Post on 02-Jun-2020
Good Things Come…
2017 Q1 Market Review & Outlook2017 Q1 Market Review & Outlook
Our “2017 Outlook” Presentation(published in January 2017 and available on the STYLUS website)
focused on key factors which would drive North American
equity markets.
Market Outlook Themes: 2017
Canadian Equities• All sectors in Canada had expectations for positive earnings growth• Canadian stocks were reasonably priced• Positive trend in corporate profitability
Energy Sector• Energy stocks had the biggest expected earnings growth of any industry in
North America• Gap between global supply of oil and demand was expected to narrow• Upturn in oil prices expected to support Canadian economy
U.S. Equities• Valuations for U.S. stocks were high• Very strong corporate profitability• Positive earnings growth expected to sustain equity markets
Trump Factor• An ambitious, pro-growth agenda had equity investors feeling very optimistic• Sectors directly impacted by Trump’s plans expected to outperform (i.e.
Financials, Industrials, Energy)
STYLUS• In 2016, there was a disconnection between stocks with the best earnings and
those with the best price performance. In 2017, we expect to return to a more normal, earnings-focused investment environment.
Market Outlook Themes: 2017
In short, we expected good things in 2017 for North American equity markets
(with a caveat that patience is still a virtue!).
2.4%
5.1%
0%
1%
2%
3%
4%
5%
6%
S&P/TSX INDEX
S&P500 Index(CAD)
TSX & S&P 500 Index Returns: Q1 2017
The year did indeed get off to a good start …
Both the Canadian and U.S. equity markets produced strong first quarter returns.
Contribution by Sector: Q1 2017
Returns in the Canadian Index were widespread, as almost all sectors had a positive contribution to the S&P/TSX in Q1.-2%
-1%
0%
1%
2%
-1%
0%
1%
2%
3%
Contribution by Sector: Q1 2017
The U.S. market also had positive returns in almost every sector in Q1. The “FANG” stocks helped the Info Tech and Consumer sectors lead the way:Facebook +23.5%Amazon +18.2%Netflix +19.4%Google +7.5%
When we look at the performance of the STYLUS Funds each quarter, we
typically analyze the ‘style’ trend which differentiates their respective returns.
But in Q1, the difference in returns for our Canadian equity Funds was more of
a “stock story” …
STYLUS Canadian Fund Returns: Q1 2017
-0.9%
-2%
-1%
0%
1%
2%
Momentum
STYLUS Canadian Fund Returns: Q1 2017Without Energy stocks, the rest of the Momentum Fund returned 4.4% for the quarter, with strong contributions from Premium Brand Holdings and CRH Medical Corp.
Unfortunately, the performance of Momentum was hurt by its holdings within the Energy sector due to weakness in the commodity price.
Do we still have conviction in our energy stocks for 2017? Keep reading the presentation …
2.4%
0%
1%
2%
3%Growth
STYLUS Canadian Fund Returns: Q1 2017
The biggest contributors to the Growth Fund’s 2.4% first quarter return all happened to be consumer-based stocks:
Dollarama
goeasy financial
Restaurant Brands
0.6%
0%
1%
Value with Income
STYLUS Canadian Fund Returns: Q1 2017
• Intertape Polymer• Peyto Exploration
This marked the 7th consecutive quarter with a positive return for the Value with Income Fund. That’s a 20.8% total return over the last 21 months!
The Value with Income Fund produced a positive return in the first quarter, but was impacted by two stocks with unexpectedly weak earnings reports, which caused their share prices to fall significantly:
1.3%
0%
1%
2%
Q1
Wealth Protection Fund: Q1 2017
A great quarter for the Wealth Protection Fund.
It’s goal is to produce steady returns with low volatility (aka ‘a smoother journey’).
It was right on track in Q1.
U.S. Blended Equity Fund: 1st Quarter Return
4.5%
0%
1%
2%
3%
4%
5%
The U.S. Blended Equity Fund had a great start to 2017, as we had solid contributions from both the growth and value stocks within the Fund.
