SUMMARY Winter 2020 - Guardian Capital

SUMMARY Winter 2020 - Guardian Capital
Winter 2020


•   For a year that started amidst a large market correction and widespread expectations of an
    imminent recession, 2019 ended up as close to a best-case scenario for investors as could be
    hoped, with every major asset class ending the year solidly in positive territory.

•   That this all occurred against a broad-based slowing in global growth, and a backdrop of
    persistent and significant geopolitical risks that stifled business investment and trade, and clouded
    the outlook, makes the performance all the more notable.

•   Looking forward, there are reasons for optimism. The chief risks that have hampered activity for
    much of the last few years are moving to the back burner (at least for a little bit). With that, the
    focus can once again return to the fundamentals driving underlying growth.

•   On this score, developments in recent months have been encouraging, with the dataflow pointing
    to activity stabilizing across the globe that is helping to push concerns about an imminent collapse
    of the global economy to the wayside. Indeed, there are even signs that a nascent pickup in
    growth is gaining traction (albeit, a modest one).

•   Add to that the likelihood that central bank policymakers will continue to err on the side of caution,
    by keeping monetary conditions highly accommodative, and the outlook for the coming months
    appears to be constructive for corporate earnings. This market environment should underpin
    another year of decent performance for risk assets.

•   That said, hopes for a repeat of 2019’s outsized performance should be tempered. The road to the
    end of the year will likely see more than a few bumps on it given the preponderance of risk events
    that litter the political landscape over the next 12 months.

                                                                                            Economic Outlook | 1
SUMMARY Winter 2020 - Guardian Capital
Hindsight & 2020                                                                                    calendar year with returns in excess of 20% — in
                                                                                                    the previous seven instances, the average return in
For a year that started amidst a large market
                                                                                                    the subsequent year is just 2.5%
correction and widespread expectations of an
imminent recession, 2019 ended up as close to a                                                     CHART 2: BIG GAINS NOT SUSTAINED
best-case scenario for investors as could be hoped.                                                 Annual Change in MSCI All-Country World Index
Every major asset class ended the year solidly in                                                    40

positive territory. Global equities turned in their best                                             30

year of the cycle with gains in excess of 20% — and                                                  20

sizable returns were experienced in every major                                                      10

geographic region as well.                                                                           0


Bonds, for their part, generated amongst their best                                                 -20

performance of the decade (the global bond index                                                    -30

turned in its second best total return since 2009,                                                  -40

behind only 2017), more than doubling their average                                                 -50
                                                                                                          1988   1991   1994   1997   2000   2003   2006   2009   2012   2015   2018
returns over the preceding 10 years in the process.                                                 Shaded regions represent periods of US recession
                                                                                                    Source: Bloomberg, Guardian Capital
Even balanced fund investors got in on the act, with
a global 60/40 portfolio registering decade-best
gains of nearly 20%.                                                                                Of course, some context is worthwhile. The outsized
                                                                                                    gain in the 2019 calendar year likely does not
CHART 1: ALL RISE!                                                                                  happen without what transpired at the end of the
Total Return by Asset Class, 2019                                                                   year before.
(percent; US dollar basis)
35                                                                                                  Recall that 2018 ended with a sharp correction in
30                                                                                                  global equities that wiped out all of the year’s earlier
25                                                                                                  gains and resulted in the worst annual stock market
                                                                                                    performance since 2008, not to mention one of the
                                                                                                    worst years outside of a recession on record. The
                                                                                                    only worse years were on either side of the Tech
                                                                                                    bubble bursting at the turn of the millennium.

                                                                                                    Given that the sell-off at the close of 2018 was
     US Equity   Canadian EAFE Equity   60/40*   EM Equity   Global High    Global       Global
                  Equity                                     Yield Bonds   Corporate
                                                                                                    panic-induced rather than driven by a material
US Equity=S&P 500; Canadian Equity=S&P/TSX; EAFE Equity=MSCI EAFE;                                  deterioration of underlying fundamentals, that it was
EM Equity=MSCI Emerging Markets; Global HY=Bloomberg Barclays Global
HY; Global Corp=Bloomberg Barclays Global Aggregate Corporate; Global                               reversed in fairly short order is not exactly a surprise
G’ment=Bloomberg Barclays Global Aggregate Government                                               — and the rather arbitrary nature of performance
*60/40 portfolio is 60% MSCI AWCI, 40% Bloomberg Barclays Global
Aggregate Index Source: Bloomberg, Guardian Capital                                                 scorekeeping around calendar dates meant that the
                                                                                                    rebound registered as strong gains in 2019.
That this all occurred against a broad-based slowing
                                                                                                    The MSCI All-Country World Index (ACWI) plunged
in global growth, and a backdrop of persistent and
                                                                                                    12% in the final three months of 2018, to close the
significant geopolitical risks that stifled business
                                                                                                    year down 11% and off 17% from the high it
investment and trade, and clouded the outlook,
                                                                                                    registered in late January 2018. The global stock
makes the performance all the more notable — and
                                                                                                    market has since rallied more than 20% over the
may be concerning for what it suggests for the
                                                                                                    past 12 months (2019 marked its best calendar year
coming year.
                                                                                                    since 2009), but it is up just 8% from September
Over the last three decades, equity markets have                                                    2018’s levels and a meagre 3% relative to the peak
invariably seen returns moderate sharply following a                                                nearly two years prior.

                                                                                                                                                              Economic Outlook | 2
SUMMARY Winter 2020 - Guardian Capital
CHART 3: IT’S ABOUT WHERE YOU START & FINISH                                                       Performance that is driven by changes in valuations
MSCI All-Country World Index                                                                       over improving corporate financials does not
580                                                                                                typically prove to be sustainable, as the investor
                                          +3% since January 26, 2018
                                                                                                   optimism-driven multiple expansion tailwind one
                                                                                                   year turns to a headwind for the market the next.
520                                                                                                This is especially the case in an environment where
500                                                                                                fundamentals are weakening — and the fact that
480                                                      +24% since
                                                        December 31,
                                                                                                   earnings per share (EPS) actually declined by 6% in
460                                                                                                2019, the first decline since the oil-price-induced
440                                                                                                17% plunge in EPS in 2015, does not exactly
                                                                                                   provide a good omen for markets over the coming
  Jan-18        May-18       Sep-18        Jan-19        May-19          Sep-19          Jan-20

Source: Bloomberg, Guardian Capital
                                                                                                   Importantly, though, there are some caveats.
In other words, the moves over the last 12 months                                                  Namely, the contraction in bottom-line results last
may seem outsized, but are much more modestly-                                                     year came despite revenue growth remaining fairly
sized in the context of the last 24 months — and on                                                healthy, with overall top-lines expanding at a two-
this score, the average annualized return over the                                                 year high rate and nearly double the average for the
last two years is just a modest 5% per year, with the                                              last decade.
bulk of the gains coming in the first few weeks of
                                                                                                   CHART 5: SALES EARNING THEIR SHARE
2018.                                                                                              MSCI All-Country World Index Revenues & Earnings
                                                                                                   (trillions of US dollars; trailing 12-month basis)

Profit drivers
                                                                                                   30                                                                                          3.0

                                                                                                           Revenues (LHS)

                                                                                                   25                                                                                          2.5
Following this, caution is rising about the prospects                                                      Earnings (RHS)

for the global stock markets over the fact that the                                                20                                                                                          2.0

driving force behind the 2019’s gains were not so                                                  15                                                                                          1.5

much fundamental as sentimental.
                                                                                                   10                                                                                          1.0

Breaking down last year’s return for the ACWI into
                                                                                                   5                                                                                           0.5
its components of earnings per share growth
(fundamentals), price-to-earnings multiple expansion                                               0
                                                                                                    1995   1997   1999   2001   2003   2005   2007   2009   2011   2013   2015   2017   2019

(a proxy for investor sentiment) and dividends,                                                    Shaded regions represent periods of US recession
                                                                                                   Source: Bloomberg, Guardian Capital
shows that the 2019’s solid performance was almost
strictly due to multiple expansion.

                                                                                                   Drilling down into the components of EPS for the
MSCI All-Country World Index Total Return Decomposition                                            global stock market shows that the source of the
(year-over-year percent change)                                                                    weakness instead was turning that revenue growth
                                                                                                   into growth in corporate profits. Profit margins
 40                                                                                                contracted by the most since 2008 and shaved off
 20                                                                                                nearly 10 percentage points of EPS growth in 2019,
                                                                                                   while an increase in the index divisor (a proxy for
                                                                                                   share count) provided a modest drag as well.

