Market Call:

Patrick Horan, principal, Agilith Capital

FOCUS: North American Equities

Market outlook:

There are a number of global macro factors that seem likely to pressure market sentiment in the near term including the dramatic wealth transfer from oil rich nations to oil poor, ongoing economic malaise in Europe, continued devaluation of the Euro and Yen relative to the U.S. dollar and lower growth expectations out of China. Also, the lack of a correction of greater than 10 percent in 2014 leads us to believe that a correction of greater than 10 percent is a reasonable possibility in 2015 and that such a correction would likely be accompanied by a change in market leadership going forward.

We continue to believe that the long term direction of rates is higher and when the trajectory changes, the reaction could be swift and quite damaging to interest sensitive assets. The biggest secular force to drive rates higher is likely some evidence of growth resuming in Europe and Japan; however, to the extent that China and Middle Eastern governments use their reserves that are largely U.S. dollar denominated (to stimulate economic growth in the case of China or to mitigate the impact of falling oil prices in the case of the Middle East), the sale of U.S. Treasuries would also help to drive yields higher.

While real returns for many European long bonds are nil to negative, we note that in North America, the real return (after adjusting for inflation) is approaching all-time lows and equates to roughly 0.20 percent per annum. For bonds trading at a premium to par, the return after tax is negative.

Canada will likely experience a period of slower growth as it adapts to the end of a commodity supercycle and transitions to a stronger export market. Although we can see oil moving lower from here, we expect a $50 to 70 range over the next couple of years.

We thing the Canadian dollar is at roughly fair value and still have a bias that favours US financials and Canadian companies with export business models and leverage to a stronger U.S. dollar.

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