Market Outlook Themes: 2017
Now that we have 90 days “in the books” for 2017, let’s update our 2017 Market
Outlook themes ...
We expect to return to a more earnings-based investment
environment
2017 Outlook Theme #1
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2012 2013 2014 2015 2016 2017
What are Earnings Doing in Canada?
The positive trend in earnings growth for Canadian stocks continued in the first quarter.
Quarter Over Quarter Earnings Growth
Source: Morningstar
2013 2014 2015 2016 2017
The outlook hasn’t changed since the start of the year: every sector in Canada is expected to have positive earnings growth in 2017.
0%
10%
20%
30%
40%
50%
60%
Source: Morningstar
What are Earnings Doing in Canada?2017 Year Over Year Expected Earnings Growth
-5%
0%
5%
10%
15%
20%
2012 2013 2014 2015 2016 2017
What are Earnings Doing in the U.S.?
After a surprisingly weak year of earnings growth in 2016, the expected earnings for the first quarter of 2017 shows the resiliency of corporate America.
Source: Morningstar
Quarter Over Quarter Earnings Growth
2013 2014 2015 2016 2017
2017 Median Earnings Growth by Sector in U.S.
Growth-oriented sectors (Energy & Technology) are expected to have the best 2017 earnings growth in the U.S., compared to much lower expectations for stocks in defensive sectors (Utilities and Telco).
0%
10%
20%
30%
40%
50%
Source: Morningstar
2017 Year Over Year Expected Earnings Growth
Do economic conditions in Canada & U.S.A. look favourable for corporate earnings
expectations to come true?
Canadian Macro Economic Fundamentals: Summary
Canada has added 191,000 jobs over last 6
months versus initial expectations of -42,000
Investment in infrastructure has been slow but expected
to be a positive factor in 2017
InfrastructureEmployment ManufacturingMonthly data has been a positive surprise in 6 of the last 7 months; Sales up 4.2% year over year.
Surprise! Canada’s GDP growth leads the G7
US Macro Economic Fundamentals: Summary
Average 175,00 new jobs added per month over last 6 months; unemployment
rate at 4.7%
Employment
Housing starts remain strong (1.2 million units per year) and
continue to trend upward
Housing
For the last 5 quarters, the Manufacturing Index is
above 50 (which indicates expansion)
Manufacturing
U.S. GDP revised higher for 2017
Market Outlook Themes: 2017
Strong economic data supports equities in three simple ways:
1) Helps consumer confidence (i.e. people will continue to spend)
2) Helps investor confidence (i.e. people will keep their money invested)
3) Supports expectations of future earnings growth
What are the key risks to this positive economic trend in North America?
Macro Economic Fundamentals: Risks
Trump protectionist policies impacting Canadian exports to US
Trade
Oil
Housing
US Dollar
Interest Rates
Delay on Trump Policy Implementation
Legislation to curtail heated housing markets in Vancouver and Toronto could negatively affect Canadians’ wealth
U.S. production remains high, putting downward pressure on oil prices
A strong USD makes it challenging for American manufacturers to export their goods
Optimism for continued economic growth is based on “promises” but no changes have been implemented yet
Rising rates are a sign of a strong economy, but they also have a potential negative trickle effect globally
We expect the energy sector to remain a major driving force in
Canadian equities in 2017
2017 Outlook Theme #2
Natural gas prices fell 14%Oil prices fell 6%
The energy story took a step back in the first quarter …
Energy Update: Q1 2017
$1
$2
$3
$4
Price of Natural Gas
$30
$35
$40
$45
$50
$55
$60
Price of WTI Crude (USD)
2016 2017 2016 2017
Oil Falls
What caused the weakness in oil prices in Q1?
Energy Update: Q1 2017Ongoing concerns of large U.S. oil inventories and the Americans ramping up production again too quickly.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1-Dec-14 1-Dec-15 1-Dec-16
US Rig Count
0
200
400
600
800
1,000
1,200
1,400
1,600
1-Dec-14 1-Dec-15 1-Dec-16
US Crude Inventory
Rig counts have steadily increased since mid-2016.
Inventory levels haven’t shown any significant decrease so far in 2017.
