Fourth Quarter 2015

Over the past year, the financial markets bore witness to the unwinding of the decade long commodity super-cycle. As a result, energy and base metal prices were hit hard, with a resultant decline in the value of resource producing companies. Another victim of this unwinding process was the Canadian dollar. Trading at par as recently as two years ago, it ended the year valued at only 72 cents to the U.S. dollar.

While the decline in commodity prices stole the headlines in 2015, it masked an otherwise poor year in North American stock markets. The Canadian market, which is highly levered to commodities, was down over 8%, while the more diversified U.S. equity market was virtually flat. In our opinion, it took the U.S. Federal Reserve too long to raise rates, causing undue negative speculation in the U.S. markets throughout 2015. This was resolved in December, when the Fed finally raised the overnight rate by 0.25%.

While the equity markets generally put in a poor performance during 2015, not all was doom and gloom for our clientele.

Firstly, we have shifted a significant portion of our client’s equity investments into the U.S. equity market over the past several years. This benefitted our clients from a currency perspective. Secondly, we have focused our equities in some U.S. sectors that have done quite well, such as the Health Care, Information Technology, Industrials, Consumer Staples and Consumer Discretionary sectors. Thirdly, we have avoided the mining industry and maintained a minimal exposure to energy companies, saving our clients the pain of the commodity price meltdown.

Looking into 2016, we see a few trends continuing and some new ones developing. We believe that U.S. economic growth will remain positive, with virtually no inflation and almost full employment. This should continue to favour our stable growth, non-cyclical companies. Canada is another story. The weakness in commodity prices will continue to harm western Canada and will keep the Canadian currency depressed. Lacking any kind of industrial strategy for decades, the country is challenged to improve its business investment levels and its competitive productivity. These will remain challenges to the Canadian equity markets.

Productivity is a key contributor to sustained economic value creation over time. Late last year, we attended the Intel investor day in San Jose, California. The senior management of this very successful company continues to adhere to a principal widely known as “Moore’s Law”. In 1965, Gordon Moore, a co-founder of Intel, observed that “the number of transistors in a dense integrated circuit would double annually”. Moore revised this in 1975, predicting that “the number of components per integrated circuit would double every two years”. Since then, this law has more or less held. While this rate of advancement may not continue indefinitely, it does highlight the importance of sustained innovation and creativity.

“Moore’s Law” has been a powerful one, as digital electronics have greatly contributed to global productivity and growth over the past 50 years. Countries and companies that embrace and pursue innovation and improving productivity are the engines of economic growth in this world.

As investors, we seek to embrace improving productivity, innovation and value creation, and those companies which espouse these characteristics. That said, we want to avoid regions and industries that do not embrace this culture. While macro-economic factors will always play an important role in shifting financial markets up and down in the shorter run, economic value creation always wins out over time. It has since the dawn of the industrial age two hundred years ago, and will continue to do so into the future.


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