Market and Investment Insights

November 2019

The Month of Mergers and Quarterly Economic Outlook

The Canadian and U.S. economies continue to show resilience as reported this month with Gross Domestic Product (GDP) growing by 1.3% and 1.9%, respectively. Further, Canadian business investment in non-residential structures, machinery, and equipment increased at a rate of 9.5% this month, up 7% from the second quarter. Lastly, the Canadian economy posted residential investment growth of 13.3% last quarter. The Bank of Canada decided, based partly upon these factors, to maintain its policy benchmark interest rate at 1.75%, believing they demonstrate the inherent strength of the economy.

November saw a flurry of mega-mergers and acquisitions (M&A), with more than $70B USD of deals announced. Charles Schwab agreed to buy TD Ameritrade for $26B USD; this agreement is expected to reshape the discount brokerage space as the combined entity would oversee more than $5T USD in assets. Additionally, we saw the largest acquisition in the luxury goods industry as Louis Vuitton bought Tiffany & Co. for $16.2B USD. Google made the most of November by acquiring Fitbit, the wearable technology company that specializes in health and fitness. This M&A activity is indicative of a business environment that enjoys loose monetary policy (i.e. low cost of money via low interest rates), an economic environment that is nearing the “late-cycle” stage, and a political environment with growing uncertainty as we approach the 2020 U.S. federal elections.

The new United States, Mexico, Canada Agreement (USMCA), colloquially known as NAFTA 2.0, was signed by American, Canadian, and Mexican leaders last fall. However, the trade pact still requires ratification by all three countries before the deal can take effect. Earlier this month, trade deal negotiators cited that the trade agreement is making progress but is experiencing some slowdowns due to the ongoing impeachment inquiry in the U.S. Although some of the optimism from the initial signing has waned, the Canadian government has said that they are prepared to do everything they can to ensure ratification of the deal.

Return Contributors

  • ARK Innovation ETF outperformed (+8%) as market sentiment improved. One of the fund’s constituents, Tesla, announced their new Cybertruck and received more than 250,000 orders within five days of the unveiling event.
  • Our overweighting to Canadian equities via BMO Low-Volatility ETF (+3.6%) added to performance as the S&P/TSX showed strength in November.

Return Detractors

  • Gold struggled last month driven in part by the inverse relationship it shares with a strengthening U.S. dollar. We maintain our position in the precious metal as a hedge against market downside risks.
  • Our underweight to U.S Equities detracted from performance as the S&P 500 continued to rally throughout the month as overall investor sentiment towards a U.S.-China trade deal improved. BMO Global Infrastructure ETF (-0.85%) was impacted the most by these issues.

All performance numbers sourced from Morningstar Direct.