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Nov 13, 2019

Grow Together - Q4 2019

With the newly elected Liberal minority and an economy that continues to slow down, we're approaching an uncertain end of the year. Our latest edition of Grow Together provides knowledge to help you prepare for the next few months.

In this issue:

President's Message | What's on Your Mind? | International Investing - It's Not Foreign |Year-End Tax Tips - What You Need To Know


Click here to download the PDF version.


President's Message: "Falling" Back

As someone who enjoys the great outdoors, the transition from summer to fall is always bittersweet. It marks the time when I put away my bike and hiking gear and start thinking about cool weather activities. Although the temperature is dropping and change is in the air, I can always look forward to a whole new set of fall and winter pursuits.


With fall bringing change, we can also get stuck thinking about the negatives: colder weather and shorter days. Our state of mind affects how we handle the changing season.


In a similar way, changes in the markets, and the constant bombardment by news that might change the markets, affects our financial state of mind. We can easily worry about things that are out of our control such as Trump Tweets, trade wars and political dramas. As Scott Blair discusses below, the media mindset can be particularly negative and seems to suffer from a “Recession Obsession”. While our time-tested indicators don’t signal a high probability of one occurring soon, even if it did it wouldn’t mean the smartest strategy would be to eliminate all the risk in your portfolio.


At CWB Wealth Management, we help clients create peace of mind for all of life by focusing on long term investment strategies that take advantage of the returns that various asset classes can provide, and by combining them in ways to reduce, but not eliminate, risk. Most importantly, the right portfolio strategy for you is not the same as the one for someone else. It depends on your unique needs, circumstances and goals.


We are here to guide you and support you on your financial journey. We do this by offering a team of experts to work with you on your needs, your plans and your portfolio. We launched our Knowledge Forums events this fall to bring experts directly to you with current market insights that guide our investing decisions along with business succession strategies, highlighting the importance of preparation for change.


In the spirit of looking forward, this issue of our newsletter provides answers to some of the frequently asked questions from clients attending our Knowledge Forums, explains why international exposure is important to your investment portfolio, and provides year-end tax tips from our Wealth Advisory Services team to help you prepare for the New Year. 


What's on Your Mind?

Are we heading into a recession? Recently, we went on the road to several Canadian cities to talk directly to our clients about the current state of the market through a presentation called “Recession Obsession.” We are very thankful for the many clients that came out to these events. Following the great success of the talk, we thought it would be useful to answer a few frequently asked questions in this quarter’s newsletter for those that could not attend.


  1. With interest rates already so low, how can we prevent a recession by continuing to lower rates?
    Price stability is a key mandate for most central banks. As economies grow, inflation tends to creep in, central banks then begin raising interest rates and making it more expensive to borrow money. This financial environment helps to keep inflation in check. Indeed, rates often rise too quickly or too high and they can tip the economy into a recession. When facing a recession, central banks cut rates to stimulate growth. Rates are currently really low by historical standards, but there is still room to cut in countries like Canada and the U.S where lowering rates can still be impactful. However, other places like Japan and Europe will need to turn to other solutions such as increasing government spending or cutting tax to boost the economy. Of course, ending the tariff war between the U.S. and China would be a big help to the global economy.

  2. What do you think about robo-advisors?
    Robo-advisors are a great option for do-it-yourself type of investors. They give some guidance and tend to be a cheaper option. However, we won’t really recognize their real impact until we see a true bear market for stocks. Many investors that use robo-advisors have not seen a down market (it’s been over 10 years). Active management tends to perform better than indices (where a lot of robo-advisor assets are) in downturns. Sometimes spectacularly so, like the dotcom bubble. Having a plan, sticking to it and staying invested in good and bad times is the key to long term investing success. However, it can be much harder without advice. So we will see how that channel performs in a downturn.

  3. Do you see negative interest rates coming to the U.S. or Canada?
    It’s possible but we do not think it will happen, at least not anytime soon. Our economies are much stronger than Europe or Japan and we have more tools (such as higher rates to cut from or tariffs that can be rolled back) to hopefully avoid a long drawn out recession that could lead to negative rates. Although inflation is low in North America, we do not have deflation (falling prices) like some economies. Moreover, we benefit from much better demographics than most of Europe and Japan. Young people are consumers. They’re ready to spend and often on big-ticket items (such as houses or cars) that help economies grow. Countries like Japan, where rates have been low or negative for a very long time, are actually experiencing an aging and declining population. It’s estimated that Japan’s population will fall by over 20% in the next 20 years making it difficult for the economy to grow. Although Canada’s birthrate is low, the country’s population continues to grow through immigration.

