1. CWB Wealth Management
  2. Blog
  3. Grow Together - September 2020
Sep 24, 2020

Grow Together - September 2020

In this new issue of Grow Together, our team looks back at changes that have taken place in the last few months – within our company, global economies and markets – while planning for the last quarter of this extraordinary year. 

In this issue: 

President's Message | The Shape of Recovery | Closing the Gap in the Emerging MarketsStaying the Course: Risk Capacity & Tolerance | RRSP & TFSA Strategies for COVID-19


Click here to download the PDF version.


President's Message

By Matt Evans, CFA 
President & CEO


Is there a better symbol for change, growth and renewal than the turning of a season? These have been our themes for Grow Together in 2020, and they remain on my mind as I watch the green grass of my front lawn newly littered with the fiery colours of falling leaves. While they do bring with them a few months of cooler air and shorter days, the colours of autumn also represent renewal: we know from experience that the changing colours make way for new growth and refreshment a few months down the line.

For our part, CWB’s private wealth management teams enter the final quarter of this year at the front end of our own season of change and renewal. With the acquisition we completed in June, our firm is now comprised of four predecessor organizations: CWB Wealth Management, the Edmonton-based investment counsel representing the legacy of Adroit Investment Management; Calgary-based CWB McLean & Partners; the cross-Canada businesses of T.E. Wealth, including T.E. Indigenous Services and Doherty & Bryant Financial Strategists; and finally, Leon Frazer & Associates, with offices in Toronto and Vancouver. We now bring recognized financial planning and investment management talent to each of our key markets across the country, and our teams collectively oversee approximately $8.5 billion of total assets under management, advisement and administration. There is no doubt CWB is now a leading player in the Canadian private wealth industry.

But as we’ve said before, growth for growth’s sake is not our goal. Growing together is about growing with and for our clients.

It’s about growing our capabilities to deliver an unrivaled experience that creates real value for the people who trust us with their complex  financial planning and investment management needs. In the previous issue of Grow Together, I introduced the new members of our deepened leadership team. We continue to work together to  evaluate the shared strengths of our group and our complementary opportunities to create value for clients across Canada. 

One of the first opportunities we recognized was to bring together our formidable in-house marketing and communication talent under  common leadership. Each of the legacy business lines mentioned above operates today as a standalone channel for insight, education and thought leadership in private wealth management. For example, we distribute Grow Together, as a quarterly newsletter through our CWB Wealth Management channel. In this issue, our readers will find high-value insight on the potential for multiple economic recovery scenarios, the hidden relative value in international and emerging markets, the importance of time in the market vs. market timing, and how to make the most of allocation decisions across registered account types.

And yet, Grow Together is just one of our three quarterly newsletters. We also distribute the equally content-rich Strategies newsletter on a quarterly basis through T.E. Wealth, as well as Points in Time through Leon Frazer & Associates. Meanwhile, CWB McLean & Partners produces a series of quarterly Outlook videos, with 18 standalone segments distributed thus far in 2020. CWB Wealth Management has produced four excellent podcasts this year through a series called What They Don’t Tell You, with a focus to provide real-life stories, candid conversations, and everything you’ve ever wanted to know about business, finances, and life. And last but not least, our teams have produced 65 highly-consumable posts across our four separate blog properties in 2020, for an impressive average of about two very timely posts per week. 

This volume of thought leadership is impressive – I’m not aware of a more prolific private wealth organization in Canada – but it’s the quality that we are really proud of. Each piece of content is thoughtfully produced by a credible expert committed to contributing to our clients’ peace of mind. Our goal in consolidating oversight of insight distribution is to ensure that all of our clients can benefit from the tremendous depth of our collective experience within CWB’s wealth organization. It’s a noisy world, and dividing the attention of our shared audience across multiple channels deprives clients of the full measure of our capabilities. 

Harmonizing insight distribution is just one frontier of many we are reviewing to simplify our model and create value for all of our clients from the respective strengths of each of our predecessor organizations. As I shared in previous issues of Grow Together, stability, continuity and minimizing disruption have been the immediate top priorities as we gradually refresh our combined capabilities. Going forward, we will continue to find creative ways to provide richer, more vibrant client experiences, with constant positive renewal through every season of change.


