Brexit: 52% of voters in the UK voted to leave the European Union. No one knows how that will shake out, and that’s the real problem. Investors, like all humans, hate uncertainty. The only reason for the price of gold to rise, the price of oil to fall, and the price of most European stocks to fall was uncertainty. There is no immediate reduction in demand or increase in supply, except for traders who don’t want to own risky assets during a period of uncertainty.

I note that North American stocks were affected to a far lesser degree, falling just 1.7% compared to over 8% for Paris. Interestingly, the FTSE 100 (UK index) opened (Friday morning) over 9% lower, but climbed throughout the day and closed only down -3.15% for the day.

At the end of this article, I include a theoretical portfolio. I’ll note here that it shifted out of stocks to all gold and bonds on Thursday morning. This reflects the nervousness in the market, which continues into the coming week.

Interest Rates

yieldcurve

The 3 month T-bill rate is 0.48%, the 1 year T-bill rate is 0.54%, the 3 year government bond yield is 0.65%, the 10 year government bond yield is 1.30% and the long government bond yield is 1.92%. The yield curve is normal. Long government bonds appear very overvalued. There seems to be very little opportunity for profit in bonds. A safe haven, such as tangible assets (eg. precious metals, real estate, etc.), may be a better bet.

Expected (forward-looking) inflation is 1.43%. This is within the Canadian central bank’s target band of 1% to 3%.

The equity risk premium for large caps, in Canada, currently appears to be 2.77%. For small caps, it currently appears to be 2.87%.

Credit Environment

The market prefers government bonds, long bonds and high quality bonds. This can be seen as a flight to quality in response to nervousness. Investors are paying more for safety, which means that yields are falling.
guage1guage2guage3

Currency

The Japanese Yen (FXY), Brazilian Real (BZF), Australian Dollar (FXA), Swiss Franc (FXF), Canadian Dollar (FXC), and Singapore Dollar (FXSG) are looking strong relative to the US dollar. The Euro is flat and the British Pound has taken a beating.
The Canadian dollar has been appreciating compared to the US dollar.

Equities

Where does there appear to be more opportunity right now?
US bonds are rising while US stocks are falling:
guage4
Canadian bonds are rising faster than Canadian stocks:
guage5

Global Markets

  • Austria has changed -7.39% in price since last week’s close.
  • Finland has changed -7.53% in price since last week’s close.
  • France has changed -7.36% in price since last week’s close.
  • Germany has changed -5.78% in price since last week’s close.
  • Ireland has changed -5.79% in price since last week’s close.
  • Italy has changed -11.23% in price since last week’s close.
  • Norway has changed -5.31% in price since last week’s close.
  • Qatar has changed -5.53% in price since last week’s close.
  • Spain has changed -12.35% in price since last week’s close.
  • Sweden has changed -8.38% in price since last week’s close.
  • Switzerland has changed -5.60% in price since last week’s close.
  • United Kingdom has changed -6.60% in price since last week’s close.

Comparing national stock markets, Brazil (EWZ), Peru (EPU), New Zealand (ENZL), and Philippines (EPHE) are rising, while other regions appear to be neutral or falling.

US Stocks

Yesterday’s closing price was 2,037.30. This is -2.21% lower than last week’s price (2,083.25), and -2.53% lower than last month’s price (2,090.10), and -0.86% lower than the price three months ago (2,055.01), and -1.31% lower than the price six months ago (2,064.29), and -3.38% lower than the price one year ago (2,108.63).The average P/E ratio of the S&P 100 (equal weighted) is 21.54. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.64% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Halliburton Company (HAL)
  • Altria Group, Inc. (MO)
  • At&t Inc. (T)
  • Raytheon Company (RTN)
  • Verizon Communications Inc. (VZ)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • General Motors Company (GM)
  • Ford Motor Company (F)
  • Metlife, Inc. (MET)
  • Conocophillips (COP)

Canadian Stocks

Yesterday’s closing price was 13,891.90. This is -0.88% lower than last week’s price (14,015.10), and -1.51% lower than last month’s price (14,105.20), and 3.47% higher than the price three months ago (13,426.20), and 4.57% higher than the price six months ago (13,284.90), and -2.87% lower than the price one year ago (14,301.80).The average P/E ratio of the TSX60 (equal weighted) is 24.55. This implies the market is overvalued. There is likely an overly optimistic outlook and risks may be unduly discounted. This implies a forward capital return of 4.07% (before dividends).

The following stocks appear to present short-term (2-6 months) opportunities for price increase (buy high, sell higher):

  • Kinross Gold Corp. (K.to)
  • Yamana Gold Inc (YRI.to)
  • Teck Resources Limited (TCK-B.to)
  • Barrick Gold Corporation (ABX.to)
  • Agnico Eagle Mines Limited (AEM.to)
  • Silver Wheaton Corp. (SLW.to)
  • Franco-nevada Corporation (FNV.to)
  • Eldorado Gold (ELD.to)
  • Goldcorp Inc (G.to)
  • Bombardier Inc., Cl. B, Sv (BBD-B.to)
  • Encana Corp. (ECA.to)
  • Transcanada Corp. (TRP.to)
  • First Quantum Minerals Ltd (FM.to)

These stocks appear to be priced attractively from a long-term (3-5 years) perspective (buy low, sell high):

  • Power Corporation Of Canada, Sv (POW.to)

Other Assets

Silver (HUZ.to), Global Infrastructure (ZGI.to), TSX REIT (XRE.to), Gold (IGT.to), Base Metals (ZMT.to), Canadian Universe Bond (XBB.to), TSX Capped Composite (ZCN.to) are performing better than cash.
The gold price is rising, which often indicates nervousness in equity markets.

Portfolio

A theoretical portfolio, split evenly between gold (IGT in Cdn$), real estate (XRE in Cdn$), Canadian stocks (XIU in Cdn$), US stocks (XSP hedged to Cdn$), international stocks (VDU in Cdn$) and bonds (XBB in Cdn$).

As of today, the theoretical portfolio would hold:

  • One unit (20%) of gold
  • One unit (20%) real estate
  • 3 units (60%) bonds
Market Outlook, June 27, 2016

Leave a Reply

Your email address will not be published. Required fields are marked *