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  • Another Year, Another Record - Private Wealth Canada
    there is also a wide dispersion within emerging markets which is why the real opportunity ultimately lies in bottom up stockpicking as opposed to a bet on emerging markets as a whole Valuations between EMs differ substantially Price to book value and price to earnings ratios of MSCI emerging market country indices Focus on identifying quality investment opportunities one business at a time Contrary to popular belief investors don t need to sacrifice quality when investing in emerging markets A good example is JD com China s second largest eCommerce player and its largest retailer Its operations are comparable to Amazon s with self managed logistics services and infrastructure e g warehouses supporting the sale and delivery of goods directly to consumers Thanks to JD s scale and business model whereby it sells and generates cash on products prior to paying related costs its rapid expansion could be entirely self funded which is a very attractive characteristic Moreover as an eCommerce company much of JD s growth capital expenditure capex is effectively recorded as marketing expenses in its income statement which in our view causes earnings to be understated JD s earnings are also affected by its decision to keep prices low in an effort to compete for market share If the company continues to grab market share it should be rewarded with rising profit margins as economies of scale lower procurement costs while increasing the industry s barriers to entry Since the earnings gestation period for internet businesses can be prolonged we generally find that valuation multiples based on earnings are less useful For eCommerce retailers Gross Merchandise Value GMV the total value of goods sold through a site is a helpful measure in assessing long term fundamental value On an Enterprise Value EV to GMV basis JD s discount relative to its peers becomes most apparent Its EV is less than 0 5 times trailing 2015 GMV while Amazon trades at around one times EV GMV If JD can indeed deliver on our expectations of 40 per cent annual GMV growth through 2019 and better yet cement a dominant position in Chinese retail it may become a significantly more valuable company than it is today In Korea we have found compelling contrarian opportunities in the brokerage sector These companies generally underperform in sluggish stock markets as they mainly derive their income from investors trading activity But we believe Korea s weak stock market and its relatively low prevalence of financial products provide a meaningful margin of safety against downside risk as these factors tend to move cyclically As shown in the chart Korea Investment Holdings trades at a discount to its global peers despite having a higher return on those assets While higher financial market activity and further deregulation should improve the overall brokerage sector s fundamental performance we prefer to invest selectively in companies that we believe possess meaningful competitive advantages unique growth drivers and strong management teams Even though parts of the stock market in India

    Original URL path: http://privatewealthmagazine.ca/articles/no-lack-of-long-term-value-in-emerging-markets.php (2016-04-26)
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  • Another Year, Another Record - Private Wealth Canada
    and incurring a permanent loss remain remote Taking into consideration the aforementioned crises we feel that the liquidity provided by the banks has always been a mirage that is prone to evaporate under certain conditions This is just the nature of liquidity as the behaviour of banks is both rationale and acceptable for any profit seeking entity So what has been the impact of new regulation The increased cost of capital and compliance has curtailed some trading strategies and has reduced the bond dealer s pain threshold One response to these challenges has been to improve the quality and stability of the earnings by shifting from a pure liability driven trading model to one that incorporates more order based or agency trading Furthermore even in moderately stressed markets those dealers carrying large inventories become highly motivated to sell quickly and mitigate losses This rush to the exit can easily lead to further downward pressure on security prices and draw in other sellers as well Is it all doom and gloom The optimists within us say there is always an opportunity in a problem The first step is acceptance Liquidity has changed and we must adapt to the new environment A good start would be for investors to demand higher credit spreads for new issues from all issuers in order to compensate for the increased cost of trading Given the recent widening of credit spreads we believe this move is already afoot Also as part of our process of acceptance we need to understand that trading larger amounts of bonds will necessitate some flexibility and creativity We cannot simply rely on dealers to be the sole providers of liquidity Instead investors themselves need to be a part of the solution Those with capital to allocate can work with the banks to

