Brexit aftermath | Reflections on 2016

Matthew Lekushoff | http://matthewlekushoff.ca

Brexit aftermath | Reflections on 2016 | Pokémon Go

Brexit? What Brexit? The U.K. referendum is currently in the running for the 2016 Y2K Award when it comes to the global markets . Of course, I say this partly tongue-in-cheek as things could turn on a dime tomorrow. But, at the moment, the markets seem to be back to business as usual.

Having the Brexit vote in the rearview mirror gives me the opportunity to look back on the first half of 2016, and allows me to highlight some areas of potential interest for the next half. I'll be commenting on commodities, emerging markets, and value stocks.

From wheat to oil to copper, commodities, as many of you know, have performed pretty poorly the last four to five years. Prices in the second quarter, however, surprised many investors with very good returns . Only uranium, coal, and wheat posted negative numbers over that time period, while natural gas and oil led the way with returns on the quarter exceeding 50% and 35%, respectively. (Speaking of oil, I found a great infographic to explain why the price of oil fluctuates so much.)

Commodities have underperformed over the last five years, and so it's reasonable to expect they have further to rebound. As with all things market related, commodity prices may continue to rise, may swing back at a later time, or fall back again-we'll have to wait to find out.

Most people are familiar with value stocks, but don't fully understand what they mean. For simplicity sake, value stocks have lower valuations than what is found in the market average of other companies. This doesn't necessarily mean that because a stock has a low price it is good value.

One of the most relied upon methods to determine a stock's value is determining the ratio of its price divided by its earnings, known as a P/E ratio or price to earnings ratio . Another way is to divide the price by its book value, known as its P/B ratio or price to book ratio .

Value companies have underperformed stocks with higher ratios over the last number of years. This underperformance led to their valuations being even more attractive than they have been historically, which indicates they should, and could, outperform in the months or years to come.

Lastly, we come to emerging market stocks . Most of the emerging market countries, especially China and India, are trading at valuations much lower than they have historically and relative to the stock markets of developed countries. It's fairly reasonable to expect emerging market countries to grow faster than developed ones, and the fact that they are cheaper is an added bonus that aids their long-term performance.

As you may have guessed, given their diverse holdings, our portfolios are currently positioned to take advantage of all three of these areas. Should any become even cheaper, we'll be happy to acquire more of them. Conversely, should their returns rise dramatically; we'll be pleased to take the profits to allocate in another position that presents better value.

As the future is uncