Stone » Monthly Fund Commentary January 2017

Monthly Fund Commentary January 2017

Market Commentary
Commentary By: Stone Asset Management Limited
Commentary Date: February 19, 2017
PDF Version: Download PDF Version

From Our Founder

It was an interesting January with US President Donald Trump’s various plans causing much social tension. With his sought-after wall along the Mexico-US border and executive order on immigration, which was overturned by a federal court, we find ourselves with another wall, a bull market trying to climb a wall of worry. In other words, we believe social policy is blurring people’s outlook on capital markets.

In fact, despite the social unease, it’s a positive environment for capital markets. We see a reacceleration of global growth, which has been happening throughout 2016 and continues now. In particular, industrial production has been strong, with year-over year growth of 2.7% as at November 2016.

This commentary reflects on the major events of early 2017 and provides our view on trends impacting markets worldwide. We review the effects of rising global production and commodity prices, the conflict between social policy and realities in the marketplace, and the impact of a strong US dollar on Canada.

Richard G. Stone
Chairman & Chief Investment Officer


Market Return (%)*
Canada (S&P/TSX) 0.8
US (S&P) (1.3)
MSCI (World) (0.9)
Best (Argentina) 9.0
Worst (Switzerland) (5.1)
* In Canadian dollar terms as at January 31, 2017

The foundation for global growth

The Global Purchasing Manager’s Index (“PMI”) is very positive. Among the 30 companies economists monitor, 26 of them are tracking a PMI above 50. As a result, you’re starting to see the foundation for global growth, which has in fact been reaccelerating since the first quarter of 2016.

Shift to a reflationary environment

We’re also starting to see top-line revenue gains among businesses, which means prices are recovering. This recovery isn’t related to volume of sales. Rather, it represents the capacity for businesses to start increasing prices for their products. This reflects a shift from a deflationary risk environment to the beginning of a reflationary environment where stocks are the better bet over bonds.

Solid markets ahead for stocks

In this changing environment, bonds are at risk. There has been much commentary about the US Federal Reserve Board (the “Fed”) raising interest rates and potentially causing an inverted yield curve that, in turn, can lead to a recession. However, an inverted yield curve in this environment will only arise if the Fed raises rates three to four times each year through to 2019. That means the earliest timeframe for the start of a recession due to an inverted yield curve would be 2020 or 2021.

Consequently, we have three solid years of good markets ahead for stocks – the asset class of choice.

Increased production going global

We also believe there will be a build-out of inventory, beginning in the US and then going global. As the US builds inventory, they will start to increase manufacturing, use more goods and import more. Foreign countries that export to the US will go through the same cycle. As this progresses, they’ll need to build more inventory to support the production of goods they export to the US.

Rising commodity prices and the US dollar

We also believe industrial commodity prices (excluding gold) will continue to gain. We don’t expect the value of the US dollar to impact commodity prices. Historically, a rising US dollar meant commodity prices would decline and negatively impact stocks. However, we believe there is a sufficient level of inflation and global growth to withstand the behaviour patterns we saw throughout 2014 and 2015, where a stronger US dollar meant lower commodity prices.

Climbing a wall of worry

In this political environment, markets are climbing a wall of worry – a wall raised by social behaviour. This is probably most reminiscent, from a social perspective, of the late 1960s and early 1970s, which was politically driven by the anti-Vietnam-War movement. We believe today a similar situation is now in the US.

Today, it’s about social behaviour, humanity, diversity and other related issues. It comes with the same level of anger and demonstrations as the anti-war era. However, what you do with your money must be different than what you might do with your heart. Our job is to look after your money without being driven by ongoing social conflict.

The globalization-nationalism divide

One of the deep fears we see driving social issues stems from differences between globalized and nationalistic countries. For example, the nationalistic position taken by the US is threatening free trade and putting Mexico at risk with issues more than a wall.

Among all of this, it’s important to note that global growth is accelerating, and it’s causing reflation. Thus, you’ve got to be invested and move forward from there. Will nationalism win over globalization? No. Will nationalism disappear? No. Will there ever be a balance? No. However, the future will still be a bias towards globalization.

The impact of a stronger US dollar on Canada

We believe the US will be one of the global growth leaders. This will result in higher interest rates and a stronger US dollar, which we believe will continue over the next couple of years.

Regarding the impact on the Canadian dollar, we don’t believe it will be extremely weak; rather, it will not continue to rally. For that reason, we have to be patient investors and stay the course. Looking at the geographical allocation of the Stone & Co. Flagship Stock Fund Canada, we’ll maintain an overweight position of 64% US equities, 30% Canadian and 6% global.

While energy prices may cause the Canadian dollar to rise, what we actually see is that the carry trade on two years – US versus Canadian Treasuries – is negative. Thus, there’s a balance on that position and we see the Bank of Canada wanting to talk down the currency. Therefore, we do not expect that commodity prices will be a near-term catalyst for a stronger Canadian dollar.

Opportunity in Europe

We believe valuations in European equities are fair to somewhat cheap, as stimulus programs are gaining traction. The political noise is loud and holding the European market down, creating a resistance for higher trading, yet we believe the European market could trend higher. We also believe Europe may experience a rush in mergers and acquisitions, as many global companies with appealing big brand names are doing business outside Europe and may want to look closer at Europe.

In short, we believe you should invest in Europe, quietly and patiently. That is, hold European investments for the next three years and expect some tough periods, right now being one of them. However, this is your opportunity to buy cheap for long-term growth potential.


February 1, 1920

The Royal North West Mounted Police and Dominion Police merge to form the Royal Canadian Mounted Police.


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