Before we look at where I see things going in 2017, I figured it was only fair to be transparent with how my predictions did over the past year. As always, I should note that these are the predictions of an index investor and a guy who considers $100 on fantasy football for the year to be a major wager. Consequently, I’m essentially saying “I openly admit that I’m taking almost no actions based on these predictions – I’m just doing this for kicks!”
Without further ado, let’s see what my prediction report card has to say as we look back at an abbreviated version of last year’s happenings…
1) Oil and the Canadian Economy Will Stay Down
Canadian oil will stay down below $50 per barrel. This will continue to hamper growth and employment within Canada. All levels of government will also feel the sting as royalties and taxes paid by oil companies and other materials and natural resources (which aren’t getting the media attention) dry up. With oil-producing countries around the world struggling to balance budgets and badly in need of oil revenue, I don’t see taps turning off or slowing down any time soon. Shale production in the USA appears to be more resistant to lower price points than anyone would have thought a year ago.
We’ll start off with a solid hit here. While the price of crude on world markets has briefly ticked above $50, once the discount on Canadian oil gets taken into account, the oil industry took a beating this year. This pain was exacerbated by the terrible wildfires in Northern Alberta. OPEC has been trying to get prices under control for months, but it seems like a case of no one wanting to sacrifice market share to me. As far as Canadian government goes, Alberta is taking the predictable dip that many people saw coming, but the title of most troubled has to go to poor Newfoundland & Labrador. What a mess this dependency on oil royalties has created. I really hope for the sake of these provinces that the whole OPEC deal actually works out (not holding my breath) and we can see $70+ oil in 2017.
2) Canadian Oil Will Be No Closer to Reaching Tide Water by 2017
Canadian provinces remain stuck in NIMBY (Not In My Back Yard) mode and I just don’t see all of the people buying into this that need to. Keystone XL appears dead (against all rational logic) and Northern Gateway won’t be far behind. The great national hope of Energy East appears to make a lot of economic sense – but when did that ever convince anyone? I’m simply betting that the project requires too many stakeholders with vastly different agendas to buy in. The really sad part about this from a broader perspective is that governments will continue to lose billions of dollars in tax and royalty revenues because Canadian oil sold at such a discount relative to other oil suppliers.
It’s possible that five years from now Canada will have so much extra pipeline capacity that we’ll laugh at the idea that this was ever an issue. With the improbable rise of Trump Nation, it’s far more probable than not that we’ll see the Keystone XL brought back from the dead. When you combine that with the expansion of Line 3 (which depends only on governments fairly smitten with the oil industry) you have to think there are much larger threats to Canada’s oil sands than pipeline capacity. That being said, I’m not giving myself a complete whiff on this one. The Energy East debate broke down exactly as predicted and I’m fairly certain our current PM isn’t going to touch that issue with a 10-foot pole when you look at all the political capital he would have to sacrifice in the politically-key province of Quebec. One might reasonably point to the Kinder Morgan pipeline approval and think a victory for industry was won, but I think that the approval was a small battle, and given the developments just south of us in the Dakotas, I’m not at all sure about who will win the larger war on that file. Stay tuned.
3) Low Interest Rates Continue to Bully Pension Funds and Savers
I think we’ll see yet another rate cut to the prime lending rate in Canada in 2016. We probably won’t delve into negative interest rate territory, but just the fact that it’s being discussed seems like a pretty good indicator of where everyone’s head is at. While this is great for borrowers (especially those borrowing to fund a growing business) it’s a terrible mess for people who depend on ultra-stable investments for their income needs. Pension funds have had to take on more and more risk over the past few years in order to desperately try to gain the returns they need in order to meet their targets. Some have even went back to active management strategies (and the accompanying sky high costs) in order to achieve these goals. Needless to say, that could backfire in one heck of a hurry. I genuinely feel bad for elderly Canadians who were relying on bond payouts of 3% or so in order to provide a decent standard of living in retirement.
