January 2018 ENR Market Outlook Executive Summary: • Global equities ranked as the top-performing asset class in 2017, outpacing fixed-income securities, currencies, commodities, and most alternative investments, including hedge funds and Commodity Trading Advisors; • The MSCI World Index posted its best calendar year since 2013, gaining 20% in 2017. The MSCI Emerging Markets Index logged its best annual return since 2009, surging more than 34%. The S&P 500 Index gained a cumulative 22%, including dividends, in 2017 -- its best performance since 2013; • Bonds, as measured by the Barclays Aggregate Bond Index (investment-grade securities) gained 3.8% in 2017. High-yield debt as measured by the Merrill Lynch High-Yield 100 Index, gained 6.6%. The J.P. Morgan Emerging Markets Bond Index rallied 9% in 2017; • The Reuters-CRB Index of raw materials gained 0.7% in 2017, posting its second consecutive calendar year increase since 2011. The energy-heavy S&P Goldman Sachs Commodity Total Return Index (GSCI) holding 62% in energy futures, gained 15.5% in 2017. West Texas Intermediate crude oil rallied 12% in 2017. Brent crude gained 18%; • The U.S. Dollar Index posted its first calendar year loss since 2012, declining 10% and its biggest annual decline since 2007. Most European currencies gained versus the dollar, especially those in Eastern Europe. Emerging market currencies also rallied; the Chinese yuan posted a strong year versus the dollar, rising 6%; • The Credit Suisse Hedge Fund Index gained an estimated 7.5% in 2017 as the median hedge fund once again failed to beat the S&P 500 Index. Hedge funds as a group have failed to beat the market for more than 15 years; • On December 22, President Trump signed into law the most important tax legislation since 1986. U.S. corporate tax reform is the big driver of the Trump tax cuts. In the past 30 years, almost every other rich country in the OECD, except the United States, has cut its corporate tax rate to attract investment. Starting in January, that rate drops from 35% to 21%, once the highest in the OECD, to somewhere in the middle. For the next five years, businesses will be able to deduct capital equipment immediately instead of depreciating it over several years. The hope among GOP lawmakers and the President is that significant corporate tax cuts will spillover into the labour market and grow jobs, lift capital spending and boost wages; • Shareholders are big winners amid U.S. tax overhaul. U.S. multinationals holding cash overseas will repatriate a big chunk of that cash-pile, benefiting investors by means of stock buybacks and special dividends. Domestically- focused companies will also benefit from lower tax rates, including small-cap equities; • Exchange-traded-funds (ETFs), have dramatically changed the investment landscape. In 2017, ETFs drew more than $465 billion dollars, a record. Active managers suffered another year of redemptions. But the broadest ETFs focusing on global advanced and emerging market large-cap stocks now hold a disproportional weighting in technology stocks. The real test for passive investing will come amid a bear market and how investors and market- makers will react to tumbling stock prices and possibly, liquidity challenges in a panic; • U.S. sales at online retailers, brick-and-mortar stores and restaurants rose 0.8% in November and 5.8% year-over- year – the largest yearly November increase since 2011, according to The Wall Street Journal. However, spending has been so strong that it is outpacing income gains. According to the Federal Reserve, total consumer credit owned and securitized now sits at an all-time high at roughly $3.85 trillion dollars; • The savings rate in the United States continues to fall. The personal savings rate or savings as a share of after-tax income, fell to 2.9% in November, its lowest level since late 2007. In an environment of record-high consumer
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January 2018 ENR Market Outlook
Executive Summary:
• Global equities ranked as the top-performing asset class in 2017, outpacing fixed-income securities, currencies,
commodities, and most alternative investments, including hedge funds and Commodity Trading Advisors;
• The MSCI World Index posted its best calendar year since 2013, gaining 20% in 2017. The MSCI Emerging Markets
Index logged its best annual return since 2009, surging more than 34%. The S&P 500 Index gained a cumulative
22%, including dividends, in 2017 -- its best performance since 2013;
• Bonds, as measured by the Barclays Aggregate Bond Index (investment-grade securities) gained 3.8% in 2017.
