Ah, year-end! A time of year when predictions are abound, correct calls (guesses?) are highlighted and excuses are made! While year-end provides a convenient benchmark that allows investors to ‘reset’, nothing is really different from one year to the other, aside from the last digit in the year. However, while it is a bit arbitrary, taking some time to reflect on the year that was is a good practice as it makes us aware of things that went well (and we should continue to do) and things that went not so well (and should be stopped). So in honour of this joyous time, we are going to look at our past year and look forward. As a forewarning though, do not expect bold market predictions within these lines. The only things we are certain of is that markets will go up and down in any given day and even any given year. But we are also fairly certain that if you can think long-term, be patient and focus on company fundamentals, you will be rewarded. It may not be this year and may not be next year, but over time, staying invested in the markets in a diversified manner has almost always been the better decision to any alternative. 

2015 was a slow and painful shift for Canadian investors from an environment that was very familiar and comfortable to one that we have not seen in a long time. As most probably know by now, this shift was in the Canadian currency and the price of oil. Looking at the below chart, it is clear that one was a significant cause of the other but a continually strong US economy does not help the currency situation either and neither will diverging interest rate policies. The trick now is determining how much of the differing rate policies are priced into the CAD/USD exchange rate. This is to say that exchange rates could stabilize around these levels, or the Canadian dollar could decline even further if rising rates in the US are not currently being accounted for. With the FED handholding markets over the last two-years with regards to an interest rate increase and a slate of positive economic news coming out of the US, it really does seem like a US rate hike is in the cards in the near term. 

We think the key in the above chart is that while the CAD is low based on recent history, it is probably sitting around its longer-term average. We saw this recency effect with a lot of investors that assumed just because the CAD was down from shorter-term averages, it would revert back to the ‘mean’. While mean reversion has merit, it is important that the correct mean is being used, and that is more likely the longer-term average, not the shorter one.

We do not want to dwell on the FX and oil issue too much as it has been well covered by us and others over the last year but when you look back at 2015, these two areas are what we really believe have defined the year as far as drivers of market returns go.  The other noteworthy trends we think are the impact that oil and a lower currency were expected to have on the economy but have not been fully seen yet. That is, increased exports and cap-ex (from the US) and lower oil/energy prices leading to stronger margins. Improved margins were seen but slowing revenues more than offset this, especially in companies exposed to Western Canada. Meanwhile, exports have increased but it has been a lagged effect. We think these are still areas to watch and as energy and FX markets begin to stabilize, US capital will likely start to look a bit closer at opportunities in Canada.

One other area that surprised many investors was the recent weakness in the utility space. The concern follows the thinking that lower oil prices lead to cap-ex cuts which lead to less oil being ‘moved’ through pipelines and has been exacerbated by recent dividend cuts by Kinder Morgan (KMI). So growth expectations are being tempered. With that said, there is likely some offsetting effect here where lower prices should increase demand across the current infrastructure. It is an area to watch but as these dividend stalwarts begin to show better valuations, we think they become all the more interesting to long-term investors.

In the near term, the FED interest rate changes will be the focus. It seems that this rate increase is facing a high probability of becoming official in 2015 but this would not be the first time the can was kicked. We think markets have had more than enough time to prepare for the rate increase and would be surprised if there were a big market reaction outside of the first day or two. We would expect how quickly and to what degree future rate increases occur to become the focal point of many investors in the New Year. A lot of this conversation will likely just be noise. The important point to glean, in our view, is simply that a rising rate means the US economy is strong and it no longer needs the help of accommodative policies. It has no doubt been an eventful year in the markets, and we are sure the next one will be as well, but it was also an eventful year at 5i Research. 

Between media appearances for Peter Hodson and Ryan Modesto as well as being featured in The Globe and Mail and Financial Post, along with  continued improvements to the research reports, addition of forums, the launch of an ETF letter ‘sister service’ and website changes that set us up for some interesting changes in the New Year, the past year at 5i Research has been an exciting but busy one! Amidst all of this, we continued to unearth stocks that we feel are quite interesting such as TIO Networks (TNC) and Knight Therapeutics (GUD) and continue to cover long-term value creators such as Constellation Software (CSU) and Amaya Gaming (AYA). However, we could not have done any of this without the help of our membership. So we would like to give a big thank you to all of the loyal subscribers since day one and all of the new subscribers that have joined us. We hope to continue to provide some of the best value out there for investment research services and continue to find interesting stocks for our members.