The Shape of Recovery

By Scott Blair, CFA
Head of Research 


Many economists have turned to the alphabet to explain how the post COVID-19 recovery would look. An L-shaped recovery signifies a sharp decline with a very weak and drawn out economic recovery. U-shaped indicates a struggling economy over the short term, followed by a robust rebound. Most now believe we are in a V-shaped recovery – a dramatic move down, followed by a dramatic recovery. We have definitely experienced the move down as Canadian real GDP fell 38.7% in Q2/20 on an annualized basis. The expectation is that Q3 will complete the “V” with a ~35% gain in real GDP compared to Q2. We agree with this expectation. 

The letter “K” has also recently entered our vocabulary and it has more to do with what’s happening within our recovering economy. 

This downturn has seen the “haves” (professionals and big businesses) recover very quickly and are often as well off or better than before. 

They are the top right arm of the “K”. The “haves” are able to work from home and are more protected from the virus. To some, this has actually boosted the amount of money in their pockets by cutting down on expensive commutes, parking fees, dining out to name a few. 


The “have-nots” have struggled and are often worse off than before. They are the bottom right leg of the “K”. This largely includes hourly employees, service workers and many small businesses. Those in this group who have not been laid off or furloughed are more likely to be unable to work from home. Their costs have stayed the same or risen (purchase own PPE), while their incomes may have been cut due to fewer hours on the job.


The K-shaped Recovery

The K-shaped Recovery


This uneven recovery is likely to continue until economies can fully re-open once again. Until then, global governments (in developed countries) are committed to providing an economic bridge to support those hurt by COVID-19. This bridge has created an artificial economy – one driven by trillions of dollars of government support – into the hands of ordinary citizens and businesses. The support will likely last in some form until COVID-19 is controlled. In our view, the tsunami of support was the right thing to do but has created an income cliff. This means that once the programs are done, incomes may significantly fall. To understand the risk around the income cliff, we need to first take a look at the programs.


Let’s take a look at Canada. The Canadian Emergency Response Benefit (CERB) was recently extended by four weeks to September 27. This program provides $2,000 every four weeks for up to 28 weeks. After September 27, CERB recipients will be transitioned to Employment Insurance (EI) or one of three new benefits created for those that have to self-isolate, care for those who are sick, or for workers who simply do not qualify for EI. It is estimated that of the millions of Canadians receiving CERB benefits, more than
two-thirds will go to EI with the others moving to the new programs. Changes to EI means that workers will receive a minimum of $400/week for up to 26 weeks (expanded from 14 weeks), which will take recipients through to next spring.

The hope is that our V-shaped recovery continues. That people gradually return to work and, by springtime, we’re back to a more normal state with a significant portion of today’s CERB recipients working. If this transpires, the income cliff would be more of a gentle hill.


What could go wrong? The benefits could hold back the recovery. For instance, many minimum wage earners and low-income Canadians will make more under the expanded EI program than they do working. They have no financial incentive to go back to work. The deficit is also concerning. Estimates show a deficit of up to $400B for Canada this year. To put that into context, this year’s deficit will add 50% to our national debt in one year. 

In general, we see better days ahead as the economy continues to improve. Though we’re concerned about the income cliff and how different people within the economy will face unique hurdles, we expect that as the overall economy recovers this issue will be manageable and we will avoid a “W” shaped recovery (V slips to recession). Global debt is a bigger issue; one that is long-term in nature. We expect it will limit potential growth once things have stabilized. Ultimately, we are looking at low growth for some time into the future, which is a satisfactory outcome given what the economy has just gone through.

Accordingly, we continue to invest in quality companies that will benefit from a rebound in economic growth, complemented by more defensive firms to protect from a potential slowdown.

Closing the Gap in Emerging Markets

By Ric Palombi, CFA 
Director of Research, CWB McLean & Partners


It’s been quite a ride for investors so far in 2020. Within an 8-month time span, the S&P 500 (S&P) saw the fastest bear market in history and then touched all-time highs since the March lows. To make matters more difficult, the rally has been concentrated in relatively few mega cap stocks, leaving many investors wondering what to make of it.

