Overall, equity markets were very strong with Canadian housing on a tear. Canadian housing seems to be taking a more calm pace in April so far. Let’s dive into some of the returns, where growth is, reopening effects, manufacturing supply issues, sectors to benefit and finally regulatory changes in the Canadian housing market.
High Level Numbers:
- Canadian 5 year bond yield which prices fixed rate mortgages was up 12% in March
- Canadian Stock Index TSX was up 3.55%
- US S&P 500 was up 4.24%
- Tech heavy US NASDAQ was up 0.41%
- US Industrials were up 8.82%
- US 10 year bond yield up 18.7%
- US Energy Sector up 2.69%
- Canadian dollar was up about 1%
Our portfolio returns were very strong this month with our bias towards the United States, industrial, banking and value since the beginning of the year. As you can see the US S&P 500 outpaced the Canadian TSX however the growth focused NASDAQ underperformed.
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Industrials that are poised to do well in a reopening environment and rising inflation outperformed as vaccination schedules in the US were moved forward. The energy sector took a slower pace after having very strong performance with the run-up to $60 per barrel of US oil.
My take is that oil will be range bound likely with an upper limit of $70 in the near term. There is excess inventory and OPEC+ countries have the ability to turn on the spigots fairly quickly as do US frackers.
Canadian employment numbers are now 98.5% of pre-pandemic numbers and the number of people looking for a job as measured by the workforce participation rate stands just 0.3% shy of Feb. 2020 numbers.
While Ontario is now in another shutdown, this indicates that employment will bounce back when the reopening happens again. While many wonder how much longer this can continue it does point to an elastic environment.
We see this in retail sales, Wells Fargo see it in their debit card transactions and we see it in the Philadelphia Fed Manufacturing Index.
While it may be hard to see past the current environment, we can have some faith that things will bounce back when allowed to.
We are seeing global shortages in semiconductor chips which are used in electronics including cars. This has caused shutdowns at several car plants.
We are seeing tight supply in rubber, lumber and many other inputs.
This is causing inflation to rise and is a cause for concern with market participants as Central banks may look to raise rates sooner than expected.
Central banks are seeing this as short term and “transitory” while economies recover from the shutdowns. They expect this to naturally moderate over the next year rather than requiring intervention to slow inflation.
Sectors That Benefit
Sectors that benefit in rising rate and inflationary environments are industrials, materials, energy and financials.
This is because industrials will be able to pass through input costs and should have higher output. Materials are being used more and will drive prices up as inventories decrease, causing increased output and higher return on assets and investments. Energy is a reflection of economic activity as well as supply demand issues. I don’t think this will be the leader but is an area to keep an eye on due to the low valuations.
Financials do well as interest rates rise which cause increased margins, higher returns and with improved economic activity comes increased banking needs.
Canadian banks are subject to regulations put on by the Office of Superintendent for Financial Institutions, OSFI. On April 8, 2021, OSFI proposed increasing the rate for which mortgages must be qualified for “uninsured” mortgages. Uninsured mortgages are mortgages that are not being insured against default. If there is a loss on an uninsured mortgage then the lender will assume the loss. If there’s a loss on an insured mortgage then the insurer will make the lender whole. Further, insuring mortgages makes it easier for lenders to securitize the loans and sell them off in bonds or debt and sell to investors.
The qualifying rates for uninsured mortgages are expected to increase to 5.25% on June 1, 2021 from the current 4.79%. This is almost 3% higher than current market rates for uninsured mortgages.
This will affect refinances, homes valued over $1 million in value, non-owner-occupied single-unit rental properties and amortizations over 25 years.
Last time the government amended the B20 lending guidelines in 2016, this caused a people affected to move quicker before the rules took effect. I would expect this to happen again.
Are you looking for a mortgage broker to help you navigate more than just a mortgage but understand the greater impact of the market and your finances when working in real estate? Then contact us today! We would love to help be the advisor for your next mortgage transaction.
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