Brokers have always joked about clients calling them and saying things like “I need a nine per cent annual compound return with no risk or I’m taking my business elsewhere.” There’s an obvious lesson here about investor expectations – risk-free returns like that are not remotely possible in a low-rate environment – but there’s an underlying factor that will become increasingly important in the coming years.
Demographic change is already causing a major shift in investor goals and this will only intensify – and potentially affect the entire structure of markets – in the coming years.
In a recent blog post, Ritholtz Wealth Management’s director of research Michael Batnick noted Fidelity Investment’s giant growth-oriented Magellan Fund was seeing redemptions despite market-beating returns. His theory is that “the baby boomers who invested with Peter Lynch in the ‘90s now have different priorities. When they were 40 and in their peak earning years, they wanted to beat the market. Now that they’re either approaching or in retirement, they don’t have as much interest in the pursuit of alpha. Today they want to know, am I going to be okay? Will the assets that I’ve accumulated last me for the rest of my life?”
I’m hearing about the same trend in Canada. Fewer and fewer investors care about beating the market. They are comfortable with small nominal gains and downside protection.
Mr. Batnick believes these conservative investors are turning to index funds to limit the volatility of individual stocks. This is working great because index performance has been generally positive. But, the S&P 500 has been driven by high growth, high valuation technology stocks and the S&P/TSX Composite returns are dependent on volatile resource sectors to a significant extent.
What happens if index performance turns negative? This would drive a lot of older, risk-averse investors out of the equity market entirely.
There will always be investors looking for growth , but there’s a risk that their numbers will steadily dwindle as the Boomer population ages and the younger generations struggle to build wealth. Valuations on riskier market sectors would go from very expensive to significant discounts to the overall market.
That’s only one possible scenario among many. There’s no doubt though that demographic change, most notably in Japan since 1990, has had dramatic effects on national economies and markets. Changes to what we accept now as the norm are to be expected.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Richelieu Hardware Ltd. (RCH-T). This stock is in recovery mode, bouncing off of its 2018 low and rallying 14 per cent since mid-April. This is a company that has delivered steady sales and earnings growth over the years. Quebec-based Richelieu Hardware manufactures and distributes specialty hardware and complementary products, such as kitchen and bathroom cabinets, servicing the residential and commercial renovation industry. Jennifer Dowty reports (for subscribers).
Berkshire Hathaway Inc. (BRK.B-N). We all know Warren Buffett is a great investor. Since he took control of Berkshire Hathaway Inc. in 1965, it has generated 10 times the return of the S&P 500 index. What’s not so well known, though, is how much Mr. Buffett’s performance has faded in recent years. Since 1998, Berkshire has beaten the S&P 500’s total return by only about a percentage point a year. Over the past 10 years, it has actually lagged behind the benchmark. Has something permanently changed? Should investors ditch Berkshire and give up on Buffett-style investing? Maybe not. A recent analysis by Lawrence Hamtil of Fortune Financial Advisors LLC in Kansas City suggests that one of the biggest drags on Mr. Buffett’s returns over the past two decades was simply Berkshire’s lofty price at the beginning of the period. Ian McGugan reports (for subscribers).
Bank of Nova Scotia (BNS-T). This stock appears on the negative breakouts list. Its share price has declined 5 per cent over the past 10 trading sessions, declining on the back of its recently announced bought deal financing with proceeds earmarked to fund the proposed acquisition of MD Financial Management. The stock is trading at a discount compared to its historical average. At the beginning of the month, two insiders were buying shares in the public market. Jennifer Dowty reports (for subscribers).
David Berman also takes a look at the bank stock: Bank of Nova Scotia’s acquisition binge is weighing on its share price amid concerns about the bank’s ability to digest new assets valued at a whopping $7-billion. But while some analysts are growing nervous about the stock and slashing their outlook, contrarians should see the recent turbulence as a gift. (for subscribers).