Another year of interest rates frozen at all-time Canadian lows – but no rate cut. Some folks see light at the end of the tunnel with the recent Fed movement in the USA, but I’m not convinced. If our housing market starts to crater before natural resources cycle back to prominence, there is still a chance the next interest rate movement could be down to prevent deflation. I really hope that all of these pension funds such as the CPP that are moving into active management of more volatile assets don’t hurt us in the long run…
4) Interest Rate Moves Continue to Sink the Canadian Dollar
With my crystal ball showing a rate cut to try to offset the slumping Canadian economy, and the USA talking about gradually raising rates now that they’re back on the rails, it doesn’t take a genius to figure out what will happen to our respective currencies. Hope you took that vacation to see Disney over the past few years because it’s about to get a whole lot more expensive! Smart folks that I often read say that the natural resting point for the Canadian Dollar versus its American counterpart is 80-85 cents. Considering where we have been for the past several years, we’re likely in for an extended ride on the other side of that figure.
We’re closing out 2016 almost where we started when it comes to the CAD-USD exchange rate. I don’t think 2017 looks a whole lot brighter. Luckily we live in a big country with lots of beautiful adventure opportunities that you can pay for without exchanging for Greenbacks. Unfortunately when it comes to groceries and consumer goods, our low dollar will mean that we feel the sting at the till as our depressed currency acts as a hidden tax on everything on country imports.
5) Canadian Housing Markets Stay Absurdly High – Before Collapsing in 2017
Anyone can throw out their thoughts for the upcoming year. I’m going Nostradamus and getting a jump start on 2017!
Everyone who understands basic economic realities knows that the Canadian housing market is somewhere between moderately overpriced and insanely overpriced. What most “experts” don’t understand – and haven’t understood for the last several years – is that the vast majority of people don’t understand economic realities. In fact, they have no interest in discussing economics at all, aside from dinner parties spent talking about how housing prices just keep going up.
Lower interest rates will continue to encourage lenders to throw money at anyone with a pulse. Sure the Federal Government just tightened rules up a little bit (smart move), but that won’t stop private lenders from filling in gaps. The media will continue to report housing prices going up and Canada’s massive real estate industry will keep encouraging people to get into the housing market (or climb higher up the housing ladder) “before it’s too late” and interest rates start going up. I realize that’s a recipe for disaster – I’m just betting the disaster will take more than 12 months to unfold. Foreign buyers will take advantage of our lower dollar and low interest rates to keep pushing prices up in Toronto and Vancouver. Sure, we’ll see some price dips in Alberta and maybe other parts of the country, but when looking at national statistics, I doubt we’ll see any negative movement on home prices, and I wouldn’t be shocked to see 5-8% gains year-over-year.
Apparently you can’t go wrong betting on Canadians’ collective obsession with owning a home. My 5-8% prediction was too cautious – and yet it was one of the more aggressive at the time coming from anyone outside of the RE industry.
I remain convinced that as Toronto and Vancouver offer more incentives to first-time homebuyers in an attempt to curry political favour, we are inside a massive housing bubble. That being said, discussing “Canada’s Housing Market” remains one of the most ridiculous daily conversations in our news media. Canada’s housing world is really a very loosely connected group of regional markets that have very different outcomes that aren’t really related to one another.
Much like the USA, all we need for people to realize that the emperor real estate agents have no clothes, and this could quickly become a catalyst to start driving sentiment downwards. Once that spiral starts, no one has any idea where it will end. Right now, our semi-religious devotion to housing and fear of renting is trumping the cooling regulations put in place by the Federal Government. If interest rates tick up 1% or more (a big IF) that might be all we need to tip this thing over the edge.