  4. I hear in the media that Canadians have taken on more debt than they can afford. Is that something that is supported by data and what effect will it have?
    We are indeed heavily indebted. That is an undeniable fact proven by the debt to income, or our debt servicing costs. For instance almost 15% of disposable income per household goes towards servicing our debt burden. That’s the highest level in thirty years (although it has been close to this level for the last decade). However, we don’t believe it is more than what Canadians can afford because, unlike other previous situations, debt servicing is going towards total capital repayments and not interest. That helps to ease the burden somewhat as equity is being built in major assets like homes. However, should rates rise rapidly or unemployment were to spike up it could become a problem. Indebtedness usually rises as the economy grows and is knocked back during a recession. It’s a natural cycle. We expect this time to be no different. Although, we do not know the timing of the next recession.

  5. Is now a good time to get into the market with the cycle so long and close to the end?
    There are a couple of key assumptions in this question that we need to address in order to correctly answer. First, it is assumed that we are near the end of the cycle and heading into a recession but this is not clear to us yet. Our mantra currently is “slowing but growing”. We see signs that the economy is slowing but don’t yet see a recession on the horizon. We follow several Leading Economic Indicators such as consumer confidence, average hours worked and manufacturing activity. Many are still growing but clearly not as robustly as in the previous years. When we start to notice these indicators falling, we will be more confident that the cycle is near the end and we’ll be able to predict a recession. The second assumption in the question is that investors can time the market effectively. Unfortunately, most investors cannot. Even if you think a recession is coming and successfully get out of the market in time, you need to get back in at the right time to truly benefit from the situation.
    Most studies looking into investor behaviours show that investors who try to time the market end up selling low and buying high.
    For this reason, our strategy is to lower our weighting in equities if we see a recession, but we will never sell all our equities for our clients. The cost of being wrong is just too high. As stated earlier, having a plan, sticking to it and staying invested is the key to long term success and it is usually easier with an advisor.

    The questions above were some of the more common ones from our “speaking tour”. As you can see, macro uncertainty and ongoing news headlines are resulting in widespread questioning on whether now is the time to flee to safety and pull money out – by simply siting in cash or in GICs for peace of mind. We want to remind our clients to answer the most important question before making any decision – will this move help you reach your financial goals? Having a strong, trusted advisor to help you navigate through the market and answer these crucial questions is your safest bet to face the current uncertainty of the market.

    If you have any other questions please reach out and ask, our team of experts will be more than happy to guide you. 

International Investing - It's Not Foreign

International investing often appears as foreign, intimidating Canadian investors who prioritize comfort by investing in the safety of home. However, investing only in Canada provides a false sense of security as it exposes investors to limitations. The Canadian market has a limited scope and only a few sectors which are globally competitive. For this reason, it’s crucial to consider the myriad of companies based outside of the U.S. and Canada that operate as global leaders providing valuable financial returns along with relevant diversification to investors. In this piece, we highlight how “it’s not foreign” to invest internationally as it allows investors access to leading trends not available at home.


Our portfolio counts many global leaders that have no parallel here in Canada, such as: LVMH, Nestle, Rolls-Royce, Daimler and Sony. Not only are these names not foreign to Canadians, but they also benefit from long-term secular trends that support strong growth in their revenue and earnings profile compared to the broader economy;


Consider the case of LVMH, the parent company of various luxury brands such as Louis Vuitton, Bvlgari, Dom Perignon and many more. While everyone frets over a slowing global economy that is barely expected to reach 3% growth, LVMH just reported organic sales growth of 11% in the latest quarter. LMVH, based out of Paris, benefits from the strong demand for luxury products not only in the developed world, but also in places like China, where rising incomes lead to a strong propensity to consume luxury products. The current per capita spending on luxury products in China is only $66 USD compared to $196 USD in the US and $228 USD in Japan. This important gap suggests a very long growth runway for the luxury goods sector in China as spending will very likely continue to increase. This trend is also applicable to the rest of the Emerging Markets. Hence a leader like LVMH represents one of the best-positioned global companies to benefit from this trend.


While Louis Vuitton benefits from a familiar reputation in the Canadian market, a lesser known company has an equally good outlook. Based out of Germany, Infineon Technologies represents one of the largest producers of semiconductor electronic components in the world, with a primary focus on components used in heavy-duty power applications in cars, domestic appliances, industrial motors, power generation facilities, data centers and more. Amongst multiple types of sensors, they notably also produce radars, lidars, and imaging sensors which are utilized in advanced driver assistance systems in cars and smartphones. Brands familiar to Canadians that use Infineon components include the who’s who of the world: Mercedes-Benz, Tesla, Audi, Samsung, Google, etc. Due to the growing end-market applications for Infineon’s products, the company is able to grow sales even in a slowing global economy and has a very strong growth runway over the next decade. Thus while Canadians would unknowingly use many products containing Infineon components, they would never be able to invest in such a company domestically.