                                                                          P/E multiple expansion
                                                                          EPS growth
                                                                          Total Return
      1996   1998   2000   2002   2004   2006   2008    2010      2012   2014     2016   2018

Source: Bloomberg, Guardian Capital

                                                                                                                                                                   Economic Outlook | 3
CHART 6: SALES EARNING THEIR SHARE                                                                                                                                                          CHART 8: ON THE MARGIN
MSCI All-Country World Index EPS Decomposition                                                                                                                                              MSCI All-Country World Index Profit Margins
(year-over-year percent change)                                                                                                                                                             (percent)
 60                                                                                                                                                                                          10




 0                                                                                                                                                                                           6

                                                                                                                                                       Shares outstanding
                                                                                                                                                       Profit Margins
                                                                                                                                                       Revenues                              3

                                                                                                                                                       EPS growth
-60                                                                                                                                                                                          2
      1996       1998      2000     2002   2004             2006              2008              2010                     2012                   2014            2016       2018               1995   1997   1999   2001   2003   2005   2007   2009   2011    2013   2015   2017   2019

Source: Bloomberg, Guardian Capital                                                                                                                                                         Shaded regions represent periods of US recession
                                                                                                                                                                                            Source: Bloomberg, Guardian Capital

Notable as well is that these dynamics are largely                                                                                                                                          First and foremost, the spike higher in profit margins
echoed across industry segments and regions.                                                                                                                                                in 2018 was predominantly due to the US corporate
Every area but the Energy sector recorded a rise in                                                                                                                                         tax cut package at the onset of that year (the US
revenues in US dollar terms in 2019, with declines in                                                                                                                                       accounts for nearly 60% of global equity market
EPS being the product of margin compression and                                                                                                                                             capitalization), which drove effective corporate
an increase in the proxy for shares outstanding. The                                                                                                                                        income tax rates stateside to historically low levels.
latter was concentrated among Emerging Markets
(EM) reflecting the expansion of the MSCI EM index
                                                                                                                                                                                            CHART 9: DEATH OF TAXES?
to include Saudi Arabia and Argentina, as well as
                                                                                                                                                                                            US Effective Corporate Income Tax Rate
increased weight of China’s “A” shares.                                                                                                                                                     (percent)

CHART 7: SALES NOT AILING                                                                                                                                                                   45
MSCI All-Country World Index EPS Decomposition, 2019
(year-over-year percent change; US dollar basis)
                                                                                              Profit Margins                                                Revenues                        35
                                                                                              Shares Outstanding                                            Earnings Per Share
 10                                                                                                                                                                                         30

 -5                                                                                                                                                                                         20
-15                                                                                                                                                                                         15

-25                                                                                                                                                                                           1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
-30                                                                                                                                                                                         Shaded regions represent periods of US recession



                                                                                                                                                  Real Estate


                                                                                                               Comm. Services

                                                                                                 Health Care

                                                                                                                                                                                            Source: Bloomberg, Guardian Capital

Source: Bloomberg, Guardian Capital                                                                                                                                                         Given the nature of these cuts (for example, many
                                                                                                                                                                                            benefits were front-loaded and they provide a one-
The downshift in global profit margins did, however,                                                                                                                                        time, rather than sustained boost to margin growth),
come as they were sitting at an all-time high for                                                                                                                                           it was not unexpected that there would be some
companies across the world in aggregate (and left                                                                                                                                           giveback — and to that end, US corporate income
them not far from their peaks), and do not                                                                                                                                                  tax receipts have increased by 25% for the
necessarily indicate that firms were under pressure                                                                                                                                         cumulative 12 months ended December despite the
from weakening demand; instead there are a few                                                                                                                                              weakness in reported earnings.
other clear drivers.

                                                                                                                                                                                                                                                             Economic Outlook | 4
CHART 10: THE TAX MAN COMETH                                                              CHART 12: MATERIAL COST INCREASES
US Federal Government Corporate Income Tax Receipts                                       Commodity Price Changes, 2019
(billions of US dollars; 12-month moving total)                                           (percent change, US dollar basis)
400                                                                                       60





150                                                                                         0

                                                                                                                                      Iron Ore

                                                                                                               WTI crude







   1999   2001    2003    2005    2007    2009    2011   2013    2015    2017    2019
Shaded regions represent periods of US recession                                          Source: Bloomberg, Guardian Capital
Source: Bloomberg, Guardian Capital

                                                                                          Further, tight labour market conditions across the
Also having an undeniable impact was escalation of
                                                                                          globe have resulted in increased pressure on the
the trade conflict in 2019 between the US and China
                                                                                          combination of wages and benefits to which
which saw the implementation of tit-for-tat tariffs on
                                                                                          companies are having to commit to retain skilled
a broad range of imports — in addition to the US’s
                                                                                          workers, the other main input to production. While
broad duties on imports steel and aluminum.
                                                                                          this is a boon to employees, it is a strain on profits,
In contrast to the opinion of some policymakers,                                          especially given that gauges of consumer price
tariffs are not paid by the opposing governments,                                         inflation remain benign, suggesting limited pass-
but by the importer — meaning, for example, that                                          through onto end-clients.
the 50% rise in customs duty revenue for the US
                                                                                          CHART 13: WAGES GETTING A RAISE
government has come out of domestic business
                                                                                          G7 Employment Cost Index
profits.                                                                                  (year-over-year percent change)
US Federal Government Customs Duty Revenues                                               3.0
(billions of US dollars; 12-month moving total)



 50                                                                                       1.5

                                                                                                2001            2003                2005           2007              2009           2011         2013            2015        2017                2019
                                                                                          GDP-weighted average year-over-year change in employment cost indexes
                                                                                          Shaded regions represent periods of US recession
                                                                                          Source: Bloomberg, Guardian Capital
   1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Shaded regions represent periods of US recession

                                                                                          2020 vision
Source: Bloomberg, Guardian Capital

There are also other cyclical market factors at play.                                     Shifting gears from the year that was to the year to
Raw materials continue to be a key input to                                               come, the question is, what trends can be expected
production and the rise in commodity prices — the                                         to continue over the coming year?
S&P GS commodity price index rose 16% in 2019,                                            One development that appears likely to persist is the
with crude oil prices rising by a whopping 35% in the                                     positive top-line growth. Corporate revenue growth
year — increased the costs across a swath of                                              is highly tied to the economic cycle, and for the here

                                                                                                                                                                                                         Economic Outlook | 5
and now, it appears that a constructive underlying                                                                                                                                                                                                                This turn for the better echoes what has been
macro backdrop is poised to regain the driver’s seat.                                                                                                                                                                                                             playing out in other data, perhaps most notably the
                                                                                                                                                                                                                                                                  manufacturing purchasing managers’ indexes (PMI).
Global growth did indeed moderate again in 2019
(the International Monetary Fund estimates that                                                                                                                                                                                                                   The bellwether survey-based indicators caused
growth in the world’s aggregate gross domestic                                                                                                                                                                                                                    angst for economy-watchers in the summer of 2019,
product slowed to its slowest pace of expansion                                                                                                                                                                                                                   as they dipped into contractionary territory. The
since 2009s outright contraction). This slowdown,                                                                                                                                                                                                                 gauges of activity among goods producers,
however, did not morph into the economic downturn                                                                                                                                                                                                                 however, have turned the corner and are again
that many pundits were fretting — instead, the                                                                                                                                                                                                                    showing factories are expanding.
record-long expansion rolls on (now in its 127th
                                                                                                                                                                                                                                                                  CHART 16: MANUFACTURING ON THE MEND
                                                                                                                                                                                                                                                                  Manufacturing Purchasing Managers’ Index
                                                                                                                                                                                                                                                                  (diffusion index; >50 denotes expansion)
CHART 14: RECORD SET                                                                                                                                                                                                                                               60
Duration of US Economic Expansions
(months)                                                                                                                                                                                                                                                           55




 80                                                                                                                                                                                                                                                                                                                                               World

 40                                                                                                                                                                                                                                                                35
  0                                                                                                                                                                                                                                                                  2008   2009   2010   2011   2012   2013   2014   2015   2016   2017   2018    2019

















                                                                                                                                                                                                                                                                  Aggregated indexes are GDP-Weighted averages of country indexes
                                                                                                                                                                                                                                                                  Shaded region represents period of US recession
                                                                                                             Expansion Start                                                                                                                                      Source: Bloomberg, Guardian Capital
Source: National Bureau for Economic Research (NBER), Guardian Capital