It wasn’t just that oil prices fell that caused energy stocks to retreat in the first quarter.
Investor sentiment had become too exuberant –the Energy Index had simply gone up too fast.
Energy Update: Q1 2017
Did Investors Get Too Excited About Energy Stocks?
Energy stocks were overbought: the performance of the energy index in the most recent recovery was way ahead of the last 3 periods.
0%
10%
20%
30%
40%
50%
60%
1997-1999 2000 - 2002 2008 - Early 2009 Mid 2016 - Jan 2016
TSX Energy Index:Index % Return 12 Months After A Fall In Oil Prices
Energy Update: Q1 2017
As always, let’s turn the analysis in the energy sector back to earnings…
-80%
-60%
-40%
-20%
0%
20%
40%
60%
2012 2013 2014 2015 2016 2017
What Are Earnings Doing in Canada for Energy Stocks?
When Fiscal Q1 earnings are reported in April & May, they are expected to show that earnings growth is very strong for energy companies.
2013 2014 2015 2016 2017
Fore
cast
Source: Morningstar
Quarter Over Quarter Earnings Growth
Energy Outlook in Canada is Positive
• The imbalance between global production and consumption is closing
• Median analyst estimates forecast oil prices increasing to $60 a barrel by year end
• Saudi Arabia (and their OPEC brethren) are committed to cutting output Remember, Saudi Arabia plans to take their major oil company
public in 2018, so higher oil prices would help provide a stronger valuation and raise more cash!
Source: US Energy Information Administration
With a positive outlook for earnings for stocks in the sector, STYLUS will continue to hold onto our investments in Energy. There are three additional factors supporting oil prices:
Tax Reform
Bank deregulation
Infrastructure
Trade
2017 Outlook Theme #3: The Trump Agenda
2017 Outlook Theme #3: The Trump Agenda
Investors rushed into some sectors after the Trump election on speculation that those stocks would benefit most from his policies:
2016: November 8 – December 31
Financial Sector: 17%Industrials: 13%Energy: 12%S&P 500 Index: 11% (USD)
2017 Outlook Theme #3: The Trump Agenda
Reality sunk in during the first quarter that election promises don’t instantly bring earnings growth, and as a result, those same sectors all lagged the S&P500 Index:
Q1 2017: January – March
S&P 500 Index: 5.5% (USD)Industrials: 5%Financial Sector: 2%Energy: -7%
2017 Outlook Theme #3: The Trump Agenda
Just another example that investing on hope or promises isn’t a profitable approach.
=
2017 Outlook Theme #3: The Trump Agenda
STYLUS will wait until Trump’s policies/plans are more than just tweets or empty promises – we need confirmation of action. Only then we find, analyze
and invest in the appropriate stocks.
NORTH AMERICAN MARKET
FUNDAMENTALS
0.9x
1.1x
1.3x
1.5x
1.7x
1.9x
2.1x
2.3x
2.5x
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Pric
e to
Boo
k ra
tio
of m
edia
n Ca
nadi
an s
tock
Source: Morningstar
Average P/B = 1.62x
1.55x
What You Are Paying Versus What Are You GettingIt is important to look past all the noise & speculation and rely on the data: Canadian stocks are reasonably priced.
What are You PayingPrice to book ratio (P/B): A measure of the value investors attach to the net assets of companies.
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
0.9x
1.1x
1.3x
1.5x
1.7x
1.9x
2.1x
2.3x
2.5x
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Price to Boo
k ratio
of m
edian Ca
nadian
stock
Average Net ROE = 2.70%
What are You GettingReturn on equity (ROE) net of T-bill rate: Measures the profitability of Canadian companies above a risk-free rate of return.
Retu
rn o
n Eq
uity
of
med
ian
Cana
dian
sto
ck
net
of 9
0-da
y T-
bill
rate
Earnings growth is helping drive up net profitability levels in Canada.
