A Comment -- General Comments From an Expert (A Commentary)

Educational Segment. Economic scenarios most likely in the coming year. Interest rates will most likely rise. Earnings may go up or may not. The recession probability forecast from the Fed is not high at the moment. So don’t price in a recession. Inflation concerns are building. Hourly wages have ticked up to the highest point since 2009. The Fed may be increasing their tolerance for inflation. You need increasing yields and price protection. Horizons have a bunch of ETFs to address this. Floating rate ETFs hold bonds that give a higher payout as interest rates move up. They are good to have. Floating rate notes give you a stable return. You want to be more conservative on the fixed income side.

Market. U.S. equities will under-perform, though he likes sectors like banks. Post-2009 crisis, performance of these equities has been astronomical beating most other indices around the world. Today, American markets and currency are very expensive with a change in U.S. fed policy. We're in an emerging market cycle that will last for several years after bottoming in 2016. Recommends in U.S. equities, he is negative the oil space, but likes healthcare, though it's expensive now. There's better value in EM than the U.S. We're at the end of the 36-year bond bull market. Central banks are committed to gradual interest rate rises around the world. And inflation is finally here.

What ETF to buy for the S&P? If you're a very long term, buy-and-hold, investor, ZEUS is good to track the earnings potential of U.S. corporations. But he prefers to be overweight in certain sectors he picks.

What is a good ETF for Europe? Europe has been very demoralizing to investors for a long time, dogged by EU break-up threats, deflation and the Euro decline, for instance. He likes Europe. VEU:AMEX (Vanguard FTSE All-World ex-US ETF) is a core, affordable building block, but prefers a past pick, EUFN-Q (iShares MSCI Europe Financial), because as Europe recovers and earnings come back, you want to hold European banks.

What will happen to the CAD? He looks at currency like a stock--it can get overvalued or undervalued, though currencies behave differently from other assets. During the 2008 crisis, assets classes suffered, but only currencies were actually stable. Fair value for the CAD is 85 cents, though oil could pressure that. He's VERY bullish on EM currencies and neutral USD, both via-a-vis CAD.

Buy mutual funds or ETFs? Disclosure: he runs both an ETF and mutual funds. He doesn't like the active vs. passive distinction. There are active (and passive) ETFs as well as mutual funds. The big benefit of ETFs is that they've made accessible obscure asset classes, such as Chinese bonds, that weren't available before. Both vehicles are useful tools, though ETFs have built upon mutual funds.

U.S. healthcare ETF? A long-term supertrend in the U.S. but is that reflected in the current price? He's held XLV-N (S&P 500 Healthcare Sector SPDR) for a long time, but it's no longer the bargain it was a few years ago.

Which global fixed-income ETF to buy? Bond markets in the west are in a bear market. So, you must look abroad. Many investors have gone into dividend equities, but they increase risk in a future bear market. So, he looks for income sources. He holds LEMB-N (iShares JP Morgan Emerging Markets Local Currency Bond ETF) and off-shore Chinese bonds through DSUM-N (PS Yuan Dim Sum Bond ETF) which has been up 7% YTD while bond funds have been decreasing. The Chinese renminbi has been stable.

What South Africa and India ETFs to Buy? He doesn't know of South Africa, but for India, go with iShares MSCI India ETF (INDA:BATS), a classic cap-weighted ETF or the PowerShares India Portfolio ETF PIN-N which weights companies on earnings momentum.

Market. He is of the view that the suppressed volatility in the last 16, 18 months was more the exception than the norm and that the possibility of this correction was expected. It is late in the economic cycle, interest rates are starting to rise, and we are in full capacity in the US and sentiment is very extended. Interest rates are moving higher because the economy is extremely strong. Strong employment creation and retail sales. Retail sales in Canada grew at the best clip since 1997, The economy is extremely strong. Interest rates moving higher shouldn’t crash the spirit of the bull market given that earnings are growing. In the short-term there hasn’t been enough blood spilled, so there could be another sell off. All cycles come to an end.

Where to invest once we are done with the interest rates increases? The heavy lifting in building a portfolio is in asset allocation. They are taking profits and high beta from cyclical parts of the portfolio and redeploying capital to sectors with more stability through the cycle. Very important to think not in the next week or months but three to ten quarters’ from now.

Technical vs Fundamentals. Their approach is hybrid. They use technical, fundamental and quantitative disciplines to come with ideas at the stock specific level.

Interest rates – He thinks the US market is in a secular bull market. 2018 is starting off like 1994, where interest rates are starting to play a role. The 10 year yield is going above 2.75% and he sees this as bullish. For the rest of the year, he believes stocks will have a great year, but if the 10 year rate goes above 3%, we will then see another market sell off. Then good economic news will cause another rally. He sees higher interest rates as bullish. This will be a bear market in fixed income, but good for stock value.

Market. Federal Reserve stimulus impact on the market – He believes fiscal stimulus has been needed over the last 7 years. The new US tax package, along with President’s Trumps Infrastructure plan will relieve the pressure on the Fed Reserve needing to provide support. This will work to normalize interest rates.

Market. We had a nice run for the last 14 months. We are still in a bull market, but the ride is going to be little bumpier. Concerns about higher interest rates inflation. But earnings growth is going to trump all that. Protectionism is an issue. But at the end of the day, President Trump and his team understand how important global trade is.