MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY DECEMBER 11, 1997 (2)
THE YEAR IN REVIEW AND THE YEAR AHEAD: A MARKET OVERVIEW
FROM TD EVERGREEN
Nineteen ninety-seven was a volatile year for the markets, and a rewarding year for those invested for the long term, say the experts at TD Evergreen, Canada's fastest growing, fully integrated wealth management firm. ''The only risk for investors in the year ahead, is not being invested at all,'' says Jeff Carney, President and Chief Operating Officer at TD Evergreen.
''Our 325 Investment Advisors are hard at work helping our more than 100,000 clients with advice that will help make it easier for them to meet their long-term investment objectives. Canadians are beginning to understand the importance of taking a long-term approach to investing,'' he says.
In with a bang, out with a fizzle
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''Early in the new year, the strength of the equity markets was a welcome surprise,'' says Craig Strachan, Manager of Research Services at TD Evergreen. ''And the markets were still operating at full steam by the end of the first quarter -- a gain of 6.17% or 40.67% on an annualized basis. This was despite the experts' widely held belief that equity markets could not possibly repeat the spectacular year experienced in 1996, when the Toronto Stock Exchange (TSE) returned 24.3%.''
''This bullish first quarter performance raised concern about the market's ability to sustain such high valuations, especially in a high-profit/low inflation environment,'' adds Mr. Strachan. ''Volatility increased with each profit and inflation report, swinging the market up and down.''
''Ultimately, it was October's Asian currency crisis that unsettled the markets completely,'' he says. ''As a result, it appears likely that demand for some of Canada's exports, and particularly our commodities, will be lower than expected. This could take some of the wind out of the sails of Canada's commodity-based equities.''
All told, the year-to-date return on the TSE is just 13.9% -- a far cry from the 23.6% in early October.
TD Evergreen's 1997 Review of Sector Activity
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The best way to assess the markets in 1997 is to analyze activity in key sectors. Here's the picture from TD Evergreen:
Paper and Forest started to test new highs as the outlook for commodity prices appeared to hold promise. This outlook quickly changed with the Asian difficulties, because Asia imports a great deal of these products. The sector has seen a very thorough sell-off, with some stocks experiencing 10-year lows.
Oil and Gas experienced major merger and acquisition activity. This activity, along with some strong exploration programs, drove the sector to a high in early October. However, fears over drill-rig shortages, and most recently, over a higher OPEC supply quota, have taken back just about all of the returns for 1997.
Gold and Precious Metals is the 1997 sector most investors would prefer to forget. Throughout the year, investors were teased by modest rebounds in the spot price of gold, only to have more bad news -- central bank selling of gold -- sending bullion prices lower. Year-to-date returns show a loss of 50% for the sector. Investors who wanted to invest in gold and precious metals had to be very selective in choosing companies with strong hedge programs and low production costs.
Metals and Minerals bounced around for much of the year until finding direction in August. Unfortunately, that direction was down. Analysts fear that Asian woes will dampen demand for many metals. The sector is down 27% year-to-date.
Merchandising really started to appreciate during the late spring as investors became convinced that consumer spending had finally returned. The sector experienced strong gains through to October, but has pulled back modestly since then. The sector is up 18% on the year.
Pipelines, and to a lesser extent Utilities, gained throughout the year. Investors found comfort in these sectors as volatility grew. This is because the yield characteristic of these sectors gives investors some protection in a falling market. Pipelines are up 34.9% year-to-date and utilities are up 28.1%.
Financial Services continued where they left off in 1996, rising another 45% up to the end of November 1997. Buoyed by the bull market and low interest rates, banks, mutual fund companies and financing companies all had an excellent year. Only in late November did we see some weakness, as the Canadian dollar came under some pressure, raising fears that interest rates will trend higher and equity trading may slow.
TD Evergreen's 1997
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''The past year has seen TD Evergreen grow to meet Canadians' increased need for wise advice on the management of wealth,'' says Jeff Carney. ''We now have 325 Investment Advisors (an increase of 114 from one year ago) servicing more than 100,000 client accounts from 51 branches across Canada. Our assets under administration have grown to $10 billion, a 50 per cent increase in the past year.''
In 1997, TD Evergreen also became Canada's first full-service investment firm to offer clients access to their Investment Advisors and their account information, on-line. Its new service, IQ -- which was launched on TD Evergreen's fourth anniversary, and stands for Investor Queries -- is available free of charge to clients at tdevergreen.ca. TD Evergreen clients are signing up at 10 times the predicted rate.
Market Outlook for 1998
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''Analysts are anticipating a new year that will offer investors lower returns than those experienced over the last several bull years,'' says Mr. Strachan. ''The largest unknown remains -- to what extent will the Asian turmoil impact North American profits? Commodity-driven equities, like forestry and base metals, are likely to see slower growth and dampened demand. Many believe that these equities have been sold down so low they reflect only the most pessimistic outlook for 1998 -- providing some room for a rebound on any positive news and reward for investors with a little bit of patience,'' he explains.
Canada continues to have relatively low interest rates, despite the recent increases in the Bank of Canada lending rate. Consumer spending should continue to be strong, reflecting the low interest rate environment. TD Evergreen expects Canada to again post strong GDP growth figures in 1998.
Consumer Product sectors should benefit from continued spending on big ticket items such as cars, furniture and appliances. Business is likely to continue capital spending on machinery and equipment.
''As the Asian currency turmoil settles, investors are bound to recognize the value of the Canadian dollar. Our strong growth and improving fiscal house should help push the dollar higher in 1998,'' says Mr. Strachan.
Full-Blown Crisis In Confidence' Hits C$
By DAVID THOMAS - Economics Reporter The Financial Post
The shaky C$ renewed its downward slide yesterday, prompting the Bank of Canada to draw on its foreign reserves again to limit the damage.
The weakness of the C$ came amid a jittery day of losses on global stock exchanges and growing frustration in the financial community with the bank's delays in raising interest rates.
"A full-blown crisis in confidence in the Bank of Canada and the C$ has developed in the market," said Alex Araujo, a senior economist with Nesbitt Burns Inc.
The central bank entered currency markets several times, buying C$s in an aggressive defence to keep it from hitting a record low.
After slumping to US70.03› in overnight trading, the C$ rallied to US70.27› on the bank's defence, but soon tumbled below US70›.
It closed at US70.08›, down US0.14› and less than a penny above the record closing low of US69.13› in February 1986.
The central bank's moves were the latest in a string of interventions that cost about $3.1 billion in October and November. This month's tab won't be known until early January.
An interest rate hike would deliver much-needed support to the C$ and the bank has signalled one is in the cards.
But analysts speculate bank governor Gordon Thiessen is reluctant to move until Asia-related turmoil shakes out of the market.
"The more turmoil you have in Asia the less likely it is that the Bank of Canada is going to raise rates," said Andrew Pyle, chief strategist with ABN Amro Bank Canada. "It's an excuse for the market to take yet another run at the dollar."
Any further delay in raising rates could see the C$ hitting a new low, Pyle cautioned.
"At this point ... it will require a move of 50 basis points [half a percentage point] simply to prevent a continued selloff to the all-time record low."
News of strong growth in third-quarter gross domestic product, due this morning, could give the bank a reason to raise rates, economists said. It would then be seen as an anti-inflationary move, rather than a pure C$ defence.
The bank has raised rates by 25 basis points three times this year, taking the key overnight bank rate from 3.25% to 4%. The latest hike was Nov. 25.
"At the end of the day [the C$'s current woes centre] on the credibility of the Bank of Canada," said Andrew Spence, senior economist with Deutsche Morgan Grenfell Inc.
After priming the market for a round of interest rate hikes, "the bank wasn't willing to deliver," Spence said.
Most of Canada's major banks and trust companies did move yesterday, raising mortgage rates.
If the central bank is waiting for markets to settle further, yesterday's trading was a sign it could take a while.
Overseas declines set the tone for a volatile day of losses. The South Korean composite index lost 5.6% after the government revealed its bad debt problems are worse than it indicated when it agreed to a recent US$57-billion bailout by the International Monetary Fund. The currency, the won, lost another 10% against the US$.
Fears that Korea's financial woes will trigger more regional instability took the Hang Seng index in Hong Kong down 5.5% and had a similar effect on stock exchanges in Southeast Asia.
How's Your RRSP IQ?
The RRSP Blizzard Has Begun.
Financial institutions from across the land have started their annual advertising and promotional blitz to boost investments in their registered retirement savings plans as the contribution deadline draws near.
Amid this annual flurry of hype, however, the fact remains that most Canadians know little about RRSPs.
A recent Royal Bank survey of 1,200 adults suggested only 30 per cent of those who were eligible to contribute did so last year. And just over half of those who had yet to retire believed they would have enough money to live comfortably once they left the workforce.
So what about you? How's your RRSP IQ?
Here's a brief quiz to test your knowledge.
1. What's the deadline for making a contribution in the 1997 tax year?
2. The maximum allowable contribution for the 1997 tax year is $13,500. How much earned income would you need to qualify for the maximum?
