William Chin, portfolio manager, Caldwell Investment Management
FOCUS: Technical Analysis, Fixed-Income & Macro Portfolio Strategy
William Chin is also President of the Canadian Society of Technical Analysts.
Since the Global Financial Crisis, central banks have been using unconventional policies to promote growth and inflation, or to fight deflation.
The results are mixed and at times very uneven. Surely equities and the credit markets are the main recipients of ‘easy money’ and they have done quite well. As to other asset classes, their stories get more complex.
Commodities have had impressive rallies, but they have fizzled out. Essentially when cheap money is being thrown around misallocation of capital ensues. Crude oil had rallied and crashed simply because cheap money and high crude prices (also a result of low interest rates) enabled exploration and vastly increased supply.
Will the fate faced by commodities spread to equities and credit markets? That is the most commonly asked question.
Some would point out that equities and credit markets are behaving much more robustly than economic performance would indicate. Likely enough, Zero Interest Rate Policy and Quantitative Easing pushed liquidity through the financial markets and enabled companies to obtain cheap financing.
However, these funds were mostly used to buy back shares, pay special dividends and fund defensive M&A activities. Very little was directed towards capital spending. The result is low output and poor quality of jobs that offer unimpressive wages. With wage growth slow, consumer demand has not been robust, even though the labour markets seem to be improving. The lack of capital spending also led to poor productivity growth, resulting in rising costs per unit produced. Businesses therefore resort to cost cutting to compensate for lacklustre revenue growth.
As we have noticed from the U.S. Federal Reserve, the future path of monetary policy, despite “forward guidance,” has not been clear at all. After threatening to raise interest rates for most of 2015, the Federal Reserve backed off after one hike last December, recently citing global concerns and soft capital spending in the U.S. as reasons for pausing.
Forecasting in this environment is more challenging than ever due to the involvement of the central banks. They have little idea of what to do next and what “unintended consequences” their past actions might have. Established correlations sometimes break down, and large divergences occur even within the same asset class.
Forecasting is often compared to driving in the dark, with just the headlights guiding us to navigate the next turn. Often, we are tempted to make long-term forecasts, but if we can correctly navigate every next turn, we will be fine.
Technical analysis can give us a summary of past actions by our fellow market participants. From there we can assess any imbalances that might provide us with what the next turn looks like, even though established correlations and market patterns might be compromised by unconventional monetary policies.
In this environment, active management supported by sound research will be able to provide us with the right investment ideas. It will also let us know when to be careful. Speak to your advisor about the Caldwell philosophy and our actively managed investment solutions.
AGT Food & Ingredients (AGT.TO)
Clearwater Seafoods (CLR.TO)
Caldwell Canadian Value Momentum Fund
Performance as of: April 29, 2016.
Inception date is August 15, 2011. Returns are net and returns over 1 year are annualized.
- 1 year: Fund 7.8%, Index* -5.4%
- 3 year: Fund 8.9%, Index* 6.4%
- Since Inception: Fund 10.2%, Index* 4.7%
- New Flyer – 7.5%
- AGT Food and Ingredients – 7.2%
- Hardwoods Distribution – 6.8%
- Premium Brands – 6.5%
- Boyd Group Income Fund – 6.4%