Canadian inflation is under 3%!

The big story since March 2, 2022, has been the Central Banks’ fight against inflation. Since then, the Bank of Canada has raised overnight rates nine times from 0.25% to the high of 5.0% on July 12, 2023. The rise in rates was a tool to slow down the economy, lower demand, and lower price pressure. The tricky part is to lower demand but not throw the economy into recession (negative growth and high unemployment). This year the key inflation number, Canadian Total CPI, has been under 3.00%. This gave room for the Bank of Canada to lower its rate by 0.25% to 4.75% in June. On the other hand, in the US, the Federal Reserve Bank has not cut its interest rate because of continued inflationary pressures in the US economy. The rate remains at 5.25-5.50%. A top Federal Reserve official (Fed governor, Michelle Bowman, 20240626) said that they are willing to raise rates again “should progress on inflation stall or even reverse.” 

Bank of Canada sees a “soft landing”

Governor Macklem sees a soft landing for the Canadian economy. This means a slower economy but not a recession. The Bank of Canada has warned about a steep jump in mortgage payments as mortgages come due in the next couple of years. The Bank of Canada is also concerned about the drop in Canada’s productivity. So, despite what is happening in our neighbours to the south, slowly lowering rates makes sense for Canada.

Tech “bubble”?

AI (aka Artificial Intelligence) stocks have been the drivers of the markets in the US, adding to the year-to-date performance of the S&P 500 and Nasdaq indices. The conservative TSX and Dow Jones index returns indicate slower growth economies. Is this a tech bubble that will burst? The shares of AI companies have risen so quickly, it gives one pause for thought. The AI boom may be ahead of itself.

 Fixed Income markets are between rock and a hard place

The traditional investment portfolio has a mix of 60% equities, and 40% fixed income. In the past, this asset mix smoothed out gyrations in portfolios because if the equity markets fell, the fixed income prices rose. Over the past two years, this has not been the case. The fixed income markets today are caught between a rock and a hard place. The Central Bank’s goal is for lower inflation and lower interest rates. As interest rates go down, the price of fixed income securities goes up. But in today’s world, the US Federal Reserve has said they are in a holding pattern and may consider raising interest rates. The Bank of Canada sees our cooling economy and is planning on slowly lowering interest rates. At this moment, longer term fixed income returns may not provide the historic cushion as it has in the past. In its place, money market fund returns provide a good return for minimal risk. 

Political Shifts?

France and Great Britain are holding elections as we speak, the United States by year end and of course Canada before end of 2025. It’s not inconceivable that the election results could create instability, political gridlock and or a swing to the right which could have significant implications for economic growth, international co-operation and climate regulations across the areas.

PMC’s take

We remain prudent long-term investors not risk-takers. We continue to invest broadly across the asset classes and within stock market sectors to diversify market risk. 

PMC IN THE NEWS

Anish Chopra has been a guest on Bloomberg’s BNN. Here are links to his interviews:

1. Investment strategies that one can learn from NHL playoff hockey: https://www.bnnbloomberg.ca/video/investment-strategies-from-nhl-playoff-hockey~2913856

2. Why it’s a challenging time for US Federal Reserve Chair, Jerome Powell, to talk about rate cuts: https://www.bnnbloomberg.ca/video/it-s-a-tough-time-for-jerome-powell-to-talk-about-rate-cuts-portfolio-manager~2913854

CLIENT QUESTION CORNER

1. What are the Capital Gains tax increases that have been in recent headlines? 

Effective June 25, 2024, the Government of Canada increased the personal capital gains inclusion rate from 50% to 67% for capital gains over $250,000. If your capital gains are under $250,000 in a calendar year, the personal capital gains rate remains at 50%. In other words, only 50% of the gain is taxed at your marginal tax rate. What is the Marginal Tax Rate? It is a progressive tax, for example, for those with income between $55,000 - $111,000, your marginal tax rate on capital gains is 13%; on eligible Canadian dividends 7.56% and on non-eligible dividends is 13.19%.   

The easiest way to avoid paying capital gains tax is to hold your investments in a registered account, such as a Registered Retirement Savings Plan (RRSP), tax-free savings account (TSFA), a first home savings account (FHSA) or a registered education savings plan (RESP). You or your beneficiary will pay income taxes on the withdrawal amount from an RRSP or RESP. 

The Lifetime Capital Gains Exemption (LCGE) for sales of small business shares or assets for fishers and farmers rose to $1.25 million as of June 25, 2024. This will be indexed to inflation. Please contact your accountant for details. 

2. How are Money Market Funds Rates of Return reported? 

Unlike bonds, Money Market Funds (MMFs) do not have an interest rate coupon attached to them.  NBIN money market funds on your statements are NBC200 (CAD) and NBC201 (USD).  These units are always valued at $1.00. The number of Money Market units increase monthly to reflect the rate of return set by the bank. For example, on January 1, you own 10,000 units, worth $10,000.  Assume the interest rate is 4.0% for the year. By year end, December 31, the portfolio would have 10,400 units, worth $10,400.  Currently the NBC200 rate of return for CAD accounts is 4.55%. The rate of return for the USD NBC201 is 5.15%. 

3. Why is it important to have a beneficiary on my registered accounts?

If you do not specify a beneficiary, the value of the RRSP must be included in your income for the year of death. This amount is fully taxable as regular income. 

If the named beneficiary is your married or common-law spouse, the funds can be transferred into their own registered account (RRSP or RRIF) without triggering immediate taxes. No tax will be payable on the funds until they are subsequently withdrawn. Beneficiaries who are not survivors eligible for rollover will receive the gross amount of the RRSP, and the estate will have to pay the tax. If you name a Registered Charity as beneficiary of your RRSP or RRIF, the estate will receive a donation tax credit on the final tax return for the value donated to the charity.  The beneficiary could also be your estate.  Talk to your accountant and lawyer about estate planning strategies.

PMC 60th Anniversary - The years from 2000 to 2010

The years from 2000-2010 were very busy ones at PMC. Joining the firm to make those and subsequent years successful were Finn Carroll on the client and administrative side as well as Portfolio Managers Peter Walter, Norman Levine and Rhonda Dalley. Peter Walter and Norman Levine have retired, but Finn and Rhonda continue to contribute to the firm's success. The years from 2000-2010 were very challenging ones on the investment front as the firm's able team navigated the bursting of the internet bubble from 2000-2002 as well as the Great Financial Crisis of 2007-2009.

Commentary reflects the opinions of Portfolio Management Corporation (PMC) at the time of writing and may reference sources that PMC believes to be accurate and reliable.  PMC does not guarantee the accuracy or completeness of such information and our opinions and viewpoints may change over time.  Forward-looking statements are based on historical events and trends and may differ from actual results.