Making sense of the markets this week: January 18, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

The stock markets kick off 2021

So far, the stock markets of 2021 have picked up where they left off in 2020: with more gains. 

And sector by sector, we are seeing some losers of 2020 becoming winners in 2021; most notably, energy and financials have turned things around. 

The following table is courtesy of Seeking Alpha. (YTD = Year to Date, the performance so far in 2021). This table is from Thurs., Jan. 14. 

Technology is taking a bit of a breather year-to-date, while REITs (real estate) continue to face pressure. Meanwhile, healthcare, those consumer discretionaries and basic materials continue to be Steady Eddies. 

And we see the rotation to smaller and mid-cap offerings that were left behind in 2020: 

Will inflation come calling?

Another theme that is gaining steam is the “threat” of meaningful and rising inflation. That’s thanks to the stimulus dollars and the creation of monies by central banks that is well above the rate of economic growth. Eventually, those dollars will find their way into the economy and they will chase those goods and services. 

In The Globe and Mail, Scott Barlow penned an article in response a report by Morgan Stanley chief economist Chetan Ahya, which outlined five reasons why investors must prepare for inflation pressure. From that post:

“Policy-makers were unfettered by moral hazard concerns and had little hesitation about underwriting household and corporate income losses to an unprecedented degree. In particular, while unemployment cost US households US$330 billion in wage income, they have already received US$1 trillion in aggregate in transfers.” 

Canada also responded with record stimulus. 

As Barlow points out, most investors and advisors are not familiar with investing in an inflationary environment, so this may be one of the stories of the year and decade. Of course, no one knows what will happen, but it may be prudent to protect against robust inflation or even stagflation. 

Commodities are known as a wonderful inflation hedge; commodities are the “stuff” we buy and need, and they will respond to inflation. As the price of goods and services rises, so does the price of the commodities used to produce those goods and services. 

Here are recent moves, month-to-date: 

The retail investor can gain access to a commodities and currency basket by way of this ETF from Horizons. And the old standby for inflation is gold and gold stocks. (I am also investing in that new digital gold known as Bitcoin.) We can also employ real return or inflation-adjusted bonds. 

In the past, energy stocks have also “done the trick” in certain inflationary environments. 

While we don’t necessarily blow up our well-balanced portfolio, we might consider these as additional risk management assets. 

Mike Philbrick of Resolve Asset Management offers…

“It’s the transition from one economic regime to another. We are experiencing a major shift from deflationary growth to inflationary growth.” 

If you have an advisor or planner, I’d encourage you to ask how they are protecting your wealth against the threat of more robust inflation. 

Tangerine launches three new ETF portfolios

I should start this section by sharing that I was an investment advisor with Tangerine for over five years, from 2013 and into 2018. I begged the financial institution to find a way to lower their fees to the vicinity of 0.70% or so to complete with Canadian robo-advisors. 

And now they’ve finally done it, by way of ETFs. The management fee for Tangerine’s new ETF portfolios, launched in December 2020, is 0.65%. The management expense ratio will be in the area of 0.75%. 

In comparison, fees for Canadian robo-advisors are in the range of 0.45% to 0.90%, so Tangerine is certainly in line with the average. 

The Tangerine Global ETF Portfolios employ (with one exception) Scotiabank ETFs in a Tangerine mutual-fund wrapper. (As you may know, Tangerine is a subsidiary of Scotiabank, acquired in 2015 from ING.) Because the offerings are mutual funds, there are no fees when you buy or sell. 

The ETF Portfolios are available at three risk-tolerance levels and will use these ETFs: 

• Scotia Canadian Bond Index Tracker ETF
• Scotia U.S. Equity Index Tracker ETF
• Scotia International Equity Index Tracker ETF 
• iShares Core MSCI Emerging Markets IMI Index ETF
• Scotia Canadian Large Cap Equity Index Tracker ETF

The Balanced ETF Portfolio is 60% stocks and 40% bonds, while the Balanced Growth ETF Portfolio is 75% stocks and 25% bonds; and the Equity Growth ETF Portfolio is 100% stocks. 

Tangerine’s Global ETF Portfolios will follow a global index weighting that favour U.S. stocks over Canadian and international stock holdings. At the same time the portfolios will offer exposure to the growth-oriented emerging market (EM) stocks. You might recall that I mentioned the potential for EM stocks when we made sense of the markets on Nov. 9, 2020. Emerging market stocks are up by 20% from positive vaccine news in early November of 2020, besting the performance of U.S. stocks, developed markets and Canadian stocks. 

This latest offering from Tangerine is a welcome addition for Canadian investors, many of whom still suffer under the thumb of expensive and poor-performing, high-fee mutual funds. 

In a recent post on this site, Larry Bates (author of Beat The Bank) outlined the wealth formula and those wealth builders versus wealth killers. Fees are important. 