Investing in international markets does subject investors to somewhat higher volatility as there are many factors at play – macroeconomics, politics, exchange rates, etc. However, by finding and choosing companies that fit our investment process and philosophy, we believe our investors have the benefit of owning some of the best companies in the world.


Year-End Tax Tips - What You Need To Know

The recent federal election resulted in a minority Liberal Party government, with the United Conservative Party once again forming the official opposition. A minority government would require support from another party to continue to pass legislation, and it’s most likely that support could come from the NDP. What that means from a tax perspective under the new regime is uncertain at this point. But regardless of where you stand on the political spectrum, it’s fair to say that as a Canadian, you could be impacted either directly or indirectly by the resulting tax policies that may pass in the coming budgets.


So what can taxpayers do to lower their overall tax bill? The key is to be aware, and plan according to your individual situation. Whether you’re on a fixed income, an employee, executive, or business owner, here are some tips to consider for the remainder of 2019, and get you on your way for 2020.


Personal: Knowledge is Power

By establishing what your taxable income will be for the year as well as your applicable tax rates and personal objectives, you’ll be able to craft an effective strategy to lower your overall tax bill.


Determine your taxable income:

Understanding your income sources and amounts will help determine what tax rate(s) apply. What will your employment income be by December 31? Are you are anticipating a bonus? For seniors, CPP and OAS benefits are considered taxable income. Benefits can vary by individual, but maximum OAS and CPP amounts are $7,272 and $13,855 respectively for 2019. Consider how all sources of income will impact your situation. When net income exceeds $77,580, OAS begins to be “clawed back”.


Determine your tax rates:

Understanding your taxable income should then be applied to your applicable tax rates, which can vary by your level of income, and by province. See Table 1 for an illustration of the lowest and highest tax rates by income level and province.


Table 1: Tax Rates

   First marginal tax bracket  Highest marginal tax bracket


Taxable Income: $40,707 Taxable Income Over $210,371
20.06% 49.80%
 AB Taxable Income: $47,630 Taxable Income Over $314,928
25.00% 48.00%
 SK Taxable Income: $45,225 Taxable Income Over $210,371
25.50% 47.50%
 MB Taxable Income: $32,670 Taxable Income Over $210,371
25.80% 50.40%
 ON Taxable Income: $43,906 Taxable Income Over $220,000
20.50% 53.53%

Source: Dynamic Funds

Plan your strategy:

Knowing your tax rate guides you through making your tax planning decisions: whether you want to contribute to an RRSP or TFSA or commit to tax-loss selling.


Tax-loss selling is when investors sell capital investments at a loss to offset gains on other investments. Generally, tax is calculated on the net portion of capital gains and losses for the year, though there are some provisions that allow you to carry gains and losses to future or prior years. If you are considering tax-loss selling, remember that settlement must take place in 2019. Also, beware of superficial loss rules. If you or an affiliated person hold the security within 30 days, the capital loss will be denied. Similarly, if transferring securities from non-registered investment accounts into registered investment accounts, you cannot claim a loss on the value of the securities transferred. Although, you will be responsible for tax on any realized gains that occur.


In general, the ideal way to approach your personal taxes is to gain knowledge now so you can plan an effective strategy ahead.


Corporate: Manage the Balance Sheet & Income Statement

Business owners should consider capital asset additions or dispositions before the end of the year. For example, it could be beneficial to accelerate the purchase of equipment before December 31st to take advantage of the half-year rule. A business is permitted to deduct half a year’s tax depreciation in the year of acquisition.


Shareholders who received loans from the company should be aware of income inclusion rules if those loans are not repaid on time. Loans to shareholders must be repaid within one year of the corporation’s tax year-end in which the loan was made. If not, the loan will be included as income to the borrower, but not deductible as an expense to the corporation.


Small business owners should also review their passive income for the year. Recent tax changes have resulted in punitive measures to small businesses earning over $50,000 in passive income. To help avoid this, consider the following strategies:


  1. Adjusting investments from interest/dividend generating investments to those that create deferred capital gains
  2. Choosing Investments that provide tax-deferred distributions
  3. Purchasing assets that are used to create active income
  4. Holding investments in tax-exempt insurance policies
  5. Individual Pension Plans

From an investment perspective, a business owner should monitor when to take capital gains and/or trigger capital losses. This will help maintain access to the full small-business deduction.


Get in touch with us today to find out how we can help ensure you have the right plan in place.