Equity markets appear to be taking a breather as we move from early to mid-cycle in the post-COVID recovery, with market participants trying to figure out what that means and where we go from here. Many are wondering if we have seen peak earnings and peak growth, and if the rise of the variant will cause another shutdown.
You can see this in the muted reaction to some recent impressive quarterly earnings reports in the United States, with some high expectations already priced into share prices. And then investors hit the panic button on Monday, taking the S&P 500 and S&P TSX down to 3.5 per cent from its recent high, while the Canadian dollar has now lost all of its gains and is now flat on the year.
During these times its important to remember that markets don’t always go up and near-term volatility doesn’t necessarily imply that a looming meltdown is on the horizon. For example, did you know that we’ve counted that the S&P 500 has fallen more than two per cent eight times this year alone?
However, market corrections are quite common and can actually be quite healthy as they flush out those participants on the margin (excuse the pun) without the wherewithal to stand by their longer-term convictions. In that regard, looking ahead there are three main factors worth watching, not only as to the sustainability of this post-COVID recovery but also overreactions allowing for the opportunity to rebalance portfolios.
The bond market
We continue to believe that this very much is still a central bank-driven market environment. Macro policy will weigh heavily as markets react to indications of where the Fed and other central banks are positioning. For example, markets corrected more than 15 per cent when Bernanke signalled tapering back in 2010, and some argue that the tech bubble was burst when Greenspan indicated hikes were coming in early 2000.
That said, this time around central banks are in a bit of a pickle with rising inflationary pressures offset by the need to keep debt servicing costs down for massive government fiscal programs currently being funded by printing money. In addition, we’ve read that there are a record amount of job openings, but wages aren’t high enough to entice those unemployed going off government assistance.
This is where the bond market can be a good indicator and worth keeping a close eye on, but at the same time recognizing they don’t always get it right. More recently, long-term U.S. Treasuries (20 year +) have rocketed nearly 12 per cent from their May lows, nearly recouping all of their losses this year-to-date. For those overweight bonds, especially longer-dated ones, we wonder if they’re being given a rare second chance?
Don’t kid yourself. Despite the plethora of talk around the transition to clean energy, high oil prices still have a material impact on the economic recovery in the U.S. Five of the last six recessions have been preceded by a spike in the price of crude oil, with the only exception being the recession in 2020 caused by the COVID lockdowns.
The good news is that WTI oil prices have fallen from last week’s highs of nearly $75.50, down more than 11 per cent to below $67 a barrel on Monday. This couldn’t come at a better time as main street is in the midst of struggling with supply chain shortages causing inflationary pressures in key household staples such as food, clothing and gasoline.
Household spending & anti-vaxxers
We received some good news out of U.S. retail sales last Friday, showing a rebound month-over-month in consumer spending, which is a primary driver of GDP growth. People are tired of being locked up and have now been given a taste of what it’s like to experience a pre-COVID world again. This also appears to be in its early stages, as U.S. households are still sitting on quite the nest egg, having accumulated trillions in excess savings during the pandemic.
Looking forward, the trillion-dollar question, therefore, is if the stupidity of those choosing not to get vaccinated is greater than many expect, resulting in the rise of the variant this fall and forcing another lockdown. We hate to position portfolios around stupidity, but it is a risk nonetheless and worth keeping a very close eye on.
In conclusion, pullbacks are signs of a healthy market and more so, given they present a great chance to reposition and rebalance portfolios. This can be a rather difficult thing to do in today’s headline-grabbing environment, but it helps to strip out the noise, have a long-term plan and deploy some form of near-term active risk-management.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.
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Blair Hyslop is the President of the Order of the Wallace McCain Institute. He is co-CEO, along with his wife, Rosalyn Hyslop, of Mrs. Dunster’s and Kredl’s Corner Market, New Brunswick-based companies that employ more than 200 people and have operations throughout Atlantic Canada.
As the Covid-19 pandemic raged around the world, the four Atlantic Canadian provinces came together in an unprecedented spirit of cooperation and collaboration to tackle the challenges it presented. The result was one the safest places in the world, with untold lives saved. That showed what we can do as a region when we work together.
Recently, a group of entrepreneurs from all four provinces came together to discuss ways to grow our economy and erase that gap that still exists with the rest of Canada.
It’s about controlling our own destiny and creating a region with more opportunities for our people.