6) Smart Money Will Continue to Become Less Active
As more and more people wake up to the fact that Canada’s actively managed mutual funds are terrible investment options (see our free eBook for more details), passive investing strategies will continue to see growth (although will still be small time compared to our mutual fund industry). ETFs and discount brokerages have cut investing costs to the absolute bone, while robo advisors represent perhaps the easiest, most user-friendly way to passively invest your money that Canadians have ever seen. All in all, it’s a great time to be a passive investor in Canada with lots of options for folks with varying levels of financial literacy.
So… I mark on a curve – sue me. BlackRock Canada (admittedly not the least bias source) recently released a survey that stated the following:
- 31% of Canadian investors now own ETFs
- 62% of non-owners expect they’ll begin to use ETFs in the next three years
- Most non-owners were “quite interested” in learning more about ETFs
This might be a good time to mention that we have a free eBook on ETF Investing available!
While the ETF industry is still about 1/10th the size that of mutual funds, it is gaining ground – the good guys are winning! When you combine that with the growth rates seen by Canada’s Robo Advisors, and the solid index options offerings of TD’s eSeries, you might start to think that Canadians are beginning to learn what an MER is!
7) “Because it’s 2016” Will Be the Most Overused Canadian Phrase of the Year
The media loves Canada’s boy-toy of a leader. The vast majority of us love pretty people who say things in 140 characters or less. Many of us love to backlash against what the vast majority of people love.
All of these factors will combine to push “Because it’s 2016” memes and social media commentary into the stratosphere during the upcoming year. I feel like the quote reached its saturation point a long time ago, but apparently I’m in the minority. What this says about reasoned debate and exchange of ideas on complicated issues… well, I will slowly back away from a “Get off my lawn!” old-man moment.
Grade: We as a society get a collective F
8) Uber Will Continue the Slow Inexorable March to Taxi Extinction
There’s “disruption” and then there’s Uber. I think AirBnB/FlipKey can survive alongside hotels and that other industries will adapt instead of being relegated to history textbooks. Taxis are not one of those industries. The downward pressure being exerted on taxi prices will continue and something will break one way or the other. Politicians will eventually quite trying to work against this new paradigm (votes vs union donations) and work with them instead to make things slightly more safe.
Well, Uber is now valued at north of $60 Billion, Lyft comes in at a not-to-shabby $6 billion, and Chinese competitor DiDi is worth a cool $34 Billion. By comparison, GM and Ford are in the $50-$60 Billion range. With substantial political pressure on both sides of the ride-sharing issue it has been interesting to watch various politicians squirm their way to compromises. Ultimately taxis are dead, it’s really just a matter of how long it takes to pronounce their death. The really interesting development for Uber et all’s fleet of drivers is that they may be creating a monster that will eventually consume them as well. I think we’re going to see these companies with self-driving capability much sooner rather than later. All that being said, taxis didn’t totally disappear in 2016, and in some cities they even managed to stave off the inevitable a while longer.
9) More Fintech Companies Will Collapse or “Pivot” Than Succeed – Banks Still Rule
I love the general idea of robo advisors (despite the unfortunate name the industry has gotten stuck with) but wouldn’t want to own a robo advisor start up right now. The reason is that there is so much competition out there, and the struggle to get noticed amongst all of the noise in the modern consumer world. Canada’s big banks have massive branding advantages and the client infrastructure in place to slowly introduce their own in-house robo advising options. Several of them have already announced plans to go down this road. There is just so much trust in the banks (many would argue that it is underserved) as institutions that I see it as very difficult to overcome. Of course, if robo advisors can continue to make the pitch that banks have been soaking them with fees and commissions for years, they might yet gain some traction. It will be interesting to see who ends up acquiring who within this space going forward.
On the other hand, I don’t think all of Canada’s fin-tech (financial technology) start-ups have as bright a future as the robo advisors do. A lot of these companies have great ideas, but I’m just not sure how their respective monetization models will work going forward. These tech-heavy companies also face an uphill battle in trying to separate themselves from the pack when it comes the average cautious Canadian trusting them with their money. I think that a best-case scenario sees many of these companies get bought out by older/bigger brands or pivoting them into niche products aimed at very specific demographics.