                                                                                                                                                                                                                                                                  Furthermore, this improvement in factory growth
Moreover, there are increasing indications that last
                                                                                                                                                                                                                                                                  momentum has been broad-based. In December,
year may in fact mark a nadir for growth momentum.
                                                                                                                                                                                                                                                                  fully half of 34 countries’ manufacturing PMI tracked,
The composite leading indicator (a forward-looking
                                                                                                                                                                                                                                                                  were either at or above the growth break-even
gauge of economic trajectory based on activity data)
                                                                                                                                                                                                                                                                  threshold, which is the best breadth of growth since
for the 36 industrialized economies that comprise
                                                                                                                                                                                                                                                                  May and a marked improvement from the seven-
the Organisation for Economic Cooperation and
                                                                                                                                                                                                                                                                  year low share registered in July.
Development (OECD), and six other major emerging
economies, increased for the first time in two years,                                                                                                                                                                                                             CHART 17: TURNING THE CORNER
suggesting that the worst could be behind us.                                                                                                                                                                                                                     Countries with PMI Showing Manufacturing Expansion
                                                                                                                                                                                                                                                                  (percent of total)
CHART 15: BACK IN BLACK                                                                                                                                                                                                                                           100

OECD+ Composite Leading Economic Indicator
(month-over-month percent change)                                                                                                                                                                                                                                  80

0.8                                                                                                                                                                                                                                                                70



-0.2                                                                                                                                                                                                                                                               10

-0.4                                                                                                                                                                                                                                                                0
                                                                                                                                                                                                                                                                     2008   2009   2010   2011   2012   2013   2014   2015   2016   2017   2018    2019
-0.6                                                                                                                                                                                                                                                              Shaded region represents period of US recession
                                                                                                                                                                                                                                                                  Source: Bloomberg, Guardian Capital
    1974                     1979                    1984                   1989                      1994                           1999                    2004                   2009                      2014                         2019

Shaded regions represent periods of US recession
Source: OECD, Guardian Capital

                                                                                                                                                                                                                                                                                                                                Economic Outlook | 6
Of course, the manufacturing sector, despite the                                                                                                    Given that the main concern of households is their
ample attention it receives, accounts for just 15% of                                                                                               ability to provide for their families and meet their
the global economy. What matters even more is                                                                                                       financial obligations, it should come as no surprise
what is happening with the other 85% of the world’s                                                                                                 that consumers’ individual economic situations carry
output; on this score, the news continues to be                                                                                                     a huge impact on sentiment and willingness to
upbeat.                                                                                                                                             spend.

                                                                                                                                                    CHART 20: JOB MARKET BREEDS CONFIDENCE
Service sector purchasing managers’ indexes
                                                                                                                                                    US Consumer Confidence & Unemployment Rate
around the world closed 2019 with solid momentum                                                                                                    (index)                          (percent; inverted scale)
and remain firmly in growth territory, albeit at more                                                                                               150                                                                                3

modest levels than this time last year.                                                                                                             130                                                                                4

CHART 18: SERVICES STILL SOLID                                                                                                                      110

Global Purchasing Managers’ Index                                                                                                                   90

(diffusion index; >50 denotes expansion)                                                                                                                                                                                               7
 56                                                                                                                                                 70
                                                                           Composite            Services            Manufacturing
 55                                                                                                                                                 50
                                                                                                                                                                             Consumer Confidence (LHS)
                                                                                                                                                    30                                                                                 10
                                                                                                                                                                             Unemployment Rate (RHS)

                                                                                                                                                    10                                                                                 11
 53                                                                                                                                                   1987    1990   1993   1996   1999    2002    2005   2008    2011   2014   2017

                                                                                                                                                    Source: Bloomberg, Guardian Capital


                                                                                                                                                    Strong labour markets create a virtuous cycle, as
                                                                                                                                                    the increase certainty surrounding consumers’
   Jan-17               Jun-17             Nov-17             Apr-18              Sep-18           Feb-19           Jul-19                 Dec-19   employment (even if they were to lose their current
Source: Bloomberg, Guardian Capital
                                                                                                                                                    job, the market is such that there are ample
                                                                                                                                                    alternatives) is tied to increase spending, which, in
The key underpinning for this more significant chunk                                                                                                turn, stimulates further demand for labour.
of economic activity continues to be the strength of
job markets across the world. Unemployment rates                                                                                                    It is not coincidental that the growth of consumer
have trended lower globally and are almost                                                                                                          spending volumes has been firm even with the
universally at cycle lows — and testing historical                                                                                                  elevated uncertainty that prevailed. In fact, the
lows for the likes of the US, Canada, Japan and                                                                                                     measure of the volume retail sales across the 36
Germany.                                                                                                                                            member economies that comprise the OECD has
                                                                                                                                                    actually been accelerating through the end of 2019.
Unemployment Rate                                                                                                                                   CHART 21: SALES GROWTH STILL SAILING
(percent)                                                                                                                                           OECD Retail Sales Volumes
                                                                                                                               Latest               (year-over-year percent change of three-month moving average)
                                                                                                                               1-Year Ago
                                                                                                                               5-Years Ago
 18                                                                                                                                                   4
                                                                                                                               Cycle Peak










As at December 2019                                                                                                                                  -8
Source: Bloomberg, Guardian Capital                                                                                                                    1976   1980   1984   1988   1992    1996    2000   2004    2008   2012   2016

                                                                                                                                                    Shaded regions represent periods of US recession
                                                                                                                                                    Source: OECD, Bloomberg, Guardian Capital

                                                                                                                                                                                                                 Economic Outlook | 7
Fixing forecasts                                                                                                                                    provided a disproportionate drag on those
                                                                                                                                                    economies geared toward external markets, such as
These trends within the consumer sector raise an
                                                                                                                                                    those in Southeast Asia and Europe.
interesting point with respect to market expectations
for the coming year.                                                                                                                                CHART 23: TRADING PLACES
                                                                                                                                                    CPB World Trade Volumes Index
As it currently stands, real consumer spending                                                                                                      (year-over-year percent change of three-month moving average)
growth is trending at about a 2½% annual rate
among the OECD economies. Given that household
expenditures account for nearly two-thirds of gross                                                                                                  10

domestic product (GDP) for the group, that alone                                                                                                      5

would translate into a growth rate of 1.7%.                                                                                                           0


Interestingly, the current consensus forecasts for                                                                                                  -10

economic growth in 2020, for the aggregated                                                                                                         -15

Developed Markets, is actually just 1.5%. This                                                                                                      -20
represents a further moderation for the group, as                                                                                                      2001      2003    2005    2007    2009    2011    2013    2015    2017    2019

                                                                                                                                                    Shaded regions represent periods of US recession
rising capacity constraints (particularly in North                                                                                                  Source: Bloomberg, Guardian Capital
America) and demographic headwinds (Europe and
Japan) restrain growth; this is expected to be offset
                                                                                                                                                    The heightened uncertainty with respect to trade
by a pickup among Emerging Markets which are
                                                                                                                                                    policy has also greatly weighed on business
benefitting from more expansionary policies (such
                                                                                                                                                    sentiment and constrained capital expenditure.
as the huge slate of measures introduced in China
                                                                                                                                                    Growth in real fixed capital for the OECD was
to backstop their economy).
                                                                                                                                                    estimated to be less than 1% in 2019, which is
CHART 22: LOOKING FORWARD                                                                                                                           among the worst non-recessionary performances in
Real GDP Growth                                                                                                                                     the last sixty years.
(annualized percent change)
3.0                                                                   8                                                                             CHART 24: CAPEX CAPUT
                                                                      7                                                                             OECD Gross Fixed Capital Formation
                                                          2019        6                                                                             (year-over-year percent change)
                                                                                                                                  2020              10
2.0                                                                   5
                                                          2020                                                                                       8

0.5                                                                   1                                                                              0

                                                                      0                                                                              -2




                                                                                                                                     South Africa







Forecasts for 2020 are Bloomberg consensus forecasts
Source: IMF, Bloomberg, Guardian Capital                                                                                                            -10

                                                                                                                                                          1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
What this implies is that outside of consumer                                                                                                       Shaded regions represent periods of US recession
                                                                                                                                                    Source: OECD, Guardian Capital
spending, every other segment of the economy is
expected to contract on net. There is, of course,
valid reason for this view.                                                                                                                         Fortunately, though, there is scope for these areas
                                                                                                                                                    to play a bigger role in generating growth in the
The increasingly restrictive trade policies that have                                                                                               coming year, which would seemingly suggest that
come as a result of the trade war between the US                                                                                                    the balance of risks for the forecast would be to the
and China, have had an unambiguously negative                                                                                                       upside.
impact on the global flow of goods across borders.
There has been an outright collapse in the volumes
of imports and exports globally in 2019, which has