3. When is the best time of the year to make a contribution?
4. What happens if you contribute more to an RRSP than you're allowed?
5. How much can a qualifying RRSP holder withdraw from their plan to buy a house?
6. What's the best thing to do with your RRSP when you turn 69?
7. Mutual funds have become a popular retirement savings investment. How many are offered in Canada?
8. Canadians contributed a record amount to RRSPs in 1996. How much was that?
9. How long have registered retirement savings plans been around?
Answers
1. The usual deadline is March 1. But that date falls on a Sunday next year, so the deadline has been extended to March 2, 1998.
2. An RRSP holder can make the maximum contribution of $13,500 if he or she earned at least $75,000 in 1997. For those who earn less than that, the rule is 18 per cent of earned income. If you belong to a company pension plan, the limit - printed on your tax assessment slip - will be lower.
3. It's best to contribute to your RRSP as early in the year as possible. That's because the tax-sheltered money starts growing sooner. Over the lifetime of the RRSP, that can add up to tens of thousands of dollars.
4. If the RRSP holder contributes more than $2,000 over the limit, the excess is subject to a penalty tax of one per cent each month. Anything less than $2,000 is not a problem.
5. Those who qualify for the federal Home Buyers Plan can withdraw up to $20,000 tax-free from their RRSP to make a down payment on a home. A couple can withdraw up to $20,000 each from separate RRSPs. Withdrawals repaid within 15 years remain tax-exempt. Since 1992, more than 500,000 households have tapped their retirement funds for $5 billion to secure a home.
6. If you turn 69, 70 or 71 this year, you're required to 'collapse' your RRSP by Dec. 31. The most popular way to do this is to convert the RRSP to a registered retirement income fund or annuity. Cashing the entire RRSP could result in a hefty tax bill.
7. In 1994, there were about 500 mutual funds to chose from in Canada. Now, there's more than 1,700.
8. Canadians contributed a record $26 billion to RRSPs in 1996, up 13 per cent from the previous year. In fact, contributions have risen 68 per cent since 1991.
9. RRSPs were first offered in 1957.
TODAY'S EXPECTATIONS
Daily Morning Market Update for Fri., Dec 12, 1997
Canadian dollar - Stronger, 1.4100 - 1.4200
Canadian money market - Weaker, flattening bias
Canadian bond market - Stronger, flattening bias
US bond market - Sideways trading
Canada - US spreads - Canada outperforms in the longer terms
TODAY'S MARKETS
Bond Market: The US Treasury market is expected to retain its optimistic bias today, although significant market gains are unlikely over the near term. The benign economic numbers seen over the past two days, as well as the continuing uncertainty in Asia has provided a supportive mixture for the market. This morning's 50 basis points rate hike by the Bank of Canada should benefit the mid to longer terms of the Canadian bond market.
Money Market: The Bank of Canada raised the target for overnight rates by 50 basis points this morning, establishing a new range of 4.00 - 4.50 percent. Canadian money market rates are expected to trend higher during today's session, adjusting to the new funding costs. Likely, the short end of the market will underperform, for a flatter money market curve.
Foreign Exchange: The Canadian dollar rallied sharply this morning following the Bank of Canada's rate hike. While a hike was largely anticipated, the size of the increase took the market by surprise, sending the currency on a stronger path. The currency may take a run at the 1.4100 level today, despite some resistance seen at the 1.4130 level.
OVERNIGHT ACTIVITY:
The US Treasury market improved further overnight, breaking through the 6 percent level in the long end. The market was supported in part by "safe haven" flows triggered by the Asian turmoil. The US dollar was little changed versus the other major currencies, as market participants awaited news regarding the Japanese Government's plans for dealing with the crisis in the country's financial system. The Canadian bond market underperformed the US market on modest interest overnight, while activity was light in the Canadian money market. The Canadian dollar traded in a range of 1.4258 - 1.4273 overnight.
YESTERDAY:
The US bond market surged on Thursday on a weaker than expected Retail Sales report for November and continued declines in global equity markets. The safe-haven flows into Treasuries gathered steam following Korean currency and debt downgrades. Long Treasury yields ended the day at 6.00% on a gain of close to a point. Canadas ended the day softer in the short end, but modestly better in the mid and long terms, with spreads to Treasuries blowing out across the curve. More Provincial supply was seen in the 10 year term. The Canadian dollar came under attack, reaching a high of 1.4289 before settling back to a 1.4270 close. Bank of Canada intervention was reported as aggressive. Treasury Bill yields rose 6 basis points in the 3 month term and 8 bps out in years.
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