Editorial
The year 2015 was certainly an eventful one. This past quarter marked another Canadian election that saw the Liberals win a majority government under the leadership of Justin Trudeau. On the world stage, China made headlines as their economic growth began to stall and their stock market proved very volatile.
As Syria enters its fifth year of civil war, there has been a growing sense of urgency and desire for Canadians to help. However, the November attacks in Paris involving several suicide bombings and mass shootings put everyone on high alert. Despite these heightened security concerns, Canada was able to welcome the first flight of Syrian refugees on December 10th in Toronto. Some of us have already had the pleasure of interacting with those newly landed. For others, we look forward to inviting them into our homes and our churches. We have seen countless demonstrations of God’s love as we hear stories of people’s generosity and banding together to privately sponsor these families. Although it is through dire circumstances that we welcome those fleeing war-torn countries, we remember the words of Nehemiah when he said,
“Go and enjoy choice food and sweet drinks, and send some to those who have nothing prepared. This day is holy to our Lord. Do not grieve, for the joy of the Lord is your strength.”
Nehemiah 8:10
Market Update
This past November, the International Monetary Fund (IMF) announced that the Chinese yuan or Renminbi (RMB) is to be added to their basket of currency reserves alongside the dollar, yen, euro, and pound. This basket, also known as Special Drawing Rights (SDR), was established to boost global liquidity so that IMF member countries who hold it would have the right to obtain any of these currencies in order to meet balance of payment demands. Although previously rejected in 2010, the yuan has had increasing international use and recently overtook the yen as the fourth most used currency. The Chinese yuan is now dsf considered to be ‘freely usable,’ a requirement for becoming a part of this basket. Most hope that this addition will open up China’s financial markets, thus allowing its exchange rate to be more market-driven.
Overshadowing this positive news, the global growth engine that is the Chinese economy is still very much struggling in its transition to become a consumer driven economy, with the IMF forecasting 2016 growth at a mere 6.3%. A slowing economy in conjunction with corporations saddled with debt has left the government with its fair set of challenges in terms of kick-starting growth. Given its key role in global trade, we have witnessed falling copper, oil, and other commodity prices. The heavy reliance on China has meant that countries that export energy, natural resources and manufacturing sectors such as the emerging markets and Eurozone have been hard hit.
The ECB became the first major central bank to venture below zero percent interest rates in June 2014, with the goal of forcing banks that had been hoarding cash to extend loans to businesses. In addition to struggling with a shortage of credit, the Eurozone is still battling high unemployment. Lending to further economic uncertainty is “Brexit” – the referendum slated for the end of 2016 / beginning of 2017 that will decide whether Britain remain part of the European Union or withdraw.
The oil saga continues as OPEC members failed to agree on a production ceiling at their last meeting. Iran said that it would not consider any production curbs until it restores output, which has been scaled back for years under Western sanctions over its nuclear program. Iran is not the only country taking a somewhat offensive stance; Saudi Arabia, another top exporter, is also choosing to fight for market share and has shown no interest in returning to a strategy of supporting prices. Suffice to say, should current production levels continue, we do not expect to see much recovery in 2016.
Across our border, the days of zero interest rate policy (ZIRP) are over. On December 16, 2015, Janet Yellen announced what marks the first increase in the Fed Funds rate since June of 2006. Even though inflation is still below their 2% target, the numbers seem to indicate that the US labour market is at least moving in the right direction. This expectation of gradual future rate hikes will lead to continued strength in the greenback and should help Canadian exporters that depend on a strong demand from the US. Rising rates, although signaling a stronger economy, could hurt certain corporations’ bottom lines in vulnerable sectors such as mining and energy. With this landscape, we believe that the US may be out of the deep end but still treading water.
China, the linchpin for global growth, has come down with a case of the flu with no immediate cure. Indeed, with cold and flu season well underway, we are witnessing contagion at its best (or worst, if you’re the victim) with most major central banks still very much entrenched in their own quantitative easing programmes. And though we are apt to say ‘When the US sneezes, Canada catches a cold’ this popular adage could be expanded to ‘When China sneezes, the world catches a cold.’
REDUCING PORTFOLIO VOLATILITY
Looking back on the total return from 2015, the Canadian stock market closed at -8.32%, the US stock market at +1.38%, while the bond index returned +3.30%. With the global economic outlook for 2016 looking somewhat grim, it is especially important to have a portfolio that protects on the downside.
The following graph is an illustration showing how our portfolios do just that. As we move from right to left, there is a dramatic reduction in volatility with the addition of our non-traditional pooled funds: first with the addition of our Non-Traditional Equity Fund and further still with the addition of our Mortgage Pool. With the inclusion of these funds, not only does the risk decrease, but return increases as well.
For us at Covenant Capital Management, the global volatility has been a time of affirmation in our methodology as we continue to seek out noncorrelated pathways of return in an increasingly correlated world.
Team Updates
The year has come and gone yet again and as we now find ourselves striving to write the correct year as well as keep those pesky New Year’s resolutions, let’s take a look back at some of the highlights from the final quarter of 2015.
As 2015 ended, we welcomed Janet back to the team after a time away on maternity leave. As much as she misses the time at home with her family, she is settling back into a rhythm of work and enjoying reconnecting with many of you. Also in personnel news, we are pleased to welcome Cindy to the team full-time. Cindy is a recent TWU graduate who completed her internship with us. She will be continuing in a support role to the Discretionary Management Team, working with Janet, Maria and Loretta.
The majority of our team had some down time during the Christmas holidays that included a wide variety of celebrations, time with family and plenty of sleep. Our team has welcomed 2016 with a fresh sense of not only what the Christmas season is about, but also excited about the year ahead. The Lord’s provision in 2015 was very evident in all of our lives. We are praying that in 2016 we will continue to see the Lord’s provision and to feel Him close to us no matter what the year may hold.
We at Covenant Capital want to wish you a Happy New Year! It is our prayer that you and your family would feel God’s presence in your lives throughout 2016.