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World of pain: Why investors need to know how macro-economic events affect the Canadian market

This article appears in the February edition of the Financial Post Magazine. Go to the iTunes store to download the iPad edition of this month’s issue.

Investors did not have an easy duration of it in 2015. From oil’s price slump despite rising and omnipresent tensions in the centre East and Russia’s invasion of Ukraine to the exit by Greece from the eurozone and technical recessions in Canada and Japan, stock and bond markets rode wave after wave of volatility and many investors wound up at a negative balance. How bad was it? Cash outperformed most asset classes for the first time because the 1990s.

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Unfortunately, 2016 didn’t begin much better. Within the first couple of trading times of January, contagion from China’s latest stock-market tumbles wiped out US$4 trillion in equity value worldwide. The S&P/TSX Composite Index, meanwhile, fell into a bear market, having dropped 20% since its September 2014 high. Further on the horizon loom as many as four rate hikes by the U.S. Federal Reserve, continuing its trend toward tighter monetary policy as the American economy recovers, even when few other economies are showing anything further than weak indications of life.

“Persistent weak global growth is intensifying,” says Bruce Cooper, TD Asset Management’s chief investment officer, chalking that as much as aging demographics in both the developed world and China in addition to high levels of debt, whether that’s government, corporate or consumer, in lots of areas of the world. Both factors lead to weaker aggregate demand, which results in slower economic growth and, ultimately, poorer investment returns – something investors are going to have to obtain accustomed to unless tips over to turn things around.

Much of a portfolio’s performance in the long term is driven more by macro-economic factors and less by stock-specific factors.

In the meantime, headlines scream that one event or any other will weigh down on portfolios. But that’s just a little simplistic. “The market doesn’t tell you why it did something,” says David Kaufman, president of Westcourt Capital Corp., a Toronto-based portfolio manager specializing in traditional and alternative investment. “One macro affects another, and the world keeps spinning so it causes it to be difficult to determine stuff that are affected by multiple factors.” Nevertheless, he says, more customers are asking him how events within the U.S., China along with other places affect their investments here at home.

“Much of the portfolio’s performance in the long run is driven more by macro-economic factors and less by stock-specific factors,” says Pramod Udiaver, co-founder and CEO of Invisor Investment Management Inc. in Oakville, Ont. “And why? Since the global economy is so well integrated nowadays, that your lot of people don’t really appreciate when they consider investments.”

That insufficient appreciation might be since the effects are not often direct ones, and sometimes it’s just the perception that they should change things. But that does not make sure they are less real, there a number of big macro-economic factors that have and will still play a role. “Investment securities are valued based on expected future performance, not on the way a clients are doing in a given time,” Udiaver adds. “And the future performance is largely determined by these larger macro factors.” Most of which, for the time being, appear to be headwinds instead of tailwinds.


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