High-yield debt as measured by the Merrill Lynch High-Yield 100 Index, gained 6.6%. The J.P. Morgan Emerging
Markets Bond Index rallied 9% in 2017;
• The Reuters-CRB Index of raw materials gained 0.7% in 2017, posting its second consecutive calendar year increase
since 2011. The energy-heavy S&P Goldman Sachs Commodity Total Return Index (GSCI) holding 62% in energy
futures, gained 15.5% in 2017. West Texas Intermediate crude oil rallied 12% in 2017. Brent crude gained 18%;
• The U.S. Dollar Index posted its first calendar year loss since 2012, declining 10% and its biggest annual decline
since 2007. Most European currencies gained versus the dollar, especially those in Eastern Europe. Emerging
market currencies also rallied; the Chinese yuan posted a strong year versus the dollar, rising 6%;
• The Credit Suisse Hedge Fund Index gained an estimated 7.5% in 2017 as the median hedge fund once again failed
to beat the S&P 500 Index. Hedge funds as a group have failed to beat the market for more than 15 years;
• On December 22, President Trump signed into law the most important tax legislation since 1986. U.S. corporate
tax reform is the big driver of the Trump tax cuts. In the past 30 years, almost every other rich country in the OECD,
except the United States, has cut its corporate tax rate to attract investment. Starting in January, that rate drops
from 35% to 21%, once the highest in the OECD, to somewhere in the middle. For the next five years, businesses
will be able to deduct capital equipment immediately instead of depreciating it over several years. The hope
among GOP lawmakers and the President is that significant corporate tax cuts will spillover into the labour market
and grow jobs, lift capital spending and boost wages;
• Shareholders are big winners amid U.S. tax overhaul. U.S. multinationals holding cash overseas will repatriate a
big chunk of that cash-pile, benefiting investors by means of stock buybacks and special dividends. Domestically-
focused companies will also benefit from lower tax rates, including small-cap equities;
• Exchange-traded-funds (ETFs), have dramatically changed the investment landscape. In 2017, ETFs drew more
than $465 billion dollars, a record. Active managers suffered another year of redemptions. But the broadest ETFs
focusing on global advanced and emerging market large-cap stocks now hold a disproportional weighting in
technology stocks. The real test for passive investing will come amid a bear market and how investors and market-
makers will react to tumbling stock prices and possibly, liquidity challenges in a panic;
• U.S. sales at online retailers, brick-and-mortar stores and restaurants rose 0.8% in November and 5.8% year-over-
year – the largest yearly November increase since 2011, according to The Wall Street Journal. However, spending
has been so strong that it is outpacing income gains. According to the Federal Reserve, total consumer credit
owned and securitized now sits at an all-time high at roughly $3.85 trillion dollars;
• The savings rate in the United States continues to fall. The personal savings rate or savings as a share of after-tax
income, fell to 2.9% in November, its lowest level since late 2007. In an environment of record-high consumer
As the euro-zone recovers and tourism increases, Europcar Groupe is strongly positioned for earnings growth in 2018.
Another bonus for investors: In late October, the Macron government introduced business-friendly policies aimed at
attracting investors and revitalizing the euro-zone’s second-largest economy. The French parliament adopted a package
of measures starting this year that includes scrapping the wealth levy on everything, except property assets. A 30% flat
tax rate is also being introduced on capital gains, dividends and interest.
By unleashing big tax cuts on business and most income tax brackets, France is encouraging domestic consumption – a
plus for all French businesses. That should spillover to French tourism at home where Europcar is based and the CAC-40
Index in Paris where the company is listed. Europcar’s rental volume growth is also growing substantially more than its
peers since 2016 and along with recent acquisitions, should boost earnings in fiscal 2018.
From a valuations perspective, Europcar Groupe is attractive. The stock trades at 14.6 times price-to-earnings, 0.626 times
price-to-sales and 1.88 times price-to-book. A sweetener for investors is the dividend, currently yielding 3.98%. From its
all-time high of €13.31 in September 2017, the stock trades at €10.25, down a sizable 23%.
BUY Europcar Groupe (Paris-EUCAR) at market in Paris up to €11.20. Apply a 20% stop-loss on your entry price.
Banner Year for Stocks Lifts World Markets
ENR Market Outlook Portfolio It was a great year for the ENR Market Outlook Portfolio. The bull market finally spread from the United States to overseas
in 2017 and foreign markets beat Wall Street for the first time since 2009. A big part of that advance was due to a falling
U.S. dollar, which declined across all regions. When translated back from local currencies, dollar-based investors overseas
earned at least a 20% return as measured by the MSCI EAFE Index (Europe, Australasia and the Far East). Emerging market
investors did even better, gaining 35% as measured by the MSCI Emerging Markets Index.
From our portfolio of stocks and ETFs, the top-performing open position belongs to Canada’s Dollarama Inc. (Toronto-
DOL), up 142% since February 2016. Apple Inc. (NASDAQ-AAPL) is ranked #2, up 89% followed by PayPal Holdings Inc.
(NASDAQ-PYPL), up 84%. Other winners include General Dynamics (NYSE-GD) with a 57% gain; Nestlé (Zurich-NESN) up
30%; Diageo ADR (NYSE-DEO) up 32%; Procter & Gamble Corp. (NYSE-PG) up 27%; Huntington Ingalls (NYSE-HII) up 19%
and the iShares Global Infrastructure Index (NYSE-IGF), gaining 18%.
This month, we’ve got two new recommendations – one domestically-focused on value and another in Europe.
Corporate tax reform in the United States will benefit shareholders in several ways this year. These include share buybacks,
dividends and a higher stock price. We think owning a basket of value-based companies likely to benefit from tax changes
should translate into profits. The iShares Russell Top Value ETF (NYSE-IWX) holds a big chunk in those industries that will
churn greater after-tax profits. Also, value stocks have badly trailed growth stocks for almost ten years and are much less
expensive compared to the high-flying groups that have dominated this bull market.