Source: Morningstar
What You Are Paying Versus What Are You Getting
Given what we have said about earnings, economic conditions, and market fundamentals, what do we currently hold in our Canadian Funds…
STYLUS Momentum Fund As at March 31, 2017
* New additions this quarter
EnergyCdn. Natural Resources*EnCana Corp.NuVista Energy Ltd.Raging River ExplorationSeven Generations EnergySuncor Energy Inc.Trican Well Service Ltd.*
FinancialsBank of MontrealManulife FinancialBank of Nova ScotiaTMX Group Ltd.
Information TechnologyAvigilon Corp.*Blackberry Ltd.*Enghouse Systems Ltd.*Open Text CorporationSierra Wireless, Inc.*
MaterialsHudBay Minerals Inc.Lundin Mining Corp.*Methanex Corp.*
Consumer DiscretionaryDollaramaRestaurant Brands Intl.
IndustrialsNew Flyer IndustriesWaste Connections
Real EstateFirstService Corp.*
Consumer StaplesPremium Brands Holdings
Health CareCRH Medical Corp.
Consumer DiscretionaryCanadian Tire Corp.*DollaramaMTY Food Group Inc.Restaurant Brands Intl.Uni-Select Inc.*
MaterialsCCL IndustriesMethanex Corp.*West Fraser Timber Co.Winpak Ltd.*
FinancialsBank of MontrealCIBCIndustrial AllianceRoyal Bank of Canada*
Consumer StaplesNorth West Company Inc.*Loblaw Companies Ltd.Premium Brands Holdings
EnergyNuVista EnergySeven Generations EnergyZCL Composites Inc.*
IndustrialsNew Flyer Industries Waste Connections
Real EstateColliers Int’l Group*FirstService Corp.*
STYLUS Growth Fund As at March 31, 2017
* New additions this quarter
FinancialsBank of Montreal*CIBCFiera Capital Corp.Great-West Lifeco Inc.*Manulife FinancialNational Bank of CanadaRoyal Bank of CanadaToronto Dominion Bank
EnergyCdn. Natural Resources*Enbridge IncInter Pipeline Ltd.Peyto Expl. & Dev. Corp.Suncor Energy Inc.*TransCanada Corp.*
Consumer StaplesNorth West Company Inc.*Premium Brands HoldingsRogers Sugar
IndustrialsNew Flyer IndustriesWajax Corporation
UtilitiesCdn. Utilities Ltd.Valener
Real EstateCdn. Apartment Prop. REIT*Canadian REIT*
MaterialsMethanex Corp.*
Health CareExtendicare Inc.*
STYLUS Value with Income Fund As at March 31, 2017
* New additions this quarter
FinancialsBank of MontrealCIBCFairfax FinancialGreat-West Lifeco Inc.*Industrial Alliance*Manulife Financial*National Bank of CanadaRoyal Bank of Canada
EnergyCenovus Energy Inc.*EnbridgeInter Pipeline Ltd.Suncor EnergyTransCanada Corp.*
Consumer DiscretionaryCanadian Tire Corp.*Dollarama*Restaurant Brands Intl.*
OtherOpen Text Corp.Rogers Communications
Consumer StaplesGeorge Weston Ltd.Maple Leaf Foods
IndustrialsWaste Connections Inc.
MaterialsCCL Industries inc.*
As at March 31, 2017STYLUS Wealth Protection Fund
* New additions this quarter
5%
6%
7%
8%
9%
10%
11%
12%
1.1x
1.3x
1.5x
1.7x
1.9x
2.1x
2.3x
2.5x
2.7x
2.9x
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Pric
e to
Boo
k ra
tio
of m
edia
n U
.S.
stoc
k
Long-term Average P/B =
2.20x
2.65x
What are You PayingPrice to book ratio (P/B): A measure of the value investors attach to the net assets of companies.
U.S. stocks continue to be very expensive –these valuations mean we have to be very careful not to overpay for any stocks in the STYLUS U.S. Blended Equity Fund.Source: Morningstar
What You Are Paying Versus What Are You Getting
5%
6%
7%
8%
9%
10%
11%
12%
1.1x
1.3x
1.5x
1.7x
1.9x
2.1x
2.3x
2.5x
2.7x
2.9x
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Pric
e to
Boo
k ra
tio
of m
edia
n U
.S.
stoc
k
What are You GettingReturn on equity (ROE) net of T-bill rate: Measures the profitability of American companies net of the risk-free rate of return.