Investors might be well served by this combination of sensible global asset allocation and low fees. One would need to be a client of Tangerine to access these ETF portfolios. Once you’re in and investing, you will also have access to the bank’s investment advisors. Or, if you prefer, you can also choose to do everything online from start to finish; in that sense, the portfolios are very robo-like. 

In my opinion, Tangerine Investments became the first robo-advisor in Canada with the introduction of their core index-based mutual fund portfolios in 2008. These are more “complete” managed portfolios that can be accessed online, with an online risk and suitability assessment. 

Tangerine clients who currently hold the core portfolios but would like to switch to the ETF portfolios can simply hit the “switch my portfolio” button once they are logged into their investment account. Keep in mind that if you hold the core portfolio in a non-registered account, switching may trigger capital gains, and you may have to pay some taxes. Seek professional tax advice if necessary before you make any moves.

Bullish on natural gas

Here is a recent Goldman Sachs prediction:

“‘Perfect bullish storm’ lies ahead for natural gas”

Their note details a bullish projection for Europe and Asia, and it also touched on North America. Goldman predicts a significant upside to North American gas prices this summer to help correct what it sees as a significant market imbalance through October 2021. Their prediction is a summer 2021 gas price of $3.25/mmBtu. 

Natural gas prices in North America have increased by nearly 29% over the last year. On Thursday it was trading at $2.73 / million BTUs. 

I am a big supporter of the transition to cleaner and greener and renewable energy sources. But this green shift is going to take time. And, in the meanwhile, we still need to heat our homes and businesses, and keep the lights on. With any shift to clean and green, natural gas will remain a needed and valuable resource. Every projection that I’ve read suggests that natural gas will be a major source of energy in the coming decades. 

From BloombergNEF…

“Gas is the only fossil fuel to grow continuously through the outlook, gaining 0.5% year-on-year to 2050. Cumulative growth of 33% in buildings and 23% in industry is balanced by declining gas use in power where consumption peaked in 2019—although gas-fired power capacity continues to grow worldwide. Cheap gas ultimately slows the energy transition in the United States.”

While there is a lot of hope for solar, wind, hydrogen cell and geothermal energy generation, along with other renewables, that optimism might collide with the energy realities. 

How do we capitalize on that trend for natural gas? 

The Canadian stock indices offer exposure to natural gas producers and to the pipelines that move the gas across North America. Readers will know that I am a fan of being a toll taker by way of those pipelines. TC Energy is more heavily weighted to natural gas delivery. TC Energy delivers 25% of all of the natural gas required in North America. Enbridge has natural gas pipeline operations but is more weighted to oil and liquids. That said, Enbridge moves about 20% of all gas consumed in the U.S. 

These are two major players that also offer very attractive dividends at near 6% for TC Energy and Enbridge is above 7%. Their stock prices remained depressed. That’s good news for those seeking to build that dividend stream by way of reinvestments. But of course the stocks have not been strong contributors to total returns over the last several years. 

Investors might also look to Pembina, AltaGas and Inter Pipeline. 

Also, one can access the oil and gas producers by way of iShares XEG. 

 I am still long Enbridge and TC Energy. I’m happy to collect those dividends but would certainly welcome some price appreciation in the future. Stock prices have begun to tick up. Only time will tell if that’s the beginning of a larger trend. 

Oil prices continue to surge

Also on the energy front, you may have noticed that it costs a little (or a lot) more to fill your tank these days. That’s thanks to rising oil prices, which, in the U.S., recently hit a 10-month high thanks to the promise of production cuts by OPEC (Organization of Petroleum Exporting Countries) and a weak U.S. dollar. 

U.S. oil (WTI) has increased some 47% from Nov. 1, when we first received the very positive COVID-19 vaccine reports. As I write this on Thursday morning, Jan. 14, Canadian crude is up over 4% to $39.41, a one-year high according to OilPrice.com. Over the last month, the price has increased 19%. 

The oil sector will benefit greatly upon successful vaccine delivery. There is incredible pent-up demand for travel by ground and air. More may hop in their cars and head back to work at their office locations. But, as we touched on last week, that successful vaccine delivery is the wild card in 2021. 

This might be one of the more pure plays that benefits from a return to normal. And it would also deliver a needed boost for the Canadian economy. 

That said, oil and gas producers currently make up so little of the core Canadian stock indices. There is no producer in the top 10 of the TSX Composite. Only Suncor and Canadian Natural Resources are in the top 50. 

Given the perception that Canada is largely a resource-based country and economy, it’s ironic that we would have to use an energy-focussed fund to top up the Canadian stock index to create meaningful exposure. 

Of course, you could also select and hold a basket of individual energy stocks. 

I know that suggestion will be met with raised eyebrows; so many Canadian investors have been burned by energy stocks and funds over the last decade. But, given, the recent upswing in stock prices, it appears that more and more are warming up to the idea. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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