The Rundown
A Canada-U.S. trade war would be bad news for the loonie
Domestic bond markets, and by extension the loonie, are likely to provide the most accurate reflection of global investor concerns about a Canada/U.S. trade war. Intensifying market fears of an economically damaging Canada/U.S. trade war will affect foreign investment in Canada and also Bank of Canada monetary policy. Scott Barlow looks at the charts. (for subscribers).
Why the current market order may not last much longer
Folks, this is getting ridiculous. Since the financial crisis, investors have gone all in on three big bets. They’ve gambled that the U.S. recovery will continue to lead the world, that technology companies will be the big winners in the new economy and that growth will be worth more than value. People who bet on these notions have left their peers in the dust. At this point, though, it’s worth asking if our collective obsession with this three-pack of trends isn’t just a bit overdone. Ian McGugan reports (for subscribers).
Why value investors shouldn’t give up just yet
While growth stocks continue to clobber value stocks, causing many investors to question their priorities, it’s not time to declare the death of value investing. Sure, the technology-heavy Nasdaq is at yet another record high in the ninth year of a broad bull market, led by tech giants Facebook, Amazon.com, Netflix and Google parent Alphabet, not to mention Apple. The rotation back to value stocks that many people started to anticipate two years ago has yet to materialize in the face of this relentless growth-stock rally. Instead, it seems some well-known value investors have shifted their thinking after five years of losing out. John Reese explains.
Don’t let this stock market rally fool you
Is this really the Trump rally? Well, this is what the bulls seem to believe. Even though the one sector carrying the load, large-cap tech, is the one that actually benefits the least from the tax cuts and trade changes under way. Absent technology, the median stock is unchanged for the year and down more than 6 per cent from the highs. There are many segments of the market being hurt from the administration’s policies. David Rosenberg explains his view (for subscribers).
This highly ranked stock picker is betting on BlackBerry and AI equities
As a stock picker and blogger, Ryan McQueeney is currently ranked 13th out of the 6,524 financial bloggers tracked by TipRanks.com. His 448 buy recommendations were on the mark 67 per cent of the time and have an average gain of 16.7 per cent in the year after recommendation. Mr. McQueeney works at Zacks Investment Research. He screens for companies on the basis of trends in their earnings estimates and revisions. Simply put, it is a positive sign if a company is exceeding consensus forecasts for its earnings, and analysts are revising their earnings estimates upward. Larry MacDonald reports (for subscribers).
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Ask Globe Investor
Question: I own units of a real estate investment trust that distributes a significant amount of return of capital every year. I know that ROC must be subtracted from one’s adjusted cost base, but I was not aware until I read your column that once the ACB hits zero any further ROC payments are taxed as capital gains. As a result I have a negative ACB of about $13,000 on one of my REITs and I’m wondering what I need to do to make sure I don’t get in hot water with the Canada Revenue Agency.
Answer: You would need to correct your prior years’ tax returns, starting with the year that the ACB fell to zero. Any additional ROC received that year, and in subsequent years, would be reported on the corresponding return as a capital gain.
The process is not as onerous as you might think.
“You don’t refile the entire return, rather you change the return online,” said Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce. “It’s just the one line. You forgot the capital gain so put in the amount of the taxable gain, which would be 50 per cent of the capital gain.”
(For more information, check out "How to change your return” on the CRA website)
You will be required to pay any taxes owing, plus interest, once your returns are reassessed. But “I doubt there would be any penalties. This isn’t a negligence scenario. You didn’t understand the rules, you didn’t understand the law,” Mr. Golombek said.
When you eventually sell the investment, make sure you use an ACB of zero (assuming you didn’t buy any more units, including reinvested distributions) and not the negative ACB to determine your final capital gain. Otherwise, you’ll end up paying double tax on the same gain.
-- John Heinzl
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What’s up in the days ahead
Rob Carrick takes a look at the challenge of today’s housing market for millennials and John Heinzl examines the outlook for Cineplex’s stock.
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Compiled by Gillian Livingston