The Atlantic Investment Bubble
The first item this group is proposing is the creation of an “Atlantic Investment Bubble” – a common equity tax credit to encourage investment across the region. Too often, businesses in Atlantic Canada struggle to find the investment needed to fuel growth compared to the rest of Canada. In fact, there is only $3 of Angel investment per capita in Atlantic Canada for every $28 invested nationally, according to the most recent figures.
That’s a huge gap, one that penalizes businesses in our region.
The challenge of finding investment affects all kinds of businesses – food producers like our company, Mrs. Dunster’s, as well as technology companies, manufacturers, tourism operators and more. We all face the same challenge – finding the capital needed to help our business grow.
Each province has its own equity tax credit aimed at encouraging local investment in local businesses. These work pretty well, as far as they go. They have different amounts of credit available and some outline support for only specific sectors. Yet the fundamental problem with this well-intentioned approach is that it ignores the regional nature of our business community.
As a region, we are simply just too small to operate only within our home provinces – we need to go to other provinces to find customers, vendors, employees, mentors and investors.
The provincial equity tax credits support investors who invest in a company in their home province. But if I wanted to encourage an investor in Nova Scotia, PEI or Newfoundland and Labrador to invest in Mrs. Dunster’s, they wouldn’t receive a tax credit. That becomes a disincentive to invest. A regional equity tax credit will address this problem and create a more robust investment environment within Atlantic Canada by promoting more interprovincial investment. That will help us close the gap with the national investment average.
How It Works
We propose a regional equity tax credit of 35 percent overlayed on the existing provincial programs and focused on sectors that will yield the most benefit to our region, including manufacturing, renewable energy, tourism, food and beverage, IT, aerospace, and cultural industries.
This approach will minimize the amount of legislative and regulatory changes required to implement the program. That’s important because speed matters here – one of the outcomes of the pandemic is there are billions of dollars on the sidelines looking for opportunities to be invested, including large amounts here in Atlantic Canada. By implementing a regional equity tax credit, we can repatriate our own money that too often gets invested in the public markets in Toronto or New York.
It means we can invest in our own potential.
We recognize, of course, that every dollar counts for provincial governments, and that they can’t spend scarce dollars on new programs without consequences. However, we believe that the Atlantic Investment Bubble will be self-sustaining, creating more new tax revenues than it costs.
We propose a four-year pilot program that is backstopped by the federal government, meaning it will have zero cost to the provincial governments. Based on our projections, this incentive would support nearly 50 companies in the first year. By year four after the first year of investment, this equity tax credit will have created over $50-million in labour income and added nearly $80-million to the region’s GDP.
Beyond the numbers, it will make our region more competitive and entrepreneurial. It will give Atlantic Canadian businesses the resources they need to grow, creating new jobs and new tax revenues.
Why You Should Care
Admittedly, a regional equity tax credit can seem like a niche idea. Why should you care about it?
I believe that Atlantic Canadians should be angry that our economy continues to lag behind the national average. It means our unemployment levels remain higher and our average incomes are lower.
It doesn’t have to be this way. We have the talent needed to grow our economy – we just need the fuel in the form of access to more capital.
The Atlantic Investment Bubble will make our business community stronger, creating access to more private sector investment that will help small- and medium-sized businesses grow and create more jobs for Atlantic Canadians, people just like you. It will make our region stronger, keeping your kids at home by providing them with meaningful opportunities.
The Government of Canada spends hundreds of billions each year providing services to Canadians. The modest expenditure to support the Atlantic Investment Bubble is a smart investment in the potential of Atlantic Canada. It is a short-term, not a long-term, expense that will deliver a strong Return On Investment by driving more private sector investment throughout Atlantic Canada.
The provincial governments in Atlantic Canada proved that they could work together in common cause during the height of the pandemic. They did a great job managing the crisis and have positioned the region strongly for the post-pandemic reality. We can build on that momentum with the Atlantic Investment Bubble.
There is already considerable support for the Atlantic Investment Bubble, including the Atlantic Canada Chamber of Commerce, Conseil économique du Nouveau-Brunswick, New Brunswick Business Council, the Order of the Wallace McCain Institute and TechImpact. They understand that this change will open investment in our region and help us achieve our true potential.
If you would like to learn more about this initiative, or to show your support, visit our website: www.atlanticinvestmentbubble.ca. If you are already sold on the benefits, speak to your MLA and MP and ask them to support this smart, cost-effective policy change.
Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle. To submit a commentary for consideration, contact editor Mark Leger: [email protected]
Rna Diagnostics has received investment capital that will enable it to complete a clinical trial on its cancer diagnostic tool, the RNA Disruption Assay.