                                                                                                                                                                                                                Economic Outlook | 8
Clouds are parting                                                               European Union (EU) finally reaching a resolution.
                                                                                 While it is arguable that the direction may not be the
A couple of major developments at the end of 2019
                                                                                 most economically beneficial for Britons, the simple
have done a significant job in removing the clouds of
                                                                                 fact that a clear decision has been reached is a
uncertainty that have obscured the outlook.
                                                                                 welcome development for an economy that has
Most notably, the specter of an ever-escalating and                              been stuck on pause.
expanding trade war has been exorcised (or at least
                                                                                 Understandably, these developments have helped
warded off for now).
                                                                                 reduce the uncertainty that has been persistently
While the situation remains fluid, the US and China                              dominating the market narrative.
signed the first phase of a broader trade deal in
January. The agreement — which includes a pledge                                 CHART 26: OVERALL UNCERTAINTY EBBING
                                                                                 Global Economic Policy Uncertainty Index
by China to purchase more US-produced goods and                                  (index)
discussions on reforms in the areas of intellectual                              360

property, technology transfer and financial services                             320
                                                                                                                                                                 2016 US Election
— marks a significant de-escalation of tensions                                  280
between the world’s two largest economies.                                       240
                                                                                                                                       Lehman Brothers    S&P downgrades US
                                                                                                                                          bankruptcy         credit rating
And while the prevailing tariffs are largely left in                             200
                                                                                                                     Iraq War begins                             China yuan
                                                                                       Asian & Russian
place (the US’ 15% tariff on $112 billion worth of                               160
                                                                                        financial crises

Chinese exports was halved, but the 25% duty on                                  120

$250 billion remain; China’s duties unchanged), the                               80

fact that rates are not going higher, or on an                                    40
                                                                                                                                                    European sovereign debt crisis

                                                                                    1997     1999     2001        2003   2005     2007       2009     2011     2013     2015     2017   2019
expanded base as previously threatened, has let the                              Shaded regions represent periods of US recession
many exposed to the globally integrated supply                                   Source:, Bloomberg, Guardian Capital

chains, and their profit margins, take a tentative sigh
of relief.                                                                       The increased clarity provided should be supportive
                                                                                 of businesses pushing forward with previously
CHART 25: TRADE FEARS OFF THE BOIL                                               delayed capital projects — which would also help
US Categorical Policy Uncertainty Index
(index)                                                                          kick-start trade flows and benefit the export-oriented
2,000                                                                            economies that have struggled (like Germany).
                                             Trade Policy

                                             Fiscal Policy                       This is especially the case given the renewed easing
                                             Monetary Policy
                                                                                 of credit conditions across the world. Central banks
                                             National Security
1,200                                                                            have effectively pledged to keep policy extremely
                                             Sovereign Debt & Currency Crises
1,000                                                                            accommodative for the foreseeable future — while
                                                                                 the odds of further rate cuts from major central
                                                                                 banks may be diminishing, given the underlying

                                                                                 strength in the labour market, the lack of verve in
   0                                                                             inflation readings and ongoing uncertainties
    1997    2000     2003    2006     2009       2012            2015     2018
Shaded regions represent periods of US recession                                 removes any impetus for policymakers to raise
Source:, Bloomberg, Guardian Capital

As well, after three years of unrelenting indecision,
there is finally some clarity with respect to the Brexit
ordeal. The British Conservative Party’s decisive win
in the United Kingdom’s (UK) December election
sets the stage for the divorce between the UK and

                                                                                                                                                                Economic Outlook | 9
Gone for now, but not for good
CHART 27: DO NOT EXPECT MUCH                                                                                   With the falling likelihood of significant downside
OIS-Implied* Change in Policy Rates Over Next 12 Months
(basis points)
                                                                                                               risks to growth materializing in the near-term thanks
 80                                                                                                            to these recent developments, recession concerns
                                                            US Federal Reserve        Bank of Canada
 60                                                                                                            have largely evaporated and expectations have
                                                            Bank of England           European Central Bank
 40                                                                                                            started to shift for the better.

  0                                                                                                            CHART 29: LOSING INTEREST IN RECESSIONS
                                                                                                               Worldwide Google Search Interest for “Recession”
                                                                                                               (index; 100 = peak search interest)
-100                                                                                                           70
          30-Sep-18          31-Dec-18          31-Mar-19          30-Jun-19      30-Sep-19      31-Dec-19

*Difference between 12-month overnight index swap rate and policy rate                                         60
Source: Bloomberg, Guardian Capital                                                                            50


The monetary policy backdrop is also a factor
behind governments considering moving away from                                                                10

the post-crisis austerity — even politicians in                                                                 0
                                                                                                                 2004       2006   2008    2010    2012     2014      2016           2018      2020
traditionally tightfisted Germany have floated the                                                             Shaded regions represent periods of US recession
                                                                                                               Source: Google Trends, Guardian Capital
idea of expanding public investment and
                                                                                                               Analyst expectations for earnings growth have
Adding even a modicum of increased government
                                                                                                               improved, with the ratio of EPS upgrades-to-
spending — which has lagged behind overall global
                                                                                                               downgrades posting broad-based increases
growth over the last decade, resulting in its declining
                                                                                                               (meaning more upgrades/fewer downgrades).
role in the GDP add-up — on top of what appears to
be a constructive backdrop for households and                                                                  CHART 30: RATIOS REVISED
businesses would provide more upside potential.                                                                One-Month Analyst Earnings Per Share Revision Ratio
                                                                                                               (ratio of upgrades-to-downgrades)
CHART 28: AUSTERE GOVERNMENTS                                                                                  3.5
World Government Spending Share of GDP                                                                         3.0
(percent)                                                                                                                                                                       Europe

18.0                                                                                                           2.5

17.5                                                                                                           2.0
                                                                                                                                                                                Emerging Markets

17.0                                                                                                           1.5

16.5                                                                                                           1.0

16.0                                                                                                           0.5

15.5                                                                                                           0.0
                                                                                                                     2016           2017            2018                 2019

                                                                                                               Source: Bank of America Merrill Lynch, Guardian Capital

       1970   1974    1978     1982      1986     1990      1994    1998   2002    2006   2010   2014   2018   Consensus earnings forecasts for the global stock
Shaded regions represent periods of US recession
Source: World Bank, Guardian Capital                                                                           market suggest that the 2019’s stagnation will now
                                                                                                               give way to fairly robust growth in profits across the
                                                                                                               globe — the ACWI is expected to post double-digit
                                                                                                               EPS growth in each of the coming two years.

                                                                                                                                                                   Economic Outlook | 10
CHART 31: LOOKING FORWARD TO EARNINGS                                                                          On the trade front, the deal between the US and
MSCI All-Country World Index Earnings Per Share                                                                China is just the first step toward a more
(US dollars per share)
                                                                                                               comprehensive agreement between the two major
                                                                     Bloomberg consensus forecasts
                                                                                                               economies. With “Phase One” done, the focus will
                                                                                                               shift to “Phase Two” which can create ample
                                                                                                               headline risk — even though the US Administration
 25                                                                                                            has suggested it may delay negotiations until after
 20                                                                                                            the election in November.
 15                                                                                                            And on that topic, the US political environment itself
 10                                                                                                            is likely to be an increasing area of market
                                                                                                               uncertainty as the election approaches.
  1995    1997   1999   2001    2003    2005    2007   2009   2011     2013   2015     2017     2019    2021
Shaded regions are periods of US recession                                                                     Investors are averse to the prospect of change and
Source: Bloomberg, Guardian Capital
                                                                                                               the historic unpopularity of the current President
                                                                                                               would suggest the odds of the incumbent being
Now, while the shift in the narrative is undeniably                                                            voted out are far from immaterial — and that is even
positive, and the prospect of an improving macro                                                               discounting the likelihood that the Republican-held
backdrop supports earnings growth providing a                                                                  Senate removes the President from Office following
fundamental support to risk assets, it will not                                                                his impeachment by the House of Representatives.
necessarily be smooth sailing on calm seas.
                                                                                                               The only incumbent Commander in Chiefs with
For one, it is arguable that markets may be getting a                                                          lower approval ratings at the onset of an election
little ahead of themselves. The ratio of bullish-to-                                                           year were Truman in 1952 and Bush in 2008, and
bearish respondents to the Investors Intelligence                                                              both saw their parties lose the presidency and seats
sentiment survey has breached the threshold of                                                                 in both the Senate and the House in that year’s
excessive optimism that has long been associated                                                               election.
with near-term market pullbacks. Investors with
                                                                                                               CHART 33: POPULARITY CONTEST
elevated expectations often find themselves
                                                                                                               US Presidential Approval Ratings, Start of Election Year
disappointed, just as setting a low bar can lead to                                                            (percent)
pleasant surprises.                                                                                             80