Within those mega cap stocks, the return has been even further concentrated to tech giants such as Amazon, Apple, Microsoft, Facebook and Google which currently make up 23% of the S&P and have returned a combined 58% this year alone (compared to S&P’s 10%). This performance is the primary reason that the S&P has been able to outperform most broad markets this year, which includes the Emerging Markets (EM) by a staggering 10% (Figure 1). 


Figure 1: S&P 500 vs Emerging Markets YTD Relative Returns

S&P 500 vs Emerging Markets YTD Relative Returns

Source: S&P Capital IQ


As an example of how expensive some of the U.S. tech names have become, we need look no further than the two top holdings in the EM index, which happen to be Alibaba and Tencent. These are also two of our long-term global equity holdings. They are mega cap tech stocks in their own right, and we believe their value has been underappreciated by investors.

First, let’s consider Alibaba. Alibaba has the largest market share for e-commerce in China through its two main websites: Taobao and T-Mall. The total value of transactions on their platforms exceeded $1 trillion USD in their last financial year. The best parallel here in the U.S. would be Amazon, where the transacted volume is likely close to $400 billion. Like Amazon, Alibaba also operates a cloud computing division and they have the highest market share in China within this segment. Note, however, that this division currently does not generate any profits, unlike Amazon’s Web Services division which has been profitable for the past several years.

Alibaba also has the largest share of the e-payments and e-wallet system operated under the Alipay brand. The simplest way to think of this would be the combination of a Paypal + Visa/MasterCard. Over time, the Alipay platform has evolved to a full financial electronic store where customers can purchase investments, insurance, etc. This financial services company is called Ant Financial, which Alibaba has a 33% stake in, with the rest being privately owned. 


Even at such scale, Alibaba’s revenue continues to grow in the 30% range with profit growth in the high 20% range. Alibaba generated a net income of $16.8 billion in the last twelve months, whereas Amazon generated $13.2 billion. Despite all of this, Alibaba’s market cap is $782 billion and trades at ~29x forward P/E while Amazon’s market capitalization is $1.7 trillion and trades at nearly 62x. Alibaba has only recently rallied as the IPO announcement of Ant Financial having a $200-300 billion valuation led to renewed excitement for the company.


This valuation divergence is also apparent when looking at Tencent Holdings. Tencent is the market leader when it comes to digital gaming, entertainment (music and video), and also owns the most widely used digital messaging platform in China – WeChat. When comparing a basket of the mega cap tech stocks in the U.S. with the two leading Chinese companies (Alibaba and Tencent), we see that the U.S. stocks enjoy a substantially higher valuation, as shown in Figure 2.


Figure 2: Forward Valuation Metrics for Alibaba and Tencent vs Major U.S. Tech Names

Forward Valuation Metrics for Alibaba and Tencent vs Major U.S. Tech Names

Source: Bloomberg

*A composite of Amazon, Apple, Microsoft, Facebook, and Alphabet (Google), weighted as per S&P 500 weights.


In terms of returns, we see that the U.S. stocks have only taken off in the past year. Since January 2020, Amazon is up 84% compared to 36% for Alibaba. In the past five years, Amazon has delivered an astounding 577% total return compared to an also great, but relatively underwhelming, 335% for Alibaba. Over the same period, the S&P has delivered total returns of 97%. While one would expect U.S. stocks to have a somewhat higher valuation than their Chinese counterparts (due to obvious factors relating to geopolitics, style of government, individual freedoms, transparency, etc.) we feel that the gap is simply too large to ignore.


Figure 3: Total returns this year and over the last 3 and 5 years (USD)

Total returns this year and over the last 3 and 5 years (USD)

Source: Bloomberg

Similarly, we believe the large outperformance of the U.S. market is unsustainable in comparison with European or other Emerging Markets.

