing one country to secure goods or services from another that can produce them at a lower cost, a higher quality, or both. The tariffs announced in recent weeks are likely to modestly shrink global earnings and raise consumer prices. Repositioning a portfolio might make sense if an investor believed that market prices did not reflect the earnings or currency impacts of recent trade proposals. However, there is little question that the proposed tariffs are more than priced in.

Sharia-compliant Gold Standard Considered

The World Gold Council and the Bahrain-based International Islamic Financial Market (IIFM) are looking to develop a sharia-compliant standard for gold contracts that could see the asset class more widely employed in Islamic finance. Under current Islamic finance rules, gold is classified as a currency and is limited to use in spot transactions. A number of industry bodies, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), have looked to expand the number of gold-based financial products deemed permissible under sharia law. Executives from the World Gold Council and the IIFM have discussed transaction documentation for a number of sharia-compliant, physical gold products including investment accounts, regular savings plans, and exchange-traded funds.

VC Misses Global Record

Venture capital (VC) investment raised fell just shy of the global record for a single quarter as 2018 started. A quarterly report on global VC trends by KPMG Enterprise said US$49.3 billion of venture capital investment was raised across 2,661 deals in the first quarter. A record-breaking $29.4 billion of investment in the Americas – including $28.2 billion in the U.S. alone – combined with high investment in Asia helped fuel the strong VC market. While venture capital deal volume continued to decline, the median deal size globally continued to grow across all deal stages in the quarter reaching $1.3 million for angel and seed stage rounds, $7.7 million for early stage rounds, and $15 million for later stage rounds. “Venture capital investors continue to pour money into late-stage companies, in part because of the number of aging unicorns that have remained private,” says Brian Hughes, national co-lead partner, KPMG Venture Capital Practice, and a partner for KPMG in the U.S. “With strong IPO exits by Dropbox and Zscaler this quarter, and an increase in the number of IPO filings, we could see the tide turning over the next few quarters, bringing with it a resurgence in early stage deals activity.”

Net Inflows Return To Hedge Funds

Last year saw a return of net inflows to the hedge fund industry, alongside improved performance which helped push total assets under management to a new high of $3.6 trillion, says Preqin’s year-end survey of hedge fund managers. Thirty-one per cent of managers reported that the fundraising environment had become more challenging in the past 12 months, a significant drop from 47 per cent that said the same in November 2016. At the same time, greater proportions of managers reported that their hedge funds had met or exceeded their performance goals in 2017 compared to the year before. When looking at the causes of improved performance, the greatest proportion of fund managers cited the Trump administration, both due to the ‘Trump Bump’ – the U.S. market rally in the immediate aftermath of the presidential elections at the end of 2016 – as well as tax reform proposals passed in December 2017.

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April 9, 2018

Taxes On Wealthy Could Increase

High income earners in Ontario will see their provincial income tax increase modestly as part of proposed changes to the province’s personal income tax (PIT) regime in the 2018 Ontario budget. The Ontario Liberals are proposing to eliminate the surtax from the PIT and introduce two new tax brackets while adjusting the tax rates to make up for the loss of revenue from the elimination of the surtax. The two new tax brackets, which would increase the total number of brackets to seven from five, will be from $71,501 to $82,000 and $82,001 to $92,000, respectively. The top provincial bracket remains the same at $220,000 and above. The government says the changes are to simplify the province’s system of personal income tax and make it fairer. However, it says the issue is that the surtax is calculated after personal tax credits have been applied to taxable income, thereby reducing that amount. Because of that, higher income taxpayers were receiving a disproportionate benefit from those credits relative to the benefit available to lower-income individuals. Under the proposed changes, it is estimated that roughly 1.8 million Ontarians would pay about $200 more in provincial income taxes every year on average, while about 680,000 lower income Ontarians would see a reduction of about $130 annually. All other taxpayers would see their PIT stay the same. The proposed changes would result in an increase in tax revenue to the government of about $275 million in 2018, $285 million in 2019, and $295 million in 2020. The proposed tax rates are effective for the 2018 tax year, with the government saying that it will introduce legislative amendments to implement them. If the changes are passed, new PIT withholding rates on employment income will begin July 1.

