Jul 252019
 

The Canadian federal election is coming up soon. And after that the U.S. presidential race will be in full swing for the 2020 election. Will the incumbent Donald Trump stay for another 4 years? It’s hard to make that call at this point. But perhaps there are some investment opportunities we can look at in the meantime.

Unfortunately the financial market as a whole isn’t particularly attractive right now. The S&P 500 currently has an Earnings Yield (EY) of just 4.45%. So if we put money in a stock market index fund today, we will likely receive an annual return of 4.45% based on corporate earnings, and assuming all other factors stay the same. This is noticeably lower than the long term average EY of 7.35%. Although 4.45% isn’t the worst return you can get, after paying maybe 1% of that in tax, and losing another 2% to inflation, the net real return on investment would be less than 1.5%.

That’s why I’ve decided to be more selective about which assets to buy. One thing you can always count on during an election is uncertainty. The market hates that word. One whiff of uncertainty and investors leave the stock market faster than a guy after hearing the results of the pregnancy test. This upcoming election comes at a time when the U.S. economy is slowing due to record amounts of debt weighing it down. According to the New York Fed, household debt increased for 19 quarters in a row, and is now nearly $1 trillion above the previous peak. Student loans have doubled since 2006 as a percentage of GDP. This will most likely lead to interest rate cuts in the United States to help bolster the economy. And my assumption is that the Bank of Canada will take similar action soon after, as it often did in the past. Lower interest rates usually boosts the stock market and commodity prices.

So for the next 6 to 18 months, I think the best asset classes to be in are bonds, prime real estate, and precious metals. Long term bond funds are highly sensitive to interest rate changes. But as long as we’re quite confident that rates aren’t moving up, then bond funds should provide a low risk option to earn some interest income, with the added potential for capital gains if the price of borrowing become cheaper.

In terms of precious metals, silver is looking to be more attractive than gold right now. This is because the gold to silver price ratio over the long run has been about 60x. But at the beginning of this month the ratio reached a peak of 93x. This means for the cost of buying 1 kg of gold, you could buy 93 kg of silver instead. That means gold is super expensive relative to silver. But in recent weeks the ratio has fell to 88x. Given that the ratio is still relatively high, I believe silver is a more undervalued asset than gold today. And since the gold/silver ratio has started to reverse, this new trend could prove to be advantageous for silver companies.

In the U.S. there are lots of bond funds and silver stocks to choose from. But here in Canada I have picked 2 securities to add to my portfolio. Earlier this month I bought 210 units of BMO’s Long Term Corp Bond index fund (ZLC:TO) and 300 shares of Wheaton Precious Metals (WPM:TO.)

I have bought ZLC before, and it’s one of my favourite funds from last year’s Best Canadian Bond ETFs post. The juicy 4% yield is much better than any government bond. But to get the most out of it, I keep this in my TFSA to pay no tax on the returns. Wheaton Precious Metals (WPM) is a silver streaming company, that also sells gold. It’s traded in the United States under the same symbol – WPM:NYSE.

These 2 picks are simply what I think will be good assets to hold. But it’s just my personal opinion. It’s likely I could be completely wrong. The important thing about choosing what to buy is understanding what you are buying, and know why you are buying it. 🙂

 

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[…] good for the stock market. But things are looking less certain with global trade disputes, and the elections coming up. I think we may see a small stock market correction before more stabilization in 2020. But who […]