Key factors to watch closely in 2018

AOn the Contrary s the year comes to a close, investors for the most part have a lot to be grateful for, especially those fortunate enough to have had large allocations outside of Canada.

For example, those who bought into U.S. equity markets following the election of Donald Trump have fared very well with gains in excess of 20 per cent since of the beginning of the year. Here in Canada, despite the rebounding economic picture, the S&P TSX returned a much more modest 6 per cent (excluding dividends).

For those wondering how to position heading into 2018 there are a couple of important factors to keep a very close eye on, any of which we think will have a material impact on future performance. Canadian housing prices have persistently moved higher and continue to outperform expectations. Will that continue in 2018? tightening cycle, we wonder how aggressive they will be when it comes to unwinding their massive balance sheet. This question is very important as higher interest rates will have a pervasive impact not only on asset prices but also an already heavily levered consumers, corporations and governments. Higher rates will also move the U.S. dollar, which could in turn influence the balance of trade and international players who have borrowed in dollars to service their debt, among other effects. housing market and stronger oil prices.

While many have been trying to call a top, housing prices have persistently moved higher and continue to outperform expectations. This is a good thing as any moderation from previous years of growth could have a meaningful impact on all kinds of sectors from construction to banking. More worrisome is that we recently read about an emerging trend whereby ordinary Canadians are effectively turning themselves into “banks” by borrowing on their HELOCs and providing subprime loans at a higher rate and pocketing the spread.

Looking at oil prices, the current record-setting differential and low realized Canadian pricing, although likely temporary, isn’t providing a lot of confidence heading into 2018.

We are also concerned about a very crowded trade among the speculative longs with net positions hitting an all-time record high.

We worry what will happen to the oil price when all of these specs start to hit the sell button as U.S. shale producers respond by flooding the market.

When it comes to our own predictions for 2018, one thing is for sure: there will be a few surprises. Having a well-diversified portfolio is key, especially if, in a reversal of last year, those surprises end up being more bad than good