Gender Balance Real Target

The real issue is gender balance, not parity, says Diana Van Maasdijk, co-founder and executive director, of Equileap. She told the ‘Investing in Gender Equality’ session at the CFA Society Toronto’s ‘10th Annual Spring Pension Conference’ that gender equality has gone mainstream, including in the financial world, in the past few years. For example, asset managers now see companies without sexual harassment policies as investment risks and reports from the past 10 years show financial returns higher for companies without gender gaps. These companies also take less risk and improve opportunities for long-term growth. However, more is needed than having more women at the board level. There needs to be parity not only in pay, but in parental leave and benefits for both men and women. What is needed is gender balance, she said. The current system is not fair to men either as they have more heart attacks, experience more stress, and don’t get to spend quality time with their families. And while gender parity is being talked about more, it is not moving fast enough. She said World Economic Forum estimates are that at the current rate, achieving gender parity will take another 217 years.

Active Managers Fail To Beat Benchmarks

The majority of active managers across all categories failed to outperform their respective benchmarks over the one-year period ending December 29, 2017, with the exception of Canada dividend and income equity, says the SPIVA Canada Scorecard. Despite a slow start during the first six months of the year, the headline broad market indices posted high single-digit gains in 2017, with the S&P/TSX Composite and the S&P/TSX 60 returning 9.1 per cent and 9.78 per cent, respectively. Almost all of the returns came in during the second half of the year. Despite poor performance by the broad market indices during the first six months of the year, funds in the Canadian equity category struggled to outperform the benchmark. The large majority of active managers investing in domestic equity underperformed the benchmark, with only 6.78 per cent of Canadian equity funds outperforming the S&P/TSX Composite over the one-year period. Yield-focused active strategies fared well in 2017. Within the Canadian dividend and income equity category, 57.89 per cent of funds outperformed their respective benchmarks over the one-year period. However, over the 10-year period, no funds were able to outpace the S&P/TSX Canadian Dividend Aristocrats. Managers investing in U.S equities saw almost no change in their relative performance over the various periods compared with the mid-year 2017 scorecard. The data also showed that an even lower percentage of managers outperformed their benchmarks in the international equity (26.92 per cent) and global equity (20.97 per cent) categories over the same period.

Automation Raises Stakes To Prepare Workers

The unequal distribution of the risk of automation raises the stakes involved in policies to prepare workers for changing job requirements, says an Organisation for Economic Co-operation and Development (OECD) working paper as part of its ongoing ‘Future of Work’ initiative. Covering 32 countries, it estimates with the tasks that AI and robots cannot do shrinking rapidly, about 14 per cent of jobs in those countries are highly automatable (probability of automation of over 70 per cent) or over 66 million workers in the 32 countries covered by the study. While there is the potential to free up workers to do more productive, less routine tasks and to provide consumers with access to more and better products and services, technology will likely change many of the existing jobs, requiring workers and companies to adjust. Some jobs may become entirely redundant although the extent of automation will likely depend on policy, institutions, and social preferences. As result, education systems will need to adapt to the changes brought about by automation and teach children and youth the skills that allow them to take full advantage of the current wave of technology adoption. For those already in the workforce and whose jobs are being affected by technology, adult learning is a crucial policy instrument. Unfortunately, the likelihood of participating in any type of training, on-the-job and outside the job, is significantly lower among workers in jobs at risk of being automated. Effective and well-targeted adult learning opportunities for re-skilling and up-skilling workers are not all that is needed. For the smaller group whose jobs may disappear entirely, requalification must be accompanied by reinforced help from labour market and social policies. Newly-created jobs may require very different skills from those that are being destroyed and may be located in a different region. These displaced workers would need adequate social protection, including income support, and tailored re-employment assistance.

