2017 in Review - Pavilion Financial Corporation
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2017 in Review
With another year beginning, many Canadians spend What is a cryptocurrency?
time reminiscing on fond memories while others
ponder what the coming year will bring. We at Pavilion Think of this as ‘dollars’, but they exist only in digital
Investment House are no different. In this article, we form and never as cash. Advanced cryptography is
provide commentary on snippets of topics that we used to control and secure the currency, as well as any
feel clients should know about: Bitcoin, cannabis, transactions.
stock market volatility (or lack thereof) in 2017, equity
returns, the Canadian dollar, and new 2018 corporate “If you had invested $100 in bitcoin
taxation rules.
seven years ago, it would be worth
Bitcoin Surprises the World around $28 million today”.
“If you had invested $100 in bitcoin seven years ago, it
would be worth around $28 million today”1. What is blockchain?
Near the end of 2017, it was impossible to escape bitcoin Think of blockchain as a list of transactions or records.
euphoria. Even Ripple, a rival to Bitcoin, went from This list is distributed publicly and secured using
USD 0.65 cents at the start of the year to 51.37 cents, cryptography so it cannot be changed. All participants
a 7,000% rise2. These are almost incomprehensible using the list can verify the transactions, which
increases, especially for a technology that very few prevents any individual user from altering the records.
people had even heard of prior to 2017. As with all
What are the benefits?
new technologies, things are changing at light speed;
by the time you read this, most of what we have said Cryptocurrencies and the blockchain ledger system
may be incorrect or irrelevant. But here we provide can cut out middlemen. This could include credit card
a few basics for Pavilion clients new to the idea of companies, banks, real estate agents and governments,
cryptocurrencies. amongst others, and could reduce costs and improve
efficiency for businesses and consumers.
What is Bitcoin?
Is this a bubble?
Bitcoin encompasses two new breakthroughs:
cryptocurrency and blockchain. Bitcoin itself is a It is impossible to say with foresight if this is a bubble,
cryptocurrency that utilizes blockchain technology. but the euphoria over cryptocurrency is reminiscent of
PAVILION INVESTMENT HOUSE 1
a division of Pavilion Advisory Group Ltd.
the early internet boom. Do you remember AltaVista, As with any new industry, there are questions
Ask Jeeves, Excite, or WebCrawler? Neither do we. that simply cannot yet be answered. As such, any
Google won the internet search wars and destroyed investment in these types of companies continues to
other search engine companies in the process. Is be speculative and subject to significant risks.
Bitcoin destined to be the one common digital
currency, or is it Ripple, Litecoin, Ethereum, Zcash, or Stock Market Volatility in 2017
Monero? It is difficult to foresee the future of this new
technology, let alone understand its ultimate value. One of the surprises for 2017 was the relative calm
Bubble or otherwise, treating this as an investment is experienced by capital markets. This past year marked
pure speculation. significant decreases in volatility – a change for both
Canada and the United States.
Cannabis Comes to Canada Looking at the Canadian S&P TSX Composite Index,
At one point in November, the stock November 2017 recorded the lowest volatility in a
price of Aurora Cannabis, the marijuana decade. If we tally up the number of days that we
producer building the 800,000-square- saw either a positive or negative move of 2% in the
foot Aurora Sky production facility near Canadian equity market, the total amount of days
the Edmonton airport, increased over would be zero. Comparing this to a year like 2008
90% in less than a month3. Similar to the where we saw a remarkable 69 days recording a 2%
speculative fury of Bitcoin, these types of gains seem movement in our index, one can see how docile our
almost incomprehensible, especially considering Aurora market has been in 2017 (see Graph 16 on next page).
has barely turned a profit. Aurora, of course, was not
In a similar fashion, the S&P500 index in the U.S.,
alone. In the last few months of the year, it seemed any
recorded its lowest volatility since the 1960s7. Not only
stock with the potential to capture part of the soon-to- did this index not post a negative return in any of the
be-legal recreational marijuana market was increasing months in 2017, this same benchmark did not record
in price. any days with returns higher or lower than 2% in any
But the true value of these companies remains hard one trading day.
to measure and price, resulting in large, speculative While positive returns and low market swings put
swings. Many questions remain unanswered: smiles on faces, it is important that investors recognize
• Is $10 per gram plus taxes, the price agreed to by the this is not the historical norm. Table 1 provides
federal and provincial governments, the right price? historical context to how often on average the U.S.
Or, will the black market survive and capture revenues, market experienced downswings prior to 2017. Ups
instead of legal companies like Aurora? and downs are a normal and healthy part of capital
markets and we should expect and prepare for them
• Federal and Municipal governments have estimated their to return.
per-year costs of setting up the new system at about
$1 Billion, while initial annual revenues are estimated at Table 1: Frequency of Historical Losses for the S&P 5008
$400 million. Will tax payers demand changes to the
system if the government continues to lose money4? Frequency of Losses
Per Year
S&P 500 1928-2016
• On January 4th, 2018, U.S. Attorney General Jeff
Sessions announced a dramatic change in direction 5% Losses 3
that would enable a return to prosecuting marijuana 10% Losses 1
crimes, even in states that had legalized marijuana5. 15% Losses 1 every 2 years
Aurora’s stock fell more than 8% in a single day. Will a 20% Losses 1 every 3 to 4 years
future Canadian election bring a government with a
different view to the marijuana market that could create
sweeping changes?
PAVILION INVESTMENT HOUSE 2
a division of Pavilion Advisory Group Ltd.