Investors Intelligence Bull-Bear Ratio
(ratio of “bullish” respondents to “bearish”)                                                                   50


                                                  Extreme Optimism

  4                                                                                                             20
                                                                                                                                                                                                                                                                                                                                                             Obama (2012)

                                                                                                                                                                                                                                                                                                                                                                            Obama (2016)


                                                                                                                                                                                                                   Ford (1976)

                                                                                                                                                                                                                                                 Reagan (1984)

                                                                                                                                                                                                                                                                 Reagan (1988)

                                                                                                                                                                                                                                                                                                                                                                                           Trump (2020)
                                                                                                                                                                                                                                                                                 Bush (1992)

                                                                                                                                                                                                                                                                                                                                 Bush (2004)

                                                                                                                                                                                                                                                                                                                                               Bush (2008)
                                                                                                                                                                  Johnson (1964)

                                                                                                                                                                                   Johnson (1968)

                                                                                                                                                                                                    Nixon (1972)
                                                                                                                     Truman (1948)

                                                                                                                                     Truman (1952)

                                                                                                                                                                                                                                                                                               Clinton (1996)

                                                                                                                                                                                                                                                                                                                Clinton (2000)
                                                                                                                                                                                                                                 Carter (1980)



                                                                                                               Source: The Presidency Project,, Guardian Capital

                                                  Extreme Pessimism

                                                                                                               Interestingly, though, markets have historically not
   2007   2008   2009    2010    2011    2012     2013   2014    2015     2016    2017        2018     2019
                  Bear Market                      Corrections                       II Bull-Bear
                                                                                                               proven to be overly impacted by the shifting of what
Source: Investors Intelligence, Wall Street Journal, Guardian Capital                                          party holds the Executive Office, not to mention
                                                                                                               there has not been much of a discernable
                                                                                                               preference for either major American political party.
On top of that, those main risks to the outlook over
                                                                                                               Instead, the bigger determinant of weak market
the last couple of years may have subsided but they
                                                                                                               performance during a presidential term is the
are far from gone.
                                                                                                               presence of a recession, the seeds of which are
                                                                                                               typically sown well before a president’s term begins.

                                                                                                                                                                                                                                                                                               Economic Outlook | 11
CHART 34: PRESIDENTIAL PERFORMANCE                                                                                                                                                                                         These bumps, however, do not look likely to knock
S&P 500 Performance by US Presidential Term                                                                                                                                                                                the market off its tracks, setting the stage for further
(index; logarithmic scale)
                                                                                                                                                                                                                           positive performance for risk assets — though
                                                                                                                                                                                                                           hopes of a repeat of 2019’s outsized and broad-

                                                                                                                                                                                                               Trump (R)
                                                                                                                                                               Bush (R)
        Coolidge (R)

                                                                                                                                                                                                                           based performance should be tempered.

                                                                                                                                                                                                   Obama (D)
                                                                                                                                                                                        Bush (R)
                                                                                                                                                                          Clinton (D)

                                                                                  Kennedy (D)
                                                                                                                                                                                                                           One area where the probability of a retread of last

                                                                                                                                     Carter (D)
                                                                                                              Nixon (R)
                                                                                                                                                                                                                           year seems lowest at the moment, would be in the

                                                                                                                                                  Reagan (R)
                                                    Truman (D)
                       Hoover (R)

                                    Roosevelt (D)

                                                                                                                                                                                                                           bond market. Fixed income securities benefited
                                                                                                Johnson (D)

                                                                                                                          Ford (D)
                                                                                                                                                                                                                           considerably from the renewed downdraft in market
                                                                 Eisenhower (R)

                                                                                                                                                                                                                           interest rates that saw yields retest their lows and
                                                                                                                                                                                                                           curves flatten (and invert).
    1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 2018
Shaded regions represent periods of US recession
Source: Bloomberg, Guardian Capital                                                                                                                                                                                        CHART 35: THE LOWDOWN ON RATES
                                                                                                                                                                                                                           10-Year Sovereign Bond Yields
Domestic political risks are not exclusive to the US.                                                                                                                                                                      3.5
                                                                                                                                                                                                                                      US          Canada         UK
Countries across the world are seeing increased                                                                                                                                                                            2.5
                                                                                                                                                                                                                                      Germany     Japan

civil unrest, with mass protests in the likes of Hong                                                                                                                                                                      2.0

Kong, India, the Middle East and South America —                                                                                                                                                                           1.5

with leaders in Iraq and Bolivia stepping down in                                                                                                                                                                          1.0

reaction.                                                                                                                                                                                                                  0.5

The prime minister also resigned in Russia as
President Vladimir Putin seeks constitutional
amendments, which may allow the long-time leader                                                                                                                                                                               2015        2016           2017        2018   2019       2020    2021

                                                                                                                                                                                                                           Forecasts are Bloomberg consensus forecasts as at January 17, 2020
to maintain power once his term ends in 2024.                                                                                                                                                                              Source: Bloomberg, Guardian Capital

As well, the Brexit ordeal is far from over. Once the
                                                                                                                                                                                                                           As mentioned, rate cut expectations have
divorce is made official at the end of January, the
                                                                                                                                                                                                                           diminished against the improving backdrop, and with
clock begins ticking on the end transition period that
                                                                                                                                                                                                                           them, yields on government bonds backed up in the
runs until December 31, 2020. That means, the UK
                                                                                                                                                                                                                           final months of 2019. Importantly, though, yields
has 11 months to reach a comprehensive trade
                                                                                                                                                                                                                           remain at historically low levels, and market
agreement with the EU or it faces a “hard” Brexit
                                                                                                                                                                                                                           expectations for the coming 12 months are not for a
                                                                                                                                                                                                                           material break higher.
Finally, geopolitical tensions in the Middle East are
                                                                                                                                                                                                                           That means they offer meager returns for investors
never far from mind. While the conflict between Iran
                                                                                                                                                                                                                           looking to buy and hold, while also providing little
and the US escalated rapidly, it has subsequently
                                                                                                                                                                                                                           cushion for performance in the event yields in fact
simmered — but the last on this file has yet to be
                                                                                                                                                                                                                           drift higher (as is market consensus).
                                                                                                                                                                                                                           The upside in rates is likely to be capped by some
                                                                                                                                                                                                                           market forces. First, there remains ample demand
Forward thinking                                                                                                                                                                                                           for the safety provided by government bonds in a
This is all to say that while the macroeconomic                                                                                                                                                                            market environment still replete with risk —
fundamentals look to be constructive at the moment,                                                                                                                                                                        Bloomberg data shows that government bond funds
the road to the end of the year will likely be a bumpy                                                                                                                                                                     took in $29 billion in net new flows in 2019, equal to
one given the preponderance of risk events that litter                                                                                                                                                                     9% of total flows and the second highest tally on
the political landscape over the next 12 months.                                                                                                                                                                           record behind 2018.

                                                                                                                                                                                                                                                                                    Economic Outlook | 12
CHART 36: FUNDS STILL FLOWING TO TREASURIES                                                                               and high yield debt still provide an ample yield
Government Bond ETF Fund Flows                                                                                            premium — and offer potential for spreads to tighten
(billions of US)                                                                                        (percent)
60                                                                                                                   30
                                                                                                                          further against the more sanguine economic outlook.
               Government bond fund flows (LHS)
50                                                                                                                   25
                                                                                                                          CHART 38: LOWER STILL
               % of total ETF fund flows (RHS)
40                                                                                                                   20   Global Bond Index Yields
30                                                                                                                   15   500
20                                                                                                                   10
                                                                                                                                                                                        Investment Grade
10                                                                                                                   5                                                                  High Yield

    0                                                                                                                0    300

-10                                                                                                                  -5
        2006    2007   2008   2009     2010    2011    2012   2013    2014   2015       2016    2017   2018   2019        200
Source: Bloomberg, Guardian Capital                                                                                       150


