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Posted by Greg Taylor on Jan 3rd, 2020

New Year, New Market?

2019 was not a normal year for investing. If you had perfect information in January and knew by the end of the year earnings would decline by 6% and that mid-year recession fears were so common that the yield curve would invert, what would you predict the market would do? Flat might be the most optimistic outlook. Those things all happened, but the outcome was much different as 2019 was a year when everything went up.

The annual returns for the major equity indices were massive, but with the caveat that returns were skewed by the way 2018 ended. Almost all the equity gains can be attributed to multiple expansion. Buybacks may have contributed to some of the gains, but the true reason for the returns was the increase in investor sentiment.

Multiples expanded through the year as the market ‘climbed a wall of worry’ to end at record highs. The recession fears faded away with a detente in the trade war and the yield curve steepened following its brief summer inversion. Oil and copper staged impressive recoveries, boasted by a falling US dollar. Even gold had a good year.

While equities get the headlines, the move in bonds may be the story of the year. Starting 2019 with the Federal Reserve in tightening mode, most observers were predicting yields on the US 10-year Treasury would stay higher. By the summer, the yield sank below 1.5%. Three rate cuts later and a recovery in growth globally, yields ended the year closer to 2%. Globally, the amount of negative yielding bonds is falling. For now, recession fears have subsided and global growth is improving.

Looking to 2020, we don’t expect as strong a year as last. We do expect an increase in volatility.

US politics will dominate headlines up to the presidential election. The status quo of a Trump victory is priced into the market. So are expectations for smooth trade talks and a recovery in global growth. The biggest fear for investors should be polls coming out showing an election win by either Bernie Sanders or Elizabeth Warren, both of which have Wall Street in their sights.

The combination of US volatility and stronger global markets may finally start the long-awaited rotation away from the crowded allocations of US equities, especially information technology. Cyclical sectors such as financials, materials and energy may take over the lead. The late-cycle rotation may be in the cards this year and this could end up being a good setup for emerging markets (including Canada) to finally play catch up.

The next decade won’t look like the last. They never do. But several trends already appear to be taking hold.

Increased automation and passive investing have created a new environment for trading. The advent of better information and tools has made ESG investing accessible to all. The next generation of investors has taken notice and is making its influence felt.

The bond market will set the tone for 2020. Can yields break over 2% and target 2.5%? Central banks aren’t expected to make any moves this year, but rates should move higher with global growth. If this growth does emerge, the debate will be about how far it will be allowed to run before inflation fears return. The wildcard prediction for 2020 would be a return of inflation. After a year in which everything worked, it’s time to prepare for the unexpected and position accordingly.

Ideas with Purpose

Purpose International Dividend Fund (PID) – US markets are crowded, given their strength. It’s been easy to put higher allocations towards the US for that exact reason. But investors should be careful not to overweight the US too heavily and the start of a new year is a good time to rebalance. Purpose International Dividend Fund provides diversified exposure across developed markets outside the US while focusing on income and stability.

Purpose Premium Yield Fund (PYF) and Purpose Enhanced Premium Yield Fund (PAYF) – Adding alternative return streams to a portfolio is a prudent way to increase diversification and reduce overall risk, in our view. Our options-writing strategies can help lower overall volatility while providing more stable returns from the premiums earned by selling puts. Purpose Premium Yield Fund uses deep out-of-the-money puts to reduce beta while generating a solid yield of about 5%. Purpose Enhanced Premium Yield Fund tracks equities more closely with near-the-money puts, producing a higher yield of roughly 7%.

— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments


All data sourced from Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.