    Original URL path: http://privatewealthmagazine.ca/articles/no-free-liquid-lunch.php (2016-04-26)
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  • Another Year, Another Record - Private Wealth Canada
    opportunities are emerging from this trend for some companies UK listed ARM Holdings is one example It has built its business on designing microprocessors for mobile devices While that business remains vibrant networking and data centre opportunities can become a new driver for its growth Increasingly complex tasks performed by the networks require more and more processors running the networking equipment and greater focus on energy consumption requires these processors to be more energy efficient ARM Holdings processor architecture could fit the bill and it and its licensee partners could potentially benefit from the growth in demand as a result One such partner licensee is Cavium a U S listed semiconductor company specializing in microchips for telecom equipment It is embracing ARM architecture for networking and has designed a number of processors for networking equipment and data centre use We expect to see greater adoption of these new products by both network equipment manufacturers and the so called hyper scale data centre operators companies like Google Facebook and Amazon Naturally manufacturers of the networking equipment are also reflecting these trends in their strategy Historically networks developed separately cellular fixed line telecom and cable TV operators ran on different technical standards using very different equipment and architecture This too is changing Everything that travels through network voice calls messaging Internet browsing data or streaming video is ultimately becoming just data And the future design of telecommunication networks will reflect that with so called converged networks establishing a common network fabric across every service that the operator provides Revenue Synergies The on going merger between Nokia and Alcatel two leading manufacturers of wireless and wireline networking equipment is a reflection of this change There are compelling cost and revenue synergies resulting from the merger It was interesting to see Ericsson and Cisco two other leading players in the field to sign a partnership reflecting the same logic just a few months ago in November 2015 These changes provide new opportunities for telecom operators too One example is Deutsche Telekom a leading European telecom operator listed in Germany which is among the pioneering adopters of the converged networking approach The company expects this to lead to cost savings but also to improve the quality of its offering making the customer experience more seamless and enabling it to provide services that could set high industry standard It often takes time for the market to fully appreciate and react to fundamental change on the industry or company level especially when such change requires a detailed analysis of a technical subject such as technology Whether it be the technology space or other sectors finding companies that possess the ability to capture growth potential from such change opportunities remains crucial for equity investors Mikhail Zverev is head of global equities at Standard Life Investments Disclaimer The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security

    Original URL path: http://privatewealthmagazine.ca/articles/the-growing-networking-opportunity.php (2016-04-26)
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  • Another Year, Another Record - Private Wealth Canada
    rely on brokers charms to seduce an ever dwindling pools of clients into paying for the brokers bloated salaries and overhead expenses a number of well established start ups delivers cutting edge portfolio management advice to investors right over the Internet with some charging as little as 9 95 per month With Barclay s and Credit Suisse both exiting the U S wealth management arena while hundreds of millions of venture funding is heading to FinTech startups it appears that the bet was been wagered that new business models are here to stay While many finance professionals are still debating market structure and whether a new exchange will help people avoid high frequency traders there are companies that deliver a streaming map of high frequency trading activity directly to subscriber s desktops leaving nothing to chance and helping to significantly improve trading performance across all markets Similar innovations are going on in insurance risk management and other aspects of financial services Firms that are not up to par on what s going on are at a significant risk of failure Going back to Bloomberg s story one of the possible replacements mentioned in the news were Money net a digital platform presently run by a former Bloomberg employee Money net however is hardly alone in this space of companies that have been tacitly growing their market share and gradually replacing Bloomberg and even Reuters terminals with the most sophisticated players in this quadrillion dollar financial industry For instance have you ever heard of Quandl I have been in a unique and fortunate position to be immersed in the heart of FinTech innovation and to observe first hand the extent of what is becoming a true disruption to businesses that have in turn disrupted financial markets in the late 1970s and