It’s difficult to say what factors would drive the valuation gap to close but we do feel that, ultimately, the force of economics and the markets will apply and this gap should reduce. As both the pandemic and economic worries begin to fade, one could expect to see these lagging geographic regions and stocks (i.e. those outside the tech bucket) start to outperform. For investors focused on the long-term, diversification by geography remains the key to reducing risk while benefitting when trends change.


Staying the Course: Risk Capacity & Tolerance

By Linnea McKercher, CFA 
VP, Portfolio Manager


As we move into the fall of an extraordinary year for the markets and global economies, many investors are surprised by how well portfolios have recovered since the COVID-19 market crisis peak in March. In this environment, it’s natural to wonder if it’s time to take some chips off the table and lock in some of those gains. Adding to investor  apprehension, of course, is the upcoming U.S. election and a possible change that will result in a fiscal policy shift. We cannot say for sure what will happen on November 3, and warn that placing a bet either way can be risky. 

We don’t need to look back any further than the beginning of the COVID-19 pandemic to remind ourselves how difficult it is to time the market’s behavior. The rear view mirror tells us that we should have sold our equities in mid-February as the virus spread across the globe and economic lockdown followed. The question is how many of us would have jumped back in at the low on March 23? The time period between that peak and trough was record-breaking short (Figure 4).


Figure 4: Year to date returns

Year to date returns S&P500

Source: Bloomberg


It’s near impossible for anyone to execute both of those trades perfectly. What we saw this year is not unlike any other market correction and recovery, however the speed of this one has been unprecedented. 

How do we protect ourselves from these large swings in the market? As unsettling as it seems, the best way to protect our capital is to stay the course and remain invested with a strategy that we can feel comfortable with through the highs in February and the trough in March. Now is a good time to review the importance of sticking to a disciplined investment strategy, and the risks associated with trying to time the market. When investors have a portfolio that’s too risky for their tolerance, they’ll feel compelled to sell at the wrong time; when the market is at a low. This will lock in their losses, and prevent them from participating in the recovery.


Successful investment strategies depend on your Portfolio Manager understanding your financial goals and your unique risk profile. Your Portfolio Manager will help you understand your capacity to take on risk, as well as your risk tolerance. 

Your capacity to take on risk is more objective – it’s driven by your wealth and its ability to meet your financial goals. Risk tolerance is your emotional or psychological willingness to take on risk.

The appropriate risk tolerance will provide you with a level of portfolio volatility that gives you peace of mind and allows you to sleep at night, even through the bumps of COVID-19. 


Risk tolerance is different for every individual and it’s challenging to discern from a simple questionnaire. Realistically, it’s learned from a solid and transparent relationship with your Portfolio Manager and maybe even a good market correction. Having been in the business for a number of years, I often joke that you never really know a client’s risk tolerance until you have been through a 20% correction with them. I’ve also noticed that clients are much more risk tolerant and confident after the market has run up 20%.


Your capacity to take on risk can change over time depending on your financial situation and goals, however, your risk tolerance is more intrinsic and does not change radically over time. Your goals and risk profile help create your investment strategy, which then defines the asset mix that you invest in. Typically, your strategy should only be adjusted with major life changes (children, divorce, retirement) and usually incrementally over time. Any large upcoming needs for cash in the next one to two years (renovations, family vacations, purchase of vacation or rental properties) should be discussed with your Portfolio Manager so that appropriate reserves can be set aside for these

We won’t know until later if this is the best time to raise cash for these endeavors, but it will be protected if there is another pull
back in the market. If you make drastic moves to time economic and political events you’ll sometimes hit the jackpot, but other times you‘ll go bust.


Our advice is to not gamble with your investment strategy as a wrong move can take years to recover from. Frequent reviews of your goals,
feelings about portfolio volatility, and near-term cash needs with your Portfolio Manager are paramount to achieving your long-term  investment goals.


RRSP & TFSA Strategies for COVID-19

By Robert Bradburn, CFP®, CIM®, CLU®
AVP, Wealth Advisory Services


With no regard for your pre-COVID plans, the pandemic has stress-tested the most heartily built household financial foundations. With a substantial number of Canadians out of work and participating in CERB (24.68 million applications received as of August 24, 20201), there is a good chance that at least a few folks within your bubble have been experiencing short-term financial hardship. Even if your household has been fortunate to make it through unscathed so far, in stressful times it is common to wonder how to get the most out of limited financial resources.