Second, central banks remain a big influence. Policy                                                                       50

rates may not be expected to go much lower for                                                                              0
                                                                                                                             2001   2003   2005   2007   2009   2011    2013     2015   2017     2019

now, but there is effectively zero anticipation that                                                                      Shaded regions represent periods of US recession
                                                                                                                          Source: Bloomberg, Guardian Capital
central bankers will take rate targets higher over the
next 12 months. As well, central bank balance
sheets are continuing to expand. This expansion is                                                                        Further, with respect to a yield premium, the flatness
thanks to the Bank of Japan’s ongoing asset                                                                               of the yield curve means that the bond market offers
purchase program being supplemented by the                                                                                effectively no premium for holding long duration debt
restarting of bond buying by the European Central                                                                         which is, by definition, more sensitive to a rise in
Bank, and the US Federal Reserve no longer                                                                                market yields.
allowing its holdings to run-off.                                                                                         To that end, corporate bonds have a lower duration
                                                                                                                          which, combined with the comparatively higher yield,
CHART 37: PLENTY OF POLICY SUPPORT                                                                                        means these fixed income securities provide more
         Central Bank Policy Rates                                   Central Bank Balance Sheets                          insulation against any potential rise in rates.
                  (percent)                                              (trillions of US dollars)
7                                                             16
                                                                                                                          CHART 39: LESS CUSHION FOR THE PUSHIN’
                                     Federal Reserve                    Bank of England

                                     Bank of Canada                     European Central Bank
6                                                             14
                                     European Central Bank              Bank of Japan
                                                                                                                          Ratio of Global Bond Index Yields to Duration*
                                     Bank of England                    Federal Reserve
5                                                             12                                                          (basis points)
4                                                             10

3                                                              8                                                                                                                        Investment Grade
2                                                              6                                                                                                                        High Yield

1                                                              4                                                           15

0                                                              2

-1                                                             0
  1999     2003        2007     2011       2015        2019     2008    2010    2012       2014    2016   2018

Shaded regions represent periods of US recession
Source: Bloomberg, IMF, Guardian Capital

So, for the here and now, rates are not expected to                                                                         0
                                                                                                                             2001   2003   2005   2007   2009   2011    2013     2015   2017     2019

move too much one way or the other.                                                                                       *Measure of the increase of yields required to wipe out 12-month bond carry
                                                                                                                          Shaded regions represent periods of US recession
                                                                                                                          Source: Bloomberg, Guardian Capital
As such, it appears that what you see is what you
get for the bond market, with baseline performance                                                                        Of course, while corporate bond issues may have
expectations to resemble the coupon on offer.                                                                             lower interest rate risk, they do have comparatively
                                                                                                                          higher exposure to credit risk — and developments
On this score, government bonds look less attractive
                                                                                                                          here provide reason for some caution.
than those in the corporate space. Investment grade

                                                                                                                                                                               Economic Outlook | 13
Corporate credit outstanding globally has doubled                                                                         year was concentrated among issuers in the US
over the last decade, but the average credit quality                                                                      commodity space and overall levels remain
of that debt has deteriorated — the share of debt                                                                         historically low.
that is at least “A”-rated has declined from more
                                                                                                                          CHART 42: DEFAULT SETTINGS
than 60% to 40% over those ten years.
                                                                                                                          High Yield Corporate Bond Default Rate
CHART 40: DECLINING QUALITY                                                                                                30
Global Corporate Credit Outstanding* by Rating
                                                                                                                                                                                                        US ex. Commodities
(trillions of US dollars)                                                                              (percent)           25
14                                                                                                                   70
                                                                                                                                                                                                        Emerging Markets
12                                                                                                                   65

10                                                                                                                   60    15

 8                                                                                                                   55

 6                                                                                                                   50
 4                                                                                                                   45

 2                                                                                                                   40     0
                                                                                                                             1999   2001    2003    2005     2007      2009     2011      2013       2015      2017    2019

 0                                                                                                                   35   Shaded regions represent periods of US recession
  2001         2003        2005       2007     2009       2011            2013      2015      2017         2019           Source: Bank of America Merrill Lynch, Guardian Capital
         Aaa          Aa          A      Baa          High Yield           Share of debt rated "A" or higher (RHS)

*Based on market value of Bloomberg Barclays Global Bond Indexes
Source: Bloomberg, Guardian Capital                                                                                       The outlook does, however, remain constructive for
                                                                                                                          credit — improving earnings growth and sustained
The increased prevalence of lower quality debt is                                                                         low interest rates should limit the odds of an
made even more disconcerting given that there are                                                                         imminent credit crunch in the near-term.
some nascent signs that these more vulnerable
                                                                                                                          At the same time, the global hunt for high coupon
issuers are feeling pressure. Corporate bonds
                                                                                                                          payments has drawn plenty of investors into the less
across the globe have been experiencing more
                                                                                                                          creditworthy and less liquid segments of the bond
downgrades than upgrades of late from the ratings
                                                                                                                          market, and put considerable downward pressure on
                                                                                                                          yields. That raises the question as to whether there
CHART 41: DOWNGRADED RATINGS                                                                                              is adequate compensation for taking on the higher
Ratio of S&P Credit Ratings Upgrade-to-Downgrades                                                                         degree of risk — something that is echoed in the tilt
(ratio)                                                                                                                   in relative value favouring the higher quality
                                                                                                  US                      Investment Grade debt over High Yield.
                                                                                                  South America           CHART 43: QUALITY OVER QUANTITY OF YIELD
                                                                                                  Europe                  Global High Yield Index Spread Over Investment Grade
                                                                                                                          (basis points)

1.5                                                                                                                       1000

                                                                                                                                                                              Investment Grade relatively expensive
   2011         2012         2013       2014      2015             2016          2017      2018        2019               600

Source: Bloomberg, Guardian Capital

Moreover, global bond default rates have been                                                                                                                                    High Yield relatively expensive

moving higher since hitting record lows early in                                                                            0
                                                                                                                             2001    2003    2005     2007      2009      2011         2013      2015        2017     2019
2019. Importantly, though, the uptick through last                                                                        Dashed line represents series’ average; solid bars +/-1 standard deviation
                                                                                                                          Shaded regions represent periods of US recession
                                                                                                                          Source: Bloomberg, Guardian Capital

                                                                                                                                                                                              Economic Outlook | 14
The argument for equities                                                                                                                                                             There is variation across regional markets but
                                                                                                                                                                                      broadly improved earnings expectations for the
Even after the strong performance of not only the
                                                                                                                                                                                      coming 12 months leave forward P/E ratios well
last year but also the last decade that has markets
                                                                                                                                                                                      within the realm of normal — though valuations
at unprecedented levels, stocks still look to be the
                                                                                                                                                                                      appear more stretched in the US (and thus less
best game in town given the current market
                                                                                                                                                                                      likely to provide a boost to returns); Europe,
                                                                                                                                                                                      Australasia & the Far East (EAFE), Canada and
On a relative value basis, global equities still appear                                                                                                                               Emerging Markets look relatively more compelling.
to be the comparatively inexpensive versus bonds,
                                                                                                                                                                                      This is echoed when taking expected earnings
which speaks to a continued preference to tilt
                                                                                                                                                                                      growth into consideration, given that higher multiples
balanced portfolio exposures in their directions (and
                                                                                                                                                                                      can be justified when profits are growing rapidly. On
being commensurately underweight fixed income).
                                                                                                                                                                                      a P/E-to-growth basis, equity markets overall do not
CHART 44: THEORY OF RELATIVITY                                                                                                                                                        yet appear to be overpaying for the improved
MSCI AWCI Forward Earnings Yield-to-Global Bond Yield                                                                                                                                 outlook, with relative value opportunities most
(ratio)                                                                                                                                                                               notable in Europe and Emerging Markets.

  5                                                                                                                                                                                   CHART 46: ROOM FOR GROWTH
                                                                                                                                                                                      MSCI Country Index Forward P/E-to-Growth Ratio
  4                                                                                                                                                                                   (ratio)

                                                                                                                                       Bonds relatively expensive                     2.0

                                                                                                                                                                                                      Fair Value
                                                   Stocks relatively expensive
  0                                                                                                                                                                                   0.5
   1995        1997      1999         2001                     2003            2005           2007             2009       2011        2013        2015       2017      2019
Dashed line represents pre-crisis average; bars +/-1 standard deviation
Shaded regions represent periods of US recession



                                                                                                                                                                                                                                                                               Emerging Markets

                                                                                                                                                                                                                                                                                                  Asia Ex. Japan

                                                                                                                                                                                                                       South Korea


Source: Bloomberg, Guardian Capital

Stocks continue to look attractive on an absolute                                                                                                                                     Source: Bloomberg, Guardian Capital
basis too. Even with the multiple-driven gains of
2019, valuations for global stocks are still in fairly
middling territory relatively to their own histories                                                                                                                                  Of course, it is understandable that investors would
since the turn of the millennium.                                                                                                                                                     embed a higher risk premium on the more buoyant
                                                                                                                                                                                      growth prospects overseas given the lower earnings
CHART 45: VALUE PROPOSITION                                                                                                                                                           visibility and higher volatility in the regions.
MSCI Country Index Forward P/E Ratio
(standard deviations from 20-year average)                                                                                                                                            As well, it is notable that looking at valuation on this
                                                                                                                                                                                      basis would suggest that markets in Canada and
                                                                                                                                                                                      Japan are on the cheap side of history with good
1.0                                                                                                                                                                                   reason, given their less upbeat profit forecasts.
                                                                                                                                                                                      Finally, equities even provide appeal over bonds for
                                                                                                                                                                                      the more income-minded investors. The dividend
                                                                                                                                                                                      yield offered on domestic stock market indexes is at
                                                                                                                                                                                      least as good as the 10-year government bond yield



                                            Emerging Markets

                                                                                      Asia Ex. Japan



                                                                 South Korea
                                Hong Kong



                                                                                                                                                                                      across the G7 economies and that is not even
                                                                                                                                                                                      adopting an explicit concentration on companies that
Source: Bloomberg, Guardian Capital                                                                                                                                                   pay above average dividends.