    Original URL path: http://privatewealthmagazine.ca/articles/blindsided_by_innovation.php (2016-04-26)
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  • Three Investment Lessons From 2015
    fundamentals Stock prices currencies bond prices they are all often guided by mean reversion Their prices move up or down but then investment gravity pulls them back within a range Again wherethis gravity occurs is driven by fundamental factors This means that when underlying fundamentals shift the appropriate range for prices should also shift and the original reference points become poor measures of prediction In investing it is important to understand the underlying mechanics that contribute to the price of the asset you are examining Therefore before we assume that oil will revert back to its usual range it is important to examine the context in which the price moves are happening When a trend is thematic or structural it can often go on for far longer than anticipated When in a hole stop digging This is an oldie but goodie from our CIO Jim Hall and it is as applicable in your personal life as in investing It is a winning strategy but difficult to execute when in a hole stop digging In every investor s experience there is a point when a stock you like will start to deteriorate The learning is don t immediately start chasing When a stock is coming down in price it is doing so because the market made up of a collective of thousands of individuals is saying the price should be lower Now there are times when the market is wrong and your previous viewpoint could be right but often the market is telling you something something you may not yet know As fundamental investors the natural instinct is to presume that you know the story on a stock After all you ve likely spent hours of analysis trying to understand it But when a stock begins to deteriorate our lesson over

    Original URL path: http://privatewealthmagazine.ca/articles/three-lessons.php (2016-04-26)
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  • Gold Outlook 2013 And Beyond - Private Wealth Canada
    and the Tobin Q Ratio The Buffett Indicator uses the total market capitalization of U S equities divided by GDP The only other times the Buffett ratio exceeded 100 was just prior to the tech crash in 2000 and the credit bubble in 2008 The Shiller PE is a popular indicator of stock valuation The 134 year average P E ratio is 16 7 whereas the current ratio is 25 9 or 55 per cent overvalued The ratio has only been this high on three other occasions 1929 1999 and 2007 Each time it happened stocks dropped by over 50 per cent and didn t recover for years The Tobin Q ratio which measures market value versus replacement cost is considered one of the better long term indicators of a pending market decline The current Tobin Q ratio exceeds the 70 year average of 0 7 by 58 per cent The ratio rose above the average in 2000 and 2008 This time however the correction could be much worse than in either 2000 or 2008 Not only do we have a significant overvaluation but historically high margin debt will accelerate the decline due to margin calls These conditions provide investors with the opportunity to sell high and take a profit The Buy Low opportunity exists because gold has been in a cyclical correction for three years and seems to have formed a bottom Gold s strong fundamentals point to a bright future and of course gold has always protected portfolios during market declines The future outlook for gold pricing is not complete without understanding the implications that China will have China has been increasing its gold reserves and has made a number of strategic moves that threaten the U S dollar s reserve currency status China has signed 26 currency swap agreements wherein the U S dollar is no longer used to settle trade imbalances The Asian Infrastructure Investment Bank has been formed as an IMF alternative to provide loans to BRIC countries A yuan currency exchange hub has been created in Canada with ICBC bank China has developed an alternative to the SWIFT system of international currency transfers and Russia is developing its own version China s currency has been accepted into the IMF s SDR program with full implementation in the fall of 2016 at a 10 92 allocation The Shanghai Gold Fix to be introduced in the spring of 2016 has a good chance of eliminating short selling on the COMEX because the Shanghai Gold Fix is going to be only physical without any paper market dilution If traders try to drive gold s COMEX price down through shorting arbitrage traders in Shanghai will quickly counter the move In 2015 the result of these changes was already showing as 71 per cent of U S Treasuries were purchased by the Federal Reserve with newly issued currency as demand for US dollars decreased Finally to reinforce the Buy Low opportunity a comparison to the cyclical gold correction from