Global Market Conditions Complicated

Globally, investors face complicated market conditions after a volatile start to the year, says Russell Investments’ ‘2018 Global Market Outlook – Q2 Update.’ U.S. tax cuts, synchronized global growth, and strong corporate profits are battling monetary tightening and inflation pressures for control of global economies, it says. The tailwinds are prevailing for now, but it believes headwinds could overcome markets later in the year as interest rates rise, inflation picks up, and profit margins come under pressure from rising labour costs. Protectionist trade policy has also emerged as a risk, but it views a full-blown trade war as unlikely. “We continue to see Europe, Japan, and emerging markets outperforming the U.S. in what could be a relatively flat year for global equities,” says Andrew Pease, global head of investment strategy at Russell Investments. “We are still looking to add risk into market pull-backs, but we recognize that ‘buying the dips’ may become more challenging as markets grow more sensitive to recession risks later in the year.”

Investors Appetite For Risk Increases

Investors around the world showed an increased appetite for risk with confidence rising during March, says State Street Associates. Its ‘State Street Global Investor Confidence Index’ increased to 111.9, up 4.8 points from February. The North American index showed the biggest increase, rising 5.8 points to 109.8, while Europe rose 1.6 points to 102.1 and Asia increased 1.3 points to 109.6. Rajeev Bhargava, managing director and head of investor behaviour research at State Street Associates, says, “Although the global index increased this month, it will be interesting to see if continued Federal Reserve tightening and recent money market stress will impact investor sentiment going forward.”

AB Launches CTFS

AllianceBernstein L.P. (AB) has launched two equity Canadian trust funds (CTFs). The AB Canada Concentrated Global Equity Fund and the AB Canada Global Strategy Core Equity Fund are based on its concentrated global and global strategic core strategies. A third CTF, the AB Canada Emerging Markets Strategic Core Equity Fund, is based on its emerging markets strategic core strategy and will launch later this year. The CTFs are designed to provide qualified institutional investors with access to a deeper and broader global equity opportunity set. The launch makes them available in a Canada-domiciled, privately-placed commingled investment fund format. The concentrated global equity fund focuses on roughly 35 high-quality stocks with underappreciated long-term growth potential. The global strategic core equity fund invests primarily in companies that it believes have sustainably profitable business models, fundamentally lower volatility, and less downside risks in the future.

Chinese Equity Fund Performs Best

The best performer for March among the 44 Morningstar Canada Fund Indices was the one that tracks the greater China equity category, with a 4.1 per cent increase. Nineteen of the 44 fund indices increased during the quarter, including eight indices that increased by one per cent or more. For the first quarter, it had an exceptional month in January, increasing 8.7 per cent, but was in the red for the two subsequent months, decreasing 2.5 per cent in February and 1.7 per cent in March. Fund returns in that category were heavily influenced by currency effects, with the Canadian dollar depreciating six per cent against the Chinese renminbi and 2.3 per cent against the Hong Kong dollar over the quarter, which is beneficial for Canadian investors in foreign securities. In Canada, the S&P/TSX Composite Index started the year with three months of negative performance, resulting in a 4.4 per cent decrease for the Canadian equity fund index over the quarter. While the energy sector rebounded in March, the three largest sectors in the Canadian market ‒ financial services, basic materials, and energy ‒ suffered steep losses in February that they were unable to recuperate by the end of the quarter.

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April 2, 2018

BC Amends Speculation Tax

The British Columbia government has made amendments to its proposed speculation tax following complaints from a number of municipalities that it would affect people who had owned seasonal or vacation properties for years. The tax, announced in February, was to be assessed at 0.5 per cent of the assessed value of a vacant property this year and rise to two per cent in 2019. Carole James, BC’s finance minister, says the tax will now remain at 0.5 per cent for properties owned by BC residents and will only rise to one per cent for out-of-province Canadian residents. The two per cent rise will continue for foreign investors. The tax will also no longer apply to properties in the Gulf Islands, Parksville, Qualicum Beach, or rural Fraser Valley.