                                                                                                                                                                                                                                                                                                            Economic Outlook | 15
CHART 47: OVER AND ABOVE                                                                   Crude oil prices have similarly benefited from the
MSCI Index Dividend Yield v. 10-Year Sovereign Bond Yield                                  expectations of firming global demand, though they
(basis points)
450                                                                                        have largely just moved to the higher end of the
400                                                                                        recent trading ranges.

300                                                                                        CHART 49: STILL RANGE-BOUND
250                                                                                        Benchmark Crude Oil Prices
200                                                                                        (US dollars per barrel)
150                                                                                        120
                                                                                                                                                        WTI           Brent          WCS

          UK      Germany          Italy      France      Japan      Canada       US
As at January 17, 2020
Source: Bloomberg, Guardian Capital


Complex Commodities                                                                          0
                                                                                              2014            2015             2016              2017          2018           2019

The turn for the better in the economic outlook has                                        Source: Bloomberg, Guardian Capital

also had positive repercussions throughout the
commodity complex as well.                                                                 The main reason for this is that unlike metals,
Indeed, the combination of signs of improving                                              stockpiles of crude oil and equivalents remain
factory activity, rising capacity constraints, low                                         elevated, with commercial inventories across the
interest rates, and now easing trade tensions, has                                         OECD remaining above their five-year averages and
been supportive of the natural resource sectors                                            near historical highs in absolute terms.
which remain highly levered to the economic cycle.
                                                                                           CHART 50: UNBALANCED ACT
Industrial commodities in particular have been lifted                                        Excess* OECD Crude Oil Stocks                               OECD Crude Oil Inventories
                                                                                                   (millions of barrels)                                     (billions of barrels)
by signs that demand is slated to pick up at a time                                        500                                                    3.2

when inventories for most base metals have been                                            400                                                    3.1

pared back to their lowest levels of the cycle.                                            300

CHART 48: METALS FINDING A BASE                                                                                                                   2.8
London Metal Exchange Warehouse Stocks                                                                                                            2.7
(millions of metric tonnes)                                                                  0
1.4                                                                                    6
                                                                      Copper               -100
                                                                                       5   -200                                                   2.4
1.0                                                                                        -300                                                   2.3
                                                                                       4       2000   2003   2006    2009   2012   2015   2018       1995     2000     2005   2010     2015
0.8                                                                                        *Inventory levels relative to five-year average for a given month
                                                                      Aluminum (RHS)   3   Shaded regions represent periods of US recession
0.6                                                                                        Source: US Department of Energy, Guardian Capital
                                                                                           This abundance of supply of crude oil comes despite
                                                                                           the Organization of Petroleum Exporting Countries
   2010    2011   2012      2013       2014   2015     2016   2017    2018     2019
                                                                                       0   (OPEC) paring production. The cartel and Russia
Source: Bloomberg, Guardian Capital                                                        agreed to a further 500,000 barrel per day in
                                                                                           production cuts in December, and these curbs are
                                                                                           expected to stay in place for the coming year — as
                                                                                           output gains elsewhere (namely the US and, to a
                                                                                           lesser extent, Canada) have kept pipelines full.

                                                                                                                                                                     Economic Outlook | 16
CHART 51: LESS IN THE PIPELINES                                                                 Such a reduction in geopolitical tensions would also
Crude Oil Production                                                                            weigh on prices for gold. The precious metal, which
(millions of barrels per day)
 14                                                                                             is viewed as a traditional safe haven and has limited
                         US                      Russia                   Saudi Arabia

                         Canada                  Iran                     Venezuela             industrial use, has experienced a perfect storm of
                                                                                                factors (namely elevated market volatility and
                                                                                                renewed low interest rates) that have helped prices
                                                                                                break out their highest levels since the heights of the
 6                                                                                              European sovereign debt crisis in 2013.
                                                                                                CHART 53: GOING FOR GOLD
 2                                                                                              Spot Gold Price
                                                                                                (US dollars per troy ounce)
  2000     2002   2004   2006      2008   2010      2012         2014    2016      2018         2,000
Shaded regions represent periods of US recession
Source: Bloomberg, Guardian Capital                                                             1,800


The supply and demand dynamics have been                                                        1,400

keeping a lid on oil prices even with the rising
tensions in the Middle East. The recent
developments related to Iran (not to mention the
bombing of the Saudi pipeline in September 2019)                                                 800

have had an effect on spot prices, but carry limited                                             600
                                                                                                    2007     2009       2011      2013      2015        2017    2019
impact on term prices as the futures curve remains                                              Shaded region represents period of US recession
                                                                                                Source: Bloomberg, Guardian Capital
firmly in backwardation (meaning that futures prices
are below those in the spot market).

WTI Crude Oil Price Futures Curve
(US dollars per barrel)                                                                         New Year, High Resolution

                                                                                                Putting it all together, the bottom line is that the chief
                                                                               3-month ago
 57                                                                                             risks that have hampered activity for much of the
                                                                               1-year ago
 56                                                                                             last few years are moving to the backburner (at least
 55                                                                                             for a little bit), and with that, the focus can return to
 54                                                                                             the fundamentals driving underlying growth.
                                                                                                On this score, the developments in recent months
                                                                                                have been encouraging, with the dataflow pointing

                                                                                                to activity stabilizing across the globe, that is helping
         Spot     2020          2021      2022            2023          2024             2025
                                                                                                to push concerns about an imminent collapse of the
As at January 17, 2020
Source: Bloomberg, Guardian Capital                                                             global economy to the wayside — indeed, there are
                                                                                                even signs that a nascent pickup in growth is
This term structure is a sign that while there is risk of                                       gaining traction (albeit, a modest one).
supply disruptions, the abundance of capacity                                                   Add to that the likelihood that central bank
means that any impact will only be temporary,                                                   policymakers will continue to err on the side of
providing an anchor for near-term pricing. And note                                             caution (by keeping monetary conditions highly
too, that this also suggests that the markets are                                               accommodative) and the outlook for the coming
pricing in a disruption; should cooler heads prevail                                            months appears to be constructive for corporate
and the conflict between the US and Iran get                                                    earnings. This positive market environment should
defused, that would result in downward pressure on                                              underpin another year of decent performance for
crude prices.                                                                                   risk assets.

                                                                                                                                                   Economic Outlook | 17
That said, hopes for a repeat of 2019’s outsized
performance should be tempered. The likely road to
the end of the year will have more than a few bumps
on it given the preponderance of risk events that
litter the political landscape over the next 12 months.
Accordingly, maintaining a focus on quality in
exposures, rather than just trying to ride market
momentum, may prove prudent to help balance out
the myopia (near-term optimism) and hyperopia
(longer-term concerns) of investors’ 2020 visions.