When it comes to long-term savings, the pandemic only makes things more challenging.


Just because cash is tight this year, it shouldn’t mean your TFSA and RRSP are ignored. However, there are some important boxes to check off first.


  1. Credit Card Debt: Although some cards have lower interest rates, a lot of them are crazy high. According to MoneySense2, even the best cards charge high single to low double-digit interest rates. Carrying credit card debt month-to-month is a sure way to dig a big hole for yourself, and paying off that balance should be your top priority. You’re guaranteed to see interest charges so given the choice between investing or paying down your high-interest debt, debt reduction should win out every time.

  2. Liquidity (formerly known as an “Emergency Account”): I refer to liquidity simply as the ability to have money in your chequing account within a few days time – without hosting a fire sale on your assets. The old school rule was to have three to six months of household expenses put aside in cash for a rainy day. Of course, this means you must first have an understanding of what your household spends on necessities each month (talk to us for cash flow tracking templates). The prescribed amount might seem high, but given the reliance on CERB and the current unemployment rates, three to six months is all the more reasonable.

  3. Mortgage vs. Investments: If you’re feeling unsure about where the best spot to park extra cash is, you’re not alone. This is a common debate for anyone with a mortgage. There are two ways to look at it, and either may be the right path for you. First, the  numbers don’t lie. Your mortgage is probably 3% or less, which means that every dollar you decide to put into another jar will cost you 3% in interest each year. So, if you’re going to invest you had better get a return greater than 3% after tax. As of the time of writing, the S&P 500 is up almost 21% over the past 12 months. Had you a crystal ball in your hands a year ago, it would have been a no-brainer to invest rather than pay down your mortgage – even with the COVID-19 crisis your net would be 18% before taxes. However, this isn’t a recommendation as past performance is no indication of future performance. The thought is that if your rate of return in investments is greater than the cost of your debt, investments may be the right choice. The second way to look at this is that some folks just don’t like debt. Although the numbers suggest that having some leverage is probably a good thing, it’s hard to argue against a good night’s sleep counting debt-free sheep.

  4. RRSP & TFSA: The first place to start is to consider your taxable income for the year from all sources, including CERB. Then, take a look at which marginal bracket that places you in for your province (Alberta below, Figure 5). If you estimate your total taxable income in 2020 to be $157,000, this means your marginal tax rate is 41.22%. Every additional dollar of income earned will be taxed at 41.22%. Likewise, every dollar deducted from your income will avoid 41.22% of tax.

    Figure 5: Combined Federal and Alberta Marginal Tax Rates 2020

    Your relative tax savings from an RRSP contribution and deduction of $7,464 will be $3,077 ($7,464*0.4122). The very next dollar deducted from your income will only realize a relative savings of 38%. So, the first RRSP strategy for making the most of limited financial resources is to consider how much of a deduction you require to lower your income to the bottom of your current marginal bracket – that’s where you get the most bang for your buck. You may find that deducting into the next bracket is also worthwhile, depending on your personal income amount. 
    If your expected retirement income will be less than your current income, you should attract less tax when you pull it out than when you
    put it in and deducted.
    However, depending on expected retirement income (who knows – that could be a long way off) and with the limitations of your resources, you may find that the certainty of having no tax at all is a greater assurance than potentially being taxed at a lower rate in the future. In which case, the next dollar of savings would be diverted to the TFSA. This hybrid strategy straddles the line between the known (a deduction of a certain amount today) and the unknown (taxes could be higher when you pull the money in retirement). While there are a multitude of additional RRSP and TFSA contribution options available, you might find this to be the most efficient for your own personal financially-restricted 2020.

At CWB Wealth Management, we pride ourselves on offering financial peace of mind for all of life. If you have any questions about these strategies, or you think you may benefit from talking to one of our Senior Planners, please reach out to our Wealth Advisory Services team.