All the Money in the World How 2018’s global financial outlook could impact your investments

How the global financial outlook for 2018 could impact your investment decisions

SAYWHATYOUWILL about Donald Trump – and everyone seems to have a strong opinion one way or the other – the reality is that investors like him, if the strong surge of the U.S. stock markets in 2017 is any indication.

And why not? Mr. Trump embodies the core values of the American economy: free enterprise and wealth accumulation. You may strongly disagree with his methods and pronouncements – the majority of Americans and Canadians do, according to the pollsters – but you can’t deny they are having an effect. U.S. economic growth is accelerating, the stock markets repeatedly set new records last year and we didn’t see one major correction in all of 2017.

The good times are rolling. The question is whether they will continue to do so this year. Here are three of the critical issues to watch in 2018 and the potential impact on your money. 1 INTEREST RATES A strong economy inevitably leads to interest rate increases, and that’s exactly what happened last year. The U.S. Federal Reserve Board raised its key rate three times in 2017, and that pace is likely to continue under new chair Jerome Powell.

Canada was more restrained, with our central bank raising its overnight rate only twice during the year. The Bank’s December statement discussed the “considerable uncertainty” in the global economy, notably about geopolitical developments and trade policies.

Even if the Bank of Canada stands pat for the first part of the year, further increases by the Fed will drive commercial rates higher on both sides of the border. In theory, that should be good news for savers and bad news for borrowers, but this time around, it may be a lose-lose scenario for everyone except the banks.

After years of low rates, they are looking to widen what is known as their net interest margin (NIM). That’s the difference between the rates they charge borrowers and the amount they pay on deposits. The wider the NIM, the more money the banks make. In years past, deposit rates rose at about the same rate as borrowing costs, but not now. Banks have been squeezed since the crash of 2008. Now the squeeze is going to be on us.

We should expect to pay more for mortgages, car loans and lines of credit as 2018 unfolds. But if you’re waiting for the return of five per cent yields on guaranteed investment certificates, forget it. As I write, RBC is only offering 1.6 per cent on five-year GICs. That hasn’t changed for months despite the central bank rate increases. And with the consumer price index in-

creasing at 2.1 per cent, you are actually losing purchasing power after inflation is taken into account.

Meanwhile, according to the Bank of Canada, the average rate for a five-year fixed rate mortgage increased from 4.64 per cent in July 2017 to 4.99 per cent in December. That may not seem like a lot, but it adds up to thousands of dollars over the life of a mortgage, all of which goes to the lender’s bottom line. The take-away Avoid borrowing, forget about GICs and buy bank stocks. 2 THE LOONIE Our dollar did surprisingly well in 2017, bolstered by a resurgence in oil prices, some surprising economic strength in the first half of the year, and the coattails of robust U.S. growth. But it began to falter toward the end of the year, pushed down by higher U.S. interest rates and growing concerns over the fate of the North American Free Trade Agreement (NAFTA).

It appears that oil prices are unlikely to move much higher this year as U.S. shale producers take up the slack from OPEC production cuts. The pace of economic growth is predicted to slow, according to the OECD, from 3.2 per cent in 2017 to 2.3 per cent in 2018. While interest rates are likely to move higher, it is expected the Fed will raise at a faster pace, widening the gap between the two countries.

All that would be bad news for the loonie. Economists disagree about where it might go this year, but the trends suggest it will decline against the greenback, perhaps significantly.

That could be good news for exporters, although there is little evidence a devalued loonie has helped so far. Offsetting that would be a collapse of the NAFTA talks, leaving more than 70 per cent of our trade exposed. The take-away Buy American dollars now (especially if you spend significant down south) and invest some of your money in U.S. securities. 3 TRADE Last year in this column, I wrote that trade would be the No. 1 issue between Ottawa and Washington in 2017. It was, on many fronts.

The most high profile was the move to renegotiate NAFTA, which is not going well as I write. Then there was the ongoing softwood lumber dispute, which resulted in a general tariff of 20.8 per cent being slapped onto Canadian exports by the U.S. Commerce Department.

As a final kick in the teeth, Boeing, from which Canada was expected to buy new fighter jets, complained that Bombardier was selling its C Series planes to Delta Airlines at below market prices. The Department of Commerce agreed and slapped a prohibitive 300 per cent tariff on the aircraft. The move forced Bombardier to effectively give away a majority stake in the plane to Europe’s Airbus in exchange for marketing support and the use of that company’s U.S. production facilities. Needless to say, we are not buying Boeing’s jet fighters.

Clearly, it was not a good trading year for Canada.

There have been suggestions that the demise of NAFTA wouldn’t be overly hurtful since the rules of the World Trade Organization (WTO) would replace them. Don’t be so sure. Recently, the protectionist administration in Washington has set its sights on the WTO as well. In a December speech, Mr. Trump’s trade representative Robert Lighthizer said the organization is “losing its essential focus” and accused it of becoming “a litigation-centred organization” and not paying attention to enforcing existing rules. Who knows where the U.S. goes from here, but it is not likely to be good news for Canada.

In response, more than a quarter of Canadian businesses are consid- ering or have already moved part of their operations to the U.S., according to a survey released in December by Export Development Canada. Many said they want to diversify their trade more, with the European Union and China the prime targets.

That might not be easy. After signing a trade agreement with Europe (which has yet to be ratified), Prime Minister Trudeau’s efforts to find new partners have run aground. A trip to China that was supposed to mark the launch of new trade talks ended with zero progress. Earlier, he pulled the plug on a meeting that was supposed to approve the basic principles for the Trans-Pacific Partnership, much to the disgruntlement of his erstwhile partners. Unless there is a magical turnaround, this could be another bad year for Canadian trade. The take-away If you buy Canadian stocks, choose companies with substantial U.S. operations and revenues. Our banks, railroads and many large utilities qualify.

A wild card for 2018 is the effect on Canada of the big U.S. tax reform bill that was signed by President Trump just before Christmas. One of its key provisions is to reduce the federal tax rate on corporations from 35 per cent to 21 per cent. That wipes out the tax advantage Canada had in persuading companies to invest here (our federal rate for large companies is 20 per cent). Combine that with the possibility of losing NAFTA and the access it offers to the U.S. market and the outlook for much-needed business investment looks grim.

ONE MORE THOUGHT As I have noted, the stock markets came through 2017 without a single major correction. Perhaps the same thing will happen this year, but history suggests otherwise. Be prepared.