For Canadian investors, the key to achieving positive investment returns in 2015 could be summed up in two words: “avoid Canada”. Unfortunately, the investment call for 2016 will not be quite so simple.

After last year’s 16% decline in the C$/US$ exchange rate, the C$ is expected to trade in a range of 70-75 cents US assuming that crude oil trades in the US$40-45 per barrel range. If crude falls significantly below $35 per barrel, the C$ could again break below 70 cents US and perhaps retest the 2002/3 low of $0.63. Beyond the influence of crude oil, the C$ in 2016 will have to endure another sizeable current account deficit as well as sharply rising fiscal deficits at both the federal and provincial level. In a world of modest total return expectations for global equity and bond markets, a 15% absolute swing in the C$ could make a big difference to portfolio returns in 2016.

A modest increase in 10 year bond yields on improved activity in the domestic US economy as well as a further increases in the Fed funds rate will underpin the US$ and the S&P 500. We expect that the S&P 500 will finish the year at 2200-2300 on stronger second half earnings. The move to new highs will not be smooth as the 2150 resistance level will be a formidable challenge that will take several attempts to surmount. (This is a very conducive environment for option strategies.) Confidence in the US financial services sector will have to return if there is any hope in achieving new highs on the S&P 500. In Canada, we forecast that the TSX Composite will be range-bound between 12,500 to 13,750 and entirely dependant on movements in crude oil. Overall TSX index earnings will remain flat so there will be no help there. US short covering has been a big influence on the TSX and C$ so far this year but we expect the shorts to return when this relief rally is over.

 Assuming that our asset allocation continues to minimize fixed income (30-35%) and maximize equities (65-70%), 2016 total portfolio returns should be in the 6-8% range. However, we will continue to experience above average market volatility from the same influences as 2015 (the Fed, China and commodities).

Canada should have a better year in 2016 but investment returns will be modest and lagging its global peers so that the Canadian equity allocation will remain minimal (0-5%) unless the crude oil market changes abruptly. In addition to an unstable energy market, the Canadian economy will be affected by higher taxes, a heavily indebted consumer and untested political policies. For investors that did not diversify out of Canada in 2015, the current lift in the C$ and TSX are a great opportunity to lighten up.

TOP PICKS:

BMO Equal Weight US Bank Index ETF (ZBK.TO) 

We have a 5% position in this ETF in our Family accounts at an average cost of $16.10. US banks are cheap and should rally back to the recent high of $20.00+ . We like the un-hedged version but for those not interested in assuming currency risk ZUB is the same ETF that is currency hedged.

iShares US High Yield Bond Index Canadian Dollar Hedged (XHY.TO)

Last bought on Jan 14, 2016 at $3.16  

Painted Pony is a junior company with a senior company asset.  With the latest reserve reports in, Painted Pony now has the 4th largest natural gas reserves (4.6 trillion mcfe on a proved plus probable (2P) basis) among publicly traded oil and gas companies in Canada, only behind CNQ, ECA, and TOU.   After the completion of the Altagas’s Townsend gas processing this summer, Painted Pony expects to ramp up its gas production from 16,000 today to 40,000 be the end of 2016.  At current strip prices, the company expected to generate more casfflow in Q4 2016 than all of 2015. Based in the NE British Columbia Montney region, Painted Pony enjoys a reduced royalty rate of 3%, and sells 70% of its production directly to customers in British Columbia and upper North West United States.  Painted Pony has plans to grow to 100,000 boe/d by the end of the decade. 

Horizons US Dollar Currency ETF (DLR.TO)

Past Picks: Jan. 21, 2015

iShares U.S. Preferred Share Index (PFF.TO)

iShares MSCI Europe IMI Index ETF (XEU.TO)

Vanguard FTSE All-World ex Canada Index ETF (VXC.TO)

Total Return Average : +3.57%