WHAT'S ON MY MIND
In my forty plus years of experience, I have always gone back to basics. Back to basics means to me two things:
My emotional sense. What is my mood for taking on risk? Not all of us can go for the green in two, either because we are not risk takers or we do not have the skill.
My Investment Dashboard. What factors do I look at, and are they telling me it is a red light or green light. Below is how I currently access my dashboard.
Yield Curve - Green Light
WHAT DOES A STEEP YIELD CURVE MEAN?
A very steep yield usually means the Fed or Governor of the Bank of Canada are very accommodative. You can see from the chart below that short rates have been declining while the long end is going up. This does not speak well for those Bond funds however usually equities perform well.
TSX Earnings Forecast - Orange Light Short term, Green Light in 6 months
The pandemic took TSX earnings down from 2019 close of $1,040.24 to $783.83. This recession is like no other we have witnessed; Government debt exploded while personal debt and many companies have not suffered to the full extent. As the Prime Minister has stated, it is their goal to have the businesses intact and ready to go versus being bankrupt and needing to start over. The jury is out on this strategy. That being said, the 2021 earnings forecast of $1,007.39 and 2022 of $1,144.74 gives room for an optimistic future for the TSX.
TSX Currently is at 17,909.03
Average Multiple of TSX is around 18 therefore:
2021 of $1,007.39 X 18 = 18,133.02
2022 of $1,144.74 X 18 = 20,605.32 this is 15.05% above current TSX
Canadian Equities Over Bought/Over Sold - Red Light
"THE MARKET IS EXPENSIVE"
Looking at the chart below one can see that the TSX is almost 2 standard deviations above the average. So when you hear people say “The Market is Expensive”, I would agree, and also that it has a very short term trading range.
Investment Characteristics - Green Light
COMPARING MARKET CHARACTERISTICS TO MATCO STRATEGIES
From a market point of view, the TSX with a 3% dividend yield, Price/Earnings multiple of 16.6X, Return on Equity of 11.3% and with good earnings momentum is very appealing to me, compared to GIC rates of .6%, all while inflation is around .8% and going north.
If you compare market characteristics with that of the Matco Funds, the argument of owning equities is that much more compelling.
With a yield curve supporting equities, positive earnings forecast at a reasonable multiple if you are prepared to look 6-8 months out, great investment characteristics with some short-term headwinds, one needs to look at their emotional sense to determine what level of equities they should have.
If you are uncertain of your weight in equities give us a call.
Bill Dickie, CFA
Vice Chairman, Portfolio Manager
Founded in 2006 to manage and service seven family offices, today Matco offers the benefits of our extensive investment management experience to individual investors, foundations, endowments, condominium corporations, trusts, corporations and not-for-profit organizations.
Our mission is to simplify the investment world for our clients by understanding their needs and providing exceptional investment solutions that preserve and grow capital.