Canadian Economy Could Grow

The Canadian economy could grow nearly two per cent this year, but persisting uncertainties could temper growth, says Russell Investments’ ‘2018 Global Market Outlook – Q2 Update.’ These uncertainties include inflation, rising mortgage costs, domestic oil prices, and the outcome of the North American Free Trade Agreement (NAFTA) negotiations. In the ‘Canada Market Perspective’ segment of the report, Shailesh Kshatriya, director of Canadian strategies at Russell Investments Canada Limited, says there appears to be no love for Canadian equities as they continue to lag their U.S. and global counterparts. “Trade uncertainties are weighing on investor sentiment and the discount applied to Canadian crude is a serious blow to the economy. Restrained optimism in the markets combined with low unemployment, firming wage growth, and double-digit corporate earnings growth could result in the Bank of Canada being more dovish relative to the industry consensus.” As a result, it remains neutral toward domestic equities and believes the 10-year Canadian bond yield may have a modest upside from current levels.

Cybersecurity Governance Issue

Cybersecurity is not just a technological issue, it’s a critical governance issue with major implications for clients’ portfolios, says Dustyn Lanz, CEO of the Responsible Investment Association. The impact of these attacks is staggering, he says, with various reports suggesting the global financial impact of cybercrime is hundreds of billions of dollars annually, with some experts warning this volume could triple over the next few years. Major global corporations such as Yahoo!, Uber Technologies Inc., Target Corp., Home Depot Inc., TJX Cos. Inc., and Equifax Inc. have been the targets of cybersecurity breaches that resulted in significant financial losses. This means clients need to know that companies in their portfolios are prepared to prevent, respond to, and recover from data breaches and cybersecurity threats. Given the tremendous financial implications of cybersecurity issues, advisors would benefit from analyzing the cybersecurity policies, procedures, and practices of companies in their clients’ portfolios. Although technological solutions provide the foundation for cybersecurity, it’s how a company manages in-house human error and maliciousness that can prevent a costly data breach.

Coalition Seeks Changes To Proposed Tax Amendments

The Coalition for Small Business Tax Fairness is asking finance minister Bill Morneau to take more action on the government's proposed tax changes which it says continue to unfairly target small business. The coalition, which consists of 73 organizations representing hundreds of thousands of business owners nationwide, says while budget measures addressed some of the concerns related to the complexity of earlier proposals on passive investments, the approach outlined in the 2018 budget means many firms with existing passive investments will lose access to the lower small business tax rate on future business income. The coalition is asking the government to conduct an economic impact assessment and delay implementing the tax changes until it is complete. It asks the government not to proceed with the passive investment rules or ensure passive investments are excluded when determining eligibility for the small business deduction going forward. As well, it suggests the government postpone the income splitting changes until January 2019 and consider a full exemption for spousal income and dividends from the new income splitting rules.

Four Seasons Building Luxury Residences In Fort Lauderdale

Four Seasons is building luxury private residences in Fort Lauderdale, FL. The oceanfront property consists of 130 guest rooms and 90 residences, which range from one to four bedrooms, including furnished and fully-appointed as well as unfurnished options. Residences will range from 780 square feet to more than 6,000 square feet with three two-story residences featuring 20-foot ceilings. Owners at Four Seasons Private Residences Fort Lauderdale will have access to the Fort Portfolio of Four Seasons properties and Four Seasons’ service and amenities such as valet parking, doorman, swimming pools, cabanas, fitness centre, spa, massage room, outdoor lounge, beach butler, and yachting services.

Hedge Streak Comes To End

The Preqin All-Strategies Hedge Fund benchmark’s positive streak came to an end in February with hedge funds recording their first negative month since October 2016. They were down 0.08 per cent in the month. CTAs and funds of CTAs were hit hardest by the market turmoil in early February, with both recording their worst performance in over 10 years, down 5.04 per cent and 10.36 per cent respectively. Equity-focused hedge funds also suffered large losses, ending the month down 1.34 per cent – the benchmark’s worst performance since January 2016 when it was down 4.48 per cent. Relative value strategies (0.91 per cent) and credit strategies (0.02 per cent) were the only strategies that posted positive gains in February.

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