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About Last Night…a response to the election from our partners at Guardian Capital Advisors.

About Last Night

The people have spoken. The 45th President of the United States will be Donald Trump. In the first-wave after
any seismic event people look for the quick answers. On the morning after, everyone is trying to discern what
this means for the American economy; the spillover impact will be felt throughout the Global economy, given the
USA’s leading position in the world. So what will the impacts be?

The platforms that Trump has run on suggest reduced immigration, barriers to trade, lower taxes, and reduced social
programs. Having won the Presidency alongside the Republican majorities in the House of Representatives and
the Senate, he will have the ability to enact legislation almost unopposed, the platform he ran on will very likely
be 2017’s legislative calendar. Trump’s plans in the campaign were often shy on specific detail, which lends a lot
of hope; politicians and their policy mandarins will step into the breach and offer guidance, making the legislation
less arbitrary and more constructive. Obviously it is impossible to offer specific comments on theoretical laws, we
can only visit his policies from what we know to be publicly disclosed.

Running on a platform of reducing immigration ignores the benefits derived from it. Immigration offers the
opportunity to enhance culture, science, commerce, and the arts by admitting the talented. Immigration offers a
labour class to do the ‘dirty work’ that Americans would prefer not to, gardening and bussing dishes and driving
taxi cabs. Immigration lowers costs and creates opportunities for growth. Ironically, the US, a nation of immigrants
and built by immigrants, now views a closed border as preferable.

Trade treaties viewed as unfavourable by Republicans are in danger of being ripped up. While this makes for an
excellent talking point, it dismisses the fact that nations are not obligated to accept terms they cannot live with,
it dismisses the fact that open trade is good for everyone – even Americans, and it dismisses the advantages to the
average consumer who can buy goods from their least costly provider. Trade is good, more trade is even better.

Taxes are likely to come down for Americans, which means that deficits are likely to rise. While this enriches a
certain constituency, it leads to increased interest expenses, which means every day more American productivity is
taken out of their economy and exported overseas. Interest on borrowings is already a non-trivial portion of Gross
Domestic Product, reduced taxes are a wonderful promise, but it comes at the cost of having more national debt,
which is a tax in and of itself.

The initial reaction from the markets was negative, but there have been more than fifty days where the markets
have moved more than 3% since the 2008 financial collapse; markets crest and fall, but over the long run they
turn positive. The Global economy digested Brexit in a matter of weeks, with myriad outcomes and so much still
unknown about Britain’s future the FTSE100 is up 9.3% including dividends. Instead of a knee-jerk reaction,
adopting a sober long-term view will benefit investors. The unemotional, patient, and calm tend to be the most
successful investors. The global economy has shown itself to be incredibly resilient time and time again, the US
economy led the way out of the last recession. Time is still on our side, we intend to stay the course.

A look at current market conditions from Christie Rose, CFA.

September and October are well known for months of volatility for various reasons. Interestingly enough the market environment has seen more of a sideways move since the September 30, 2016 statements have been printed.

Our current portfolio strategy takes into consideration that in Canada we have been recovering from a correction in Energy and Materials contributing to a higher market in comparison to last quarter. Interest rates in Canada are at an all-time low. The U.S. market is intimidating as it keeps crawling higher, while looking forward, the market has to face the likelihood of rising interest rates and the outcome of a hotly contested election in the United States. The stock valuations in international and emerging markets are more reasonable and provide opportunities in our portfolios.

We remain under-weight fixed income relative to equities. We continue to expect equities to outperform bonds.

  • We are keeping the average life of bonds relatively short to minimize interest rate risk. We are maintaining exposure to high yield within fixed income to enhance yield. High yield also has less exposure to rising interest rates and low correlation to other asset classes.
  • Over the past year we have decreased our exposure to the U.S. market due to higher valuations and a strong U.S. Dollar. Earlier this year we took advantage of the weakness in Canadian markets as an attractive area to move some of the U.S. exposure into.  This strategy has been successful and as now become less attractive due to some recovery in the energy and material sectors. We are considering pulling back on our Canadian equity exposure, bringing the weighting to a slight over-weight compared to neutral stance. This trade is offering opportunity to take some of these funds and start building a small position in emerging markets, where appropriate.
  • The U.S. market has been flirting with all-time highs. It is expected that the Federal Reserve will start increasing interest rates either at the end of this year or the beginning of next year. This will likely result in higher volatility in equities. Of course, there is the upcoming election….. We continue to keep portfolios under-weight U.S. equities.
  • We have been over-weighting the Guardian Global Dividend strategy. This is a Canadian dollar strategy that looks globally for the strongest dividend payer and growers. Currently, it is just over 55% U.S. exposure and it generates a yield of approximately 3.7%. The country mix is most attractive while having approximately 55% U.S. exposure and 45% to other countries. We felt this would offer protection in the event of an increase in volatility in U.S. markets and acts as an alternative to our pure U.S. strategy. This strategy is also based on a quantitative model which can change quickly with an adaptive management style.
  • Our portfolio strategy has been to have exposure to dividend payers in order to add a cushion during weak stock performance periods. Portfolios have been balanced across countries and sectors. The portfolio yield has been in the 3.5% to 4.0% range. This range suggests there is opportunity in our portfolios to also benefit from capital appreciation – not just the dividend.

We know the market environment is changing and our strategy of being adaptive has resulted in portfolios being well positioned with a balance of growth and income characteristics.

A timely update from Christie Rose of Guardian Capital

Our Current portfolio strategy is relatively unchanged:

  • Under-weight fixed income relative to equities.
  • Keep the average life of the bonds short term to minimized interest rate risk. Keep exposure to high-yield within the fixed income to enhance yield with less exposure to rising interest rates and low correlation to other asset classes.
  • We have been looking to decreased our exposure to the U.S. due to higher valuations and strong U.S. Dollar. Weakness in Canadian markets also offered an attractive area to move some of the U.S. exposure into. The strong U.S. dollar has prevented us from adding to U.S. when new funds have been added. Rather than increasing U.S. our strategy has been to over-weight our Global Dividend strategy.
  • The Guardian Global Dividend strategy is not only just over 55% U.S. exposure but also generates a yield of approximately 3.7%. The country mix is most attractive while having approximately 55% U.S. exposure and 45% other countries. We felt this would offer protection in the event of the U.S. dollar weakening.
  • Portfolio strategy has been to have exposure to the dividend payer to add a cushion during weak stock performance periods. Portfolios have been balanced across countries and sectors. The dividend yield has been in the 3.5% to 4.0% range. This range suggests there is opportunity in our portfolios to also benefit from capital appreciation – not just the dividend. The environment may be changing and our strategy of being adaptive has resulted in portfolios being well positioned with a balance of growth and income characteristics.

 

 

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