As our Ultimate Guide to Robo Advisors points out, robo advisors are a great option for young Canadian investors. With old school money behind them, WealthSimple spent a lot of coin educating investors on who they were and what the robo industry was all about this year. Let’s hope it pays off!
We’ve also seen a few companies start to offer credit scores for free over the last year, and industry favourite RateHub tamed went into their Den and tamed the Dragons.
While there have been some notable successes, we’ve also witnessed several companies “re-brand”, “pivot”, or “re-focus”. These headwinds persist for fin-tech start-ups, but Canada’s Big Banks and insurance companies continue to dominate the country and much of the world, posting record profits. These behemoths are so entrenched in our collective consciousness and have such massive brand awareness advantages that it’s tough to see them losing this long-term fight.
10) Go Spurs Go!
Possibly the only people wrong more often than financial forecasters are sports prognosticators. In that vein, here is who I’m betting on (*if betting were legal*) in 2016.
The Spurs will shock the world and beat the previously unstoppable force known as the Golden State Warriors. Stephen Curry and Co. have had great injury luck and the Spurs are quietly lurking in the weeds doing smart Spurs things like they always do. Lebron will once again be a bridesmaid as the Spurs win two 7-game series en route to their 6th title of the Tim Duncan era.
I predict the Blue Jays will win the World Series because I’m Canadian and couldn’t name a dozen non-Jays if I had to. Don’t get off the bandwagon yet baby!
No one wants to admit that Stanley Cup playoffs comes down to who has the hot goalie 85% of the time. Instead we love to talk about stuff like “heart” and “wanting it more”. I’m pretty sure that if you’re a professional athlete who has been playing a game their whole life, have a massive financial incentive to win, and whose identity is completely tied up in being a hockey player – you “want it” pretty badly. All this to say that sports commentary is mind-numbing much of the time and that a decent team with a hot goalie will hoist sports’ coolest trophy. My random pick given those parameters is the LA Kings. You really want to bet against a goalie named Quick?
In a series of upsets that are only upsets if you haven’t watched football the last few weeks, the Seattle Seahawks will win Super Bowl 50 (Super Bowl L?). The Carolina Panthers are getting all the attention for beating up a bunch of mediocre teams all year, but Seattle’s experience will get them through the hornet’s nest that is the NFC.
So uh… The Panthers made the Big Show.
11) Money and Fisticuffs
A recent series in the National Post reveals what many Canadian parents learned a long time ago: Hockey is quickly becoming too expensive for the middle- and working-class. I wrote about this a couple of years ago, but better late than never National Post. I don’t see how this trend ever reverses and I think our collective idea of hockey as Canada’s national game will be challenged as more and more first-generation Canadians pump up the grassroots of cheaper games such as soccer and basketball from coast-to-coast.
The UFC saw a banner year in 2015, as it rode its rising stars Ronda Rousey and Conor McGregor. I believe the company has turned a corner and will continue its gentle descent into the mainstream (leading to the predictable social media backlash from hardcore original fans). Unfortunately for the star-marketing business, no one can survive 4-ounce gloves very long and Conor McGregor’s time will soon come. Love him or hate him though, people will continue to tune in to watch.
Hockey… blah, blah. The UFC was sold in 2016 for over $4 Billion!! That’s pretty mainstream if you ask me (cue the protests from the Gracie worshippers of yesteryear). Conor McGregor lost his first fight of the year, but won at life, as he is now one of the most recognizable faces in all of sports. Despite the blow to his aura of invincibility, The Notorious One “broke every money record in the book” as he so eloquently put it in his classic Irish Brogue.
Overall, not a bad batting percentage in 2016! Admittedly I didn’t go out on too many limbs, but I’d say my list compares pretty favorably with a lot of the TV talking heads. Tune in soon to see what the crystal ball holds for 2017!