    Original URL path: http://privatewealthmagazine.ca/articles/tactical-opportunity.php (2016-04-26)
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  • Pensions Defined Benefit Plans: Death Or Rebirth?
    The PPP PPPs rely on the same tax rules as traditional DB plans when it comes to the level of contributions capable of being set aside for retirement with one exception the designated plan funding restrictions Thus assuming the exact same rate of return on assets over a 20 year period someone utilizing the more generous tax deductible contribution limits of the PPP would accumulate over 1 million above and beyond what could be achieved within the more restrictive RRSP contribution limits Beyond the ability to generate a much larger nest egg to retire on without taking additional market risk the PPP also provides superior creditor protection especially in bankruptcy where the current service cost contributions owed to the PPP fund rank above the claims of secured creditors due to changes made to the Bankruptcy and Insolvency Act in 2008 For Ontario based business owners the PPP is considered a comparable plan and is therefore exempt from the scope of the proposed Ontario Retirement Pension Plan ORPP Business people who would rather trust their investment advisor to manage the 3 8 per cent ORPP contributions should start the conversation with their accountant and advisors to be ready for when the ORPP becomes effective starting in 2017 see Figure 2 Additional Advantages of PPPs over RRSPs Creditor protection of assets Ability to invest in non qualifying investment asset classes creating further diversification Potentially increase the tax deferral limits by 1 million over 20 years beyond RRSP maximums Deductibility of investment management fees Ability to pension income split 10 years prior to normal retirement age Intergenerational wealth transfers on the death of retired plan members Ability to claim HST pension entity rebate Ability to make up for investment losses with additional tax assisted contributions Fiduciary oversight Figure 2 The main focus of this article is to examine how these additional assets may be deployed in creative ways by financial advisors to generate additional value Pension Plans Investment Options Large pension plans can take advantage of an expanded opportunity set over RRSPs While RRSP investments are restricted by the qualified investment rules investments in registered pension plans do not face such restrictions Asset classes such as infrastructure private equity real estate and hedge funds often fall outside of the qualified investment criteria With very long time frames these types of investments are ideally suited for a registered plan which is intended to provide a retirement income many years in the future Most of these asset classes also tend to be very inefficient from a tax perspective If one holds these in the corporation s investment account one may receive highly taxed interest income or unwanted distributions of dividends and capital gains This tax drag reduces the long term rate of return and it is therefore preferable to hold these types of investments in a tax deferred environment A PPP provides the business owner with the opportunity to hold tax efficient investments in the corporation s non registered investment account while holding tax inefficient

    Original URL path: http://privatewealthmagazine.ca/articles/pensions-defined-benefits.php (2016-04-26)
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  • Another Year, Another Record - Private Wealth Canada
    get excited by this victory and the dramatic drop in market volatility but as students of master Yoda we exercise patience and prudence After all many of the factors prevalent in August remain the same The Federal Reserve is once again poised to raise rates China continues to grapple with the transition from being an export lead to a market based economy and commodity prices are in a funk which continues to exert a drag on domestic growth Greater Prudence At the end of September we felt the market had priced in a significant amount of bad news At current levels we feel greater prudence is in order as we wouldn t be surprised to see further volatility as sentiment waxes and wanes Although credit spreads continued to widen at the start of the month once it became apparent that the new issue supply would be limited market tone improved considerably Liquidity generally improved as dealers felt more confident making markets in a calmer environment Autos and telcos performed very well while TransAlta widened dramatically Bank NVCC spreads were extremely volatile widening 30 bps before staging an impressive rally to finish the month unchanged We continue to see reasonable value in corporate debt at current levels especially since the potential for new issue supply remains fairly low Given our concern regarding bouts of volatility we prefer shorter dated notes over longer maturities bonds Rates The Bank of Canada left the benchmark interest rate unchanged at 0 5 per cent and revised growth and inflation forecasts lower The C 30 billion fiscal deficit the new Liberal majority government intends to run over the next three years should provide a modest dose of fiscal stimulus that reduces the need for an additional rate cut from the Bank of Canada As a result

    Original URL path: http://privatewealthmagazine.ca/articles/bulls.php (2016-04-26)
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