    Equities         +         Fixed Income          —

     Equity        Neutral    Government Bonds       —

   US Equity         +              Credit           +

  EAFE Equity        +         High-Yield Credit   Neutral

     Markets         +

                                                             Economic Outlook | 18
Market Returns at December 31, 2019 All returns in Cdn $.
CANADIAN EQUITIES                                                                        US EQUITIES
 INDEX RETURNS (%)                        1 Mo 3 Mos       YTD    1 Yr    5 Yrs 10 Yrs    INDEX RETURNS (%)              1 Mo 3 Mos    YTD    1 Yr   5 Yrs 10 Yrs

 S&P/TSX Composite                         0.5     3.2    22.9     22.9    6.3     6.9    S&P 500                         0.6    6.8   24.8   24.8   14.2   16.0

 S&P/TSX 60                                -0.1    2.4    21.9     21.9    6.7     7.0    Dow Jones Industrial Average   -0.5    4.5   19.0   19.0   15.1   15.9

 S&P/TSX Completion                        2.3     5.8    26.1     26.1    5.0     6.7    NASDAQ                          1.1    9.9   28.4   28.4   16.2   17.2

 S&P/TSX SmallCap                         5.4     6.2      15.8   15.8     3.2     3.1    Russell 1000                    0.4    6.8   24.8   24.8   14.0   16.0

 BMO Small Cap Blended (Weighted)         5.4     6.3     19.2    19.2     3.9     4.7    Russell 2000                    0.4   7.7    19.2   19.2   10.7   14.2

 S&P/TSX Composite High Dividend           1.4     4.0    25.8    25.8     5.8     8.2    Russell 3000                    0.4    6.9   24.4   24.4   13.7   15.9

 S&P/TSX Composite Dividend                0.0     2.4    21.7     21.7    6.9    N/A     Russell 1000 Growth            0.6     8.3   29.5   29.5   17.2   17.7

                                                                                          Russell 1000 Value              0.3    5.2   20.1   20.1   10.7   14.2

S&P/TSX SECTOR RETURNS (%)                                                               S&P 500 SECTOR RETURNS (%)

 Communication Services                    -1.5    0.9    13.0    13.0    8.8     13.0    Communication Services         -0.3    6.9   26.3   26.3   10.4   12.0

 Consumer Discretionary                   -3.4     -2.3   15.3     15.3    5.3    12.0    Consumer Discretionary          0.5    2.5   21.8   21.8   15.7   19.7

 Consumer Staples                         -5.0     -3.9   14.4    14.4    8.7     15.0    Consumer Staples                0.1    1.5   21.5   21.5   10.8   14.6

 Energy                                    6.3     7.1    21.7    21.7    -0.7     0.6    Energy                          3.6   3.5    6.5    6.5    0.4     5.6

 Financials                                -2.5    1.0    21.4     21.4    8.8    10.4    Financials                      0.4    8.3   25.8   25.8   13.7   14.7

 Health Care                              1.4     -5.9    -10.9   -10.9 -28.8      1.9    Health Care                    1.2    12.2   15.0   15.0   12.8   17.3

 Industrials                              0.5     5.2     25.5    25.5     9.9    14.2    Industrials                    -2.3    3.5   23.2   23.2   12.0   15.9

 Information Technology                   3.2     10.8    64.9    64.9    21.5     7.2    Information Technology          2.1   12.2   43.1   43.1   22.9   20.1

 Materials                                4.9      7.8    23.8    23.8     6.2    -0.6    Materials                       0.7    4.3   18.6   18.6    9.5   11.5

 Real Estate                              -2.5    -2.4    22.6    22.6    10.2    13.4    Real Estate                    -1.0   -2.4   22.8   22.8   12.6   13.2

  Utilities                               -0.1    2.0     37.5    37.5    9.5      8.7    Utilities                       1.1   -1.2   20.3   20.3   12.8   14.2

INTERNATIONAL EQUITIES                                                                   INTERNATIONAL EQUITIES
 INDEX RETURNS (%)                        1 Mo 3 Mos       YTD    1 Yr    5 Yrs 10 Yrs    MSCI EAFE SECTOR RETURNS (%)   1 Mo 3 Mos    YTD    1 Yr   5 Yrs 10 Yrs

 MSCI World Index (Net, C$)                0.6     6.3    21.2     21.2   11.2    11.8    Communication Services         -0.5    2.6   7.0    7.0     3.7    6.7

 MSCI EAFE Index (Net, C$)                 0.8     5.9    15.8    15.8     8.1     7.8    Consumer Discretionary          0.5    7.1   18.5   18.5    8.0   10.4
 MSCI ACWI (C$)                            1.1     6.7    20.2    20.2    10.8    11.1    Consumer Staples               -0.3   -0.2   12.9   12.9    9.2   10.4

 MSCI France (C$)                          0.5    6.3     19.4    19.4    10.6     7.3    Energy                          1.1   1.7    2.2    2.2     7.0    3.6

 MSCI Germany (C$)                        -0.5    7.6     14.7    14.7     6.2     7.5    Financials                      1.9   6.2    11.8   11.8    5.2    5.6

 MSCI Japan (C$)                          -0.3     5.4    13.6    13.6    10.1     8.9    Health Care                     1.0   10.1   24.1   24.1    9.2   11.4

 MSCI U.K. (C$)                            2.7    7.7     14.9    14.9     5.6     7.3    Industrials                    -0.1   7.7    19.8   19.8   10.6    9.7

 S&P/IFC Investable (Emerging Markets)     4.7    9.1     12.1    12.1     8.7     6.7    Information Technology          1.1   10.3   30.7   30.7   14.4   10.8

 MSCI EAFE Growth (Gross, C$)              0.4     6.2    21.9    21.9    10.6     9.7    Materials                       2.1   8.2    16.7   16.7    9.4    5.1

 MSCI EAFE Value (Gross, C$)               1.2    5.7     10.9    10.9     6.5     6.8    Real Estate                    -0.4    2.1   9.0    9.0    N/A     N/A

                                                                                          Utilities                       2.5    3.1   13.2   13.2    7.5    4.2
Sources: Bloomberg Finance L.P., FTSE Bond Analytics, TD Securities, Thomson Financial

Market Returns at December 31, 2019 All returns in Cdn $.
CANADIAN FIXED INCOME                                                                    COMMODITY
 INDEX RETURNS (%)                        1 Mo 3 Mos      YTD     1 Yr    5 Yrs 10 Yrs                                        1 Mo 3 Mos    YTD    1 Yr    5 Yrs 10 Yrs
 FTSE Canada 91 Day TBill                  0.1     0.4     1.6     1.6     0.9     0.9    Bloomberg WTI Cushing Crude Oil     8.1    10.6   27.7   27.7    5.1    -0.5
                                                                                          Spot Price
 FTSE Canada Short Term Overall Bond      -0.2     0.1     3.1     3.1     1.7     2.4
                                                                                          Bloomberg European Dated Brent                    18.6
                                                                                          BFOE Price                          5.7    8.7           18.6    5.9    0.6
 FTSE Canada Mid Term Overall Bond        -1.1     -1.1    5.8     5.8     3.0     4.6

 FTSE Canada Long Term Overall Bond       -2.5     -1.9   12.7    12.7     5.2     7.1    Edmonton Crude Oil Syncrude Sweet
                                                                                          Blend FOB Spot                      10.1   10.6   37.2   37.2    5.9    -0.9
 FTSE Canada Universe Bond                -1.2    -0.9     6.9     6.9     3.2     4.3    S&P GSCI Nat Gas Index Spot         -6.3   -8.0   -29.3 -29.3    -3.3   -6.9
 FTSE Canada High Yield Overall Bond       0.3     1.4     8.5     8.5     6.5     6.7
                                                                                          S&P GSCI Copper Index Spot          2.8    5.7    -1.9   -1.9    1.7    0.4
 FTSE Canada Real Return Bond Overall     -1.5    -2.0    8.0      8.0     2.8     4.3
                                                                                          S&P GSCI Gold Index Spot            1.0     1.3   12.9   12.9    7.5    5.6

 FTSE Canada Federal Bond                 -1.1    -1.1     3.7     3.7     2.0     3.1

 FTSE Canada Provincial Bond              -1.8    -1.3    9.1     9.1      4.0     5.3   CURRENCY
 FTSE Canada All Corporate Bond           -0.5     0.1     8.1     8.1     3.8     4.9                                        1 Mo 3 Mos    YTD    1 Yr    5 Yrs 10 Yrs

                                                                                          Canadian $/US $ (% chg)             -2.4   -2.1   -5.1    -5.1   2.3    2.2

GLOBAL FIXED INCOME                                                                       Canadian $/Yen (% chg)              -1.6   -2.6   -4.1   -4.1    4.2    0.6
 INDEX RETURNS (%)                        1 Mo 3 Mos      YTD     1 Yr    5 Yrs 10 Yrs    Canadian $/GBP (% chg)              0.0    5.3    -1.2   -1.2    -1.0   0.2
 FTSE World Government Bond               -2.1    -2.4     0.5    0.5      4.3     4.1
                                                                                          Canadian $/Euro (% chg)             -0.6   0.8    -6.8   -6.8    0.7    -0.3

GOVERNMENT OF CANADA YIELD CURVE                                                         US TREASURY YIELD CURVE

Sources: Bloomberg Finance L.P., FTSE Bond Analytics, TD Securities, Thomson Financial

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