September 8, 2015 – Jim Allworth, RBC Dominion Securities – Global Financial Outlook

Jim AllworthJim Allworth has been in the investment business for forty-eight years, as both a research analyst and portfolio strategist.  Through four decades at RBC Dominion Securities, and before that Pemberton Securities, Jim has developed investment policy for the firm and translated that into solutions for individual clients.  He is vice-chair of the RBC Capital Markets Investment Strategy Committee and Co-Chair of  RBC’s Global Portfolio Advisory Committee, which provide direction on the outlook for financial markets for the firm, its advisors and clients. In his career, Jim has made hundreds of presentations on investing to advisors and clients throughout North America and Europe.

Raised in Toronto, Jim has lived in Vancouver for the past forty years with his wife Rojeanne.

In his fourth presentation to Probus Vancouver, entitled “Thinking About What Comes Next”, Jim will talk about key changes in the economic, interest rate and investment environment over the next few years, and what shifts investors should make in their thinking to cope with changing circumstances.

Notes on Jim Allworth’s presentation by John Gunn

Mark Cullen introduced our speaker, Jim Allworth of RBC Dominion Securities, speaking on the World Financial Outlook.

We are in an expansion, we see no bear market coming, nor a recession. We do not have tight money which always precedes a recession. The Bank of Canada, and the US Fed regularly contact all the banks to find out their attitude towards lending. Certainly at the present time banks in both countries are anxious to lend. Even in Europe the banks are now not worrying so much about preserving capital and are generally anxious to lend money to businesses. Even China is now actively lending money and in short we see an expansion in world business. Anytime you see tight money (e.g. 2.5% Federal Rate) there will still be at least a one year delay before a recession starts. The US economy is still the one that matters – it is still way bigger than China’s and three times as big as Japan’s. Unlike many of the other major economies, exports are not nearly as important to the US – maybe only 22%, compared to China 40%, Japan 50% and Canada 80%. In reality the US is much more isolated from the rest of the world than most people realize. They often complain about their trading partners but it is really not that important to them. They import about 3 trillion dollars worth from other countries so in a sense they are still everyone else’s best customer. To put this in perspective, $3Trillion is the size of the whole German economy, which is the world’s 4th largest economy. The fact is that at present rates of growth, China will not overtake the US for some time in terms of total GDP and even more so in GDP per person which is much more important. At the moment the average Chinese citizen is at the level of a US citizen in 1936 at the depth of the depression. For India, it is 1905! As a rough guide, always look at the yield curve – short term against long term rates. Short term is lower and only when that gets reversed is it a sign of trouble ahead. If short term is within 50 basis points of long, then you can start to worry about tight money and in due course a recession. Housing starts in USA are also up – always a good sign for the economy. US wage rates and consumer spending and level of CEO optimism are now all trending up. Heavy truck sales, always a good indicator in US, are way up. Don’t confuse “corrections” with “recessions”. Corrections come and go and are unpredictable and sometimes just the result of some world incident. One should recall Warren Buffet’s famous phrase – “Bear markets are those periods when shares are returned to their rightful owners”.

A small Fed rate hike is likely in the next few months.

Our speaker is quite optimistic about businesses in Canada – lots of start-ups in Guelph-Waterloo, high tech in Montreal, GM investing in Oshawa etc. One advantage we have in Canada is our laws regarding incoming highly trained people who are denied entry into the US. Companies who wish to hire them tend to locate here.

The EU is not a “United States of Europe” but a group of autonomous countries and may not perform like the US. However, credit is easing. As for China, the consumer demand needed to sustain growth appears not there so there will be renewed emphasis on exports. The service businesses are indeed growing in China.

In short, the US is everything, we are lucky to be their neighbour, and have faith in the long term value of the S&P 500!

Question: Are Canadian banks subject to competition from new Technology?

Answer: Yes, methods of moving funds etc. will probably cut into their business.

Question: How much are we dependent on Immigration for our economy?

Answer: Certainly it has an effect on housing but also on wage rates in general, as we find newcomers willing to do jobs which others would not do at normal wages. It may amount to a fraction of a percent in our growth, but it is generally a good trend.

Question: Which sectors do you like for the medium term?

Answer: I like the discretionary, especially in the US. Cars. Furniture. Consumer technology.

Question: Whither the Canadian Dollar?

Answer: In short, no one knows and no one predicts it well. The factors are so complicated. It depends greatly on The US Fed and on the Bank of Canada and what everyone guesses they are likely to do to their respective rates.

Question: What about our current recession?

Answer: It is a technical recession – i.e. it is two consecutive downs, but we are not in a real recession in Canada.

Chris Lay graciously thanked the speaker.