Graph 1: Number of Days With Greater than 2% Swing in Return6
50 -50
40 -40
30 -30
20 -20
10 -10
0 0
-10 10
-20 20
-30 30
-40 40
-50 50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
TSX Days > 2% 25 11 6 0 1 0 2 1 26 32 3 9 2 0 1 3 4 0
TSX Days < 2% 31 14 6 1 1 1 4 5 43 28 5 11 1 3 2 8 3 0
Total 56 25 12 1 2 1 6 6 69 60 8 20 3 3 3 11 7 0
TSX Days > 2% TSX Days < 2%
2017 Equity Review globe came in at 16.0% in Canadian dollars. The highest
return came from the developed economy of Austria,
While client statements will arrive in January with our which delivered 41.0% (CAD) in 2017.
standard capital market benchmark returns, we wanted
to highlight a few numbers that would provide a better Table 2: Top Five9
understanding of capital markets in 2017.
Local Canadian
In 2016, the Canadian market handily beat the world’s Country Index
Return Return
largest equity market, the United States. But was this
result duplicated in 2017? Unfortunately not. While the Austria ATX Index 32.80% 41.00%
Canadian equity market delivered a respectable 9.1% as Poland WIG Index 23.20% 38.00%
measured by the TSX Composite index, the S&P 500 Czech
provided a 21.8% return (USD). PX Index 22.60% 37.80%
Republic
Unfortunately, Canadian investors did not experience this Chile IPSA Index 34.00% 36.00%
growth in their U.S. investments. Due to the appreciating Greece ASE Index 26.80% 34.60%
Canadian dollar, Canadian investors received a much
Not all markets were rosy. The lowest returns in Canadian
lower return in this market, just 13.5% when measured in
dollars were connected to Qatar with returns for 2017
Canadian dollar terms.
of -21.70%. Qatar is categorized as an emerging market
Similarly, Canada underperformed the global average and, as a member of this grouping, can experience
equity market return. Using the MSCI All Cap world index significant volatility connected with political instability,
we can see that the average equity return across the which was the case for Qatar in 2017.
PAVILION INVESTMENT HOUSE 3
a division of Pavilion Advisory Group Ltd.
Table 3: Bottom Five10
Marshall McAlister, CFA
Local Canadian Private Wealth Counsellor, Principal
Country Index
Return Return mmcalister@pavilioncorp.com
MEXBOL
Mexico 10.10% 7.50% T: 780 638 2491
Index
COLCAP
Colombia 14.80% 7.50%
Index
Cary Williams, CFP
INDEXCF Associate Private Wealth Counsellor
Russia -0.10% -1.10%
Index
cwilliams@pavilioncorp.com
DFMGI
UAE -0.60% -7.40% T: 780 638 2493
Index
Qatar DSM Index -15.30% -21.70%
Canadian Dollar
The loonie is most often compared to the U.S. dollar
References
in terms of its value and in 2017 its value noticeably 1. http://www.businessinsider.com/when-to-sell-bitcoin-2017-12
rose against the U.S. dollar. Opening at $0.7441, our 2. https://www.cnbc.com/2017/12/13/another-bitcoin-rival-leaps-to-a-
dollar appreciated by 6.9% to end the year at $0.7955. record-high-surpassing-litecoins-market-value.html
3. https://www.bloomberg.com/news/articles/2017-11-13/marijuana-stocks-
It is important to note that the performance of in-melt-up-amid-canadian-legalization-fever
international investments is negatively affected by a 4. https://www.thestar.com/news/canada/2017/12/11/legalized-pot-to-cost-
rising Canadian dollar. 10-a-gram-finance-ministers-say.html
5. https://www.bnn.ca/pot-stocks-slide-as-sessions-takes-aim-at-
In contrast, our dollar depreciated against other cannabis-1.958818
6. Chart 1: via Bloomberg
currencies in 2017, most notably the British Pound 7. https://www.ft.com/content/fe4c064c-c50e-11e7-a1d2-6786f39ef675
and the Euro, which saw the relative exchange value 8. Table 1: http://awealthofcommonsense.com/2017/01/how-market-crashes-
decrease by 2.3% and 6.3%, respectively. In this case a happen/
9. Table 2: Via Bloomberg
depreciating Canadian dollar improved the net return 10. Table 3: Via Bloomberg
to our portfolio when measured in Canadian dollars.
Given Canada’s large energy exports, we have DISCLAIMER
historically seen a strong correlation between the The information contained herein is for information purposes only and does
not constitute investment advice. Any investment advice provided by Pavilion
Canadian dollar and the price of oil. Interestingly, for Investment House will only be delivered pursuant to the terms and conditions
the second straight year, this correlation seems to contained in an Investment Counsel Agreement. The information provided is
based on asset class, security, and investment data and projections that are
have broken off as the Canadian dollar rose despite a generated by Pavilion Investment House using 3rd party sources, assumptions,
depreciating West Texas Intermediate oil price in 2017. models, and methods that are consistent with investment industry standards
and are partially based on specific expectations and assumptions made by
Pavilion Investment House. Although Pavilion Investment House takes all
Conclusion steps to ensure that it presents information for which it has reasonable basis
and grounds, there can be no warranty, guarantee, or assurance, implicit or
Without a doubt, 2017 was a fascinating year full of otherwise, that the projections contained within this presentation will occur
exactly as stated. Where historical statistics are used, they are used for
change. While the future is impossible to predict, we at illustrative purposes only. Historical performance is not to be construed
Pavilion Investment House look forward to continuing as being indicative of future performance. Historical statistics use publicly
available index or mutual fund returns (where appropriate) and may not include
to help our clients manage the inevitable surprises all fees or taxes associated with implementing an equivalent strategy. © 2018
that will come in 2018 and beyond. Pavilion Advisory Group Ltd. No part of his publication may be reproduced in
any manner without our prior written permission.
PAVILION INVESTMENT HOUSE 4
a division of Pavilion Advisory Group Ltd.
You can also read