The Sudbury-based med-tech startup announced on Sept. 9 that it’s received $8 million from a group of investors, led by iGan Partners, a Toronto-based venture capital firm, and the Crown corporation BDC Capital.
That money will enable Rna Diagnostics to complete its trial, called the breast cancer response evaluation for individualized therapy (BREVITY), which began in 2018.
“The continued support of iGan Partners and our current investors, combined with the support of BDC Capital as a new investment partner, is exciting,” said John Connolly, president and CEO of Rna Diagnostics, in a news release.
“The closing of this series A financing will allow us to complete the pivotal validation trial (BREVITY) of the RNA Disruption Assay™ (RDA)™. BREVITY is currently recruiting patients at over 40 breast cancer centres in Europe and North America.”
IGan led the way during an earlier round of funding, in 2018, worth $5 million. Rna Diagnostics has additionally received funding through the Northern Ontario Heritage Fund, FedNor, the Northern Cancer Foundation, and the angel investment firm Northern Ontario Angels.
The RNA Disruption Assay determines whether a patient’s tumour is responding to cancer therapy five weeks into treatment.
If the patient’s tumour isn’t responding, the oncologist can change course, cutting down on lost treatment time and considering other treatment methods that may be more effective.
Rna Diagnostics believes this approach could reduce harmful side effects for patients and improve their chances of survival. It could also reduce costs for cancer treatment centres.
“This is an enormous, expensive problem for cancer centres,” Connolly added. “Typically, in solid tumour cancers, only 30 to 40 per cent of patients receive a survival benefit from a given drug regimen.”
The RNA Disruption Assay was discovered by Dr. Amadeo Parissenti, a researcher and professor at Laurentian University, in 2007.
In moving the test towards commercialization, Parissenti later founded Rna Diagnostics, which operates out of Sudbury’s Health Sciences North Research Institute, the research arm of the local hospital, Health Sciences North.
NEW DELHI — New Delhi wants to block Chinese investors from buying shares in Indian insurance giant Life Insurance Corp (LIC) which is due to go public, four senior government officials and a banker told Reuters, underscoring tensions between the two nations.
State-owned LIC is considered a strategic asset, commanding more than 60% of India’s life insurance market with assets of more than $500 billion. While the government is planning to allow foreign investors to participate in what is likely to be the country’s biggest-ever IPO worth a potential $12.2 billion, it is leery of Chinese ownership, the sources said.
Political tensions between the countries rocketed last year after their soldiers clashed on the disputed Himalayan border and since then, India has sought to limit Chinese investment in sensitive companies and sectors, banned a raft of Chinese mobile apps and subjected imports of Chinese goods to extra scrutiny.
“With China after the border clashes it cannot be business as usual. The trust deficit has significantly widen(ed),” said one of the government officials, adding that Chinese investment in companies like LIC could pose risks.
The sources declined to be identified as discussions on how Chinese investment might be blocked are ongoing and as no final decisions have been made.
India’s finance ministry and LIC did not respond to Reuters emailed requests for comment. China’s foreign ministry and commerce ministry did not immediately respond to requests for comment.
Aiming to solve budget constraints, Prime Minister Narendra Modi’s administration is hoping to raise 900 billion rupees through selling 5% to 10% of LIC this financial year which ends in March. The government has yet to decide on whether it will sell one tranche of shares seeking to raise the full amount or choose to seek the funds in two tranches, sources have said.
Under current law, no overseas investors can invest in LIC but the government is considering allowing foreign institutional investors to buy up to 20% of LIC’s offering.
Options to prevent Chinese investment in LIC include amending the current law on foreign direct investment with a clause that relates to LIC or creating a new law specific to LIC, two of the government officials said.
They added that the government was conscious of the difficulty in checking on Chinese investments that could come indirectly and would attempt to craft a policy that would protect India’s security but not deter overseas investors.
A third option being explored is barring Chinese investors from becoming cornerstone investors in the IPO, said one government official and the banker, although that would not prevent Chinese investors from buying shares in the secondary market.
Ten investment banks including Goldman Sachs, Citigroup and SBI Capital Market have been chosen to handle the offering.
($1 = 73.8200 Indian rupees) (Reporting by Aftab Ahmed and Manoj Kumar in New Delhi, Nupur Anand in Mumbai; Additional reporting by Beijing Newsroom; Editing by Sanjeev Miglani and Edwina Gibbs)
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