Disclaimer: The ENR Global Contrarian Portfolio owns BAE Systems PLC, Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Nestlé, Apple Inc., General Dynamics, Dollarama and Procter & Gamble Corp. ENR Low Risk Portfolio owns Pfizer, Nestlé and Procter & Gamble Corp. ENR Medium Risk Portfolio owns Huntington Ingalls Industries, BAE Systems PLC, Apple Inc., General Dynamics, Procter & Gamble Corp and Pfizer. ENR Global Aggressive Growth Portfolio owns BAE Systems PLC, Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Apple Inc., General Dynamics, Nestlé, PayPal Holdings and Dollarama.
economy, pushing up wages coupled with another year of synchronized global economic growth, then the bond market is
very vulnerable to a 1994-type of sell-off or a 2013 bond market taper tantrum. We’re betting on a bond market sell-off
this year, triggered by more Fed rate hikes and perhaps a strong U.S. dollar.
In our view, the best values in bonds remain floating rate investment-grade debt and TIPS. We are bearish on most other
fixed-income securities and would maintain a short-to-intermediate bond portfolio duration of a maximum 6.5 years. Cash
is a safer option as ninety-day T-bill yields continue to rise as the Fed tightens.
Market Outlook Bond Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
iShares TIPS NYSE TIP $113.53 Dec 7/16 2.07% $113.62 2.03% BUY
iShares Floating Rate
NYSE FLOT $50.69 Oct 5/16 1.46% $50.87 2.15% BUY
Vanguard Intermediate-Term Corporate Bond ETF
NYSE VCIT $85.66 Jan 3/17 3.22% $87.05 4.32% HOLD
Disclaimer: The ENR Low Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond ETF and the Vanguard Intermediate-Term Corporate Bond ETF. The ENR Medium Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond Fund and the Vanguard Intermediate-Term Corporate Bond ETF.
Foreign Exchange
U.S. Tax Repatriation and Rate Hikes Set to Boost USD in 2018 The U.S. dollar posted its worst year in a decade last year with the U.S. Dollar Index dropping more than 10%. The dollar
saw broad-based losses in all regions of the world, except parts of Africa and Central and South America. Some of the
worst losses occurred versus currencies in Eastern Europe and some of the emerging markets.
Heading into 2018, markets are short the dollar. The USD continues to soften as we start the first day of trading in the
New Year, extending its losses from 2017. However, we think a reversal lies ahead as the Federal Reserve continues to
tighten and tax cuts feed through consumption and corporate capital spending later this year. As mentioned before, a
previous tax repatriation in 2004 by the Bush administration and Congress resulted in a big USD Index recovery in 2005.
Over $1.8 trillion dollars of offshore profits lies overseas, mainly by the largest American multinationals, according to
Moody’s. That cash-pile, if repatriated as we expect in 2018, should be a major driving force pushing up the dollar
BUY the iShares S&P GSCI Commodity-Indexed Trust (NYSE-GSG) at market. Place a wide 25% stop-loss on your entry
price and limit your exposure to a maximum 5% of a diversified portfolio.
Market Outlook Commodity Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
iShares S&P GSCI Commodity Trust
NYSE GSG $16.34 Jan 2/18 0.00% $16.34 NEW BUY
ETFS Physical Platinum
NYSE PPLT $88.54 Nov 2/17 0.00% $89.49 1.07% BUY
Inter Pipeline Ltd TSE IPL CAD
25.67 Jun 28/17
6.28% CAD
25.99 8.36% BUY
Newmont Mining NYSE NEM $17.99 Dec 31/15
0.67% $38.06 113.65% BUY
Randgold Resources
NASDAQ GOLD $61.93 Dec 31/15
1.01% $100.59 65.11% BUY
Gran Tierra Energy
TSE GTE CAD 3.18 May 30/17
0.00% CAD 3.45 17.25% HOLD
Exxon-Mobil⁴ NYSE XOM $77.95 Dec 31/15
3.66% $84.59 16.27% HOLD
Schlumberger NYSE SLB $69.75 Dec 31/15
2.97% $69.50 5.38% HOLD
Shareholder Disclaimer:
1. ENR or its employees or its access persons own shares of Apple Inc. 2. ENR or its employees or its access persons own shares of Dollarama Inc. 3. ENR or its employees or its access persons own shares of Procter & Gamble. 4. ENR or its employees or its access persons own shares of Exxon-Mobil. 5. ENR or its employees or its access persons own shares of Nestlé
6. ENR or its employees or its access persons own shares of Pfizer Inc.
7. ENR or its employees or its access persons own shares of BCE Inc.
8. ENR or its employees or its access persons own shares of Huntington Ingalls Industries.
9. ENR or its employees or its access persons own shares of Kraft-Heinz Corp.