Retu
rn o
n Eq
uity
of
med
ian
U.S
. st
ock
net
of 9
0-da
y T-
bill
rate
Average Net ROE = 8.85%
The gap between current and expected net ROE means we must closely monitor how those expectations change during the year.
Source: Morningstar
What You Are Paying Versus What Are You Getting11.3%
Expected net ROE for 2017
10.2% Current net ROE for 2017
How is STYLUS positioning the U.S. Blended Equity Fund in a
market where stocks are expensive but upside earnings growth opportunities remain?
How Are We Positioned?
Remember the U.S. Blended Equity Fund is a combination of two investment styles….
How Are We Positioned?
…Growth & Value
Value stocks in the portfolio offer lower valuations (i.e. defensive characteristics) while the Growth holdings provides exposure to the companies with superior reinvestment rate (i.e. internal growth).
S&P500 Value stocks in US Blended
Growth stocks in US Blended
US Blended Portfolio
Price/EarningsRatio 18.6x 14.7x 19.9x 16.8x
ReinvestmentRate 10.6% 14.0% 14.8% 14.4%
The Best of Both Worlds…
How Are We Positioned?
Lower Valuations
Better Growth
What does the “best of both worlds” U.S. Blended Equity Fund hold at the end of the First Quarter?
FinancialsDiscover Financial Srvs. GrpEvercore Partners Inc.Green Dot Corporation*LegacyTexas FinancialMarketAxess Hldgs.Oaktree Capital Group*PNC Fin. Services Group*
Consumer DiscretionaryBig 5 Sporting GoodsGeneral MotorsHome DepotLear CorporationOffice Depot Inc.Thor Industries Inc.
Information TechnologyApplied Materials Inc.Broadcom LimitedCDW CorporationMicrochip Tech. Inc.*
Health CareOraSure Technologies*BioTelemetry, Inc.
EnergyEOG Resources Inc.Pioneer Natural Resources
MaterialsOlin Corporation*Steel Dynamics Inc.*
Consumer StaplesSysco Corp.
U.S. Blended Equity Fund As at March 31, 2017
* New additions this quarter
Good Things Come…
2017 Q1 Market Review & Outlook
As you have read in this quarterly review, North American corporate earnings, equity market
fundamentals & economic conditions are all favourable. Hence the title of this presentation:
Good Things Come…
2017 Q1 Market Review & Outlook
This title also corresponds to how the STYLUS disciplined investment process has held up so well through various market conditions, for even when
investor sentiment works against us in the short-term, we have always outperformed over each market cycle,
including the last 5 years …
Good Things Come…
13.1%11.8%
8.8%7.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Mom
entu
m
S&P/
TSX
Gro
wth
Valu
e w
ith
Inco
me
15.4%
5.0%
5 Year Annualized Returns: March 31, 2012 to March 31, 2017
U.S
. Bl
ende
d Eq
uity
Wea
lth
Prot
ecti
on
Announcements
Announcements: STYLUS Mid-Year Market Review
MARK YOUR CALENDARS NOW! We will be hosting Mid-Year Market review sessions at the STYLUS office between
Monday July 10 – Tuesday July 18
STYLUS Market Review Sessions
STYLUS Market Review Sessions
On May 23 & 27, STYLUS is hosting Money Management 101sessions for the “Next Generation” (young adults ages 18-35).
Announcements: Education Session
Topics: Types of Income Understanding Taxes Creating & Managing a Budget Planning for Big Purchases Debt Management Contributions to Investments
If you haven’t done so already, contact Fiona Robertson (email: frobertson@stylusam.com) to get your young adult children signed up for these informative sessions.
We Hope You Enjoyed Our Market Review!
If you have any questions about this presentation or if you would like to discuss
your individual investment goals and objectives, please contact us:
(416) 847-5900
Rick, Brennan, Julianna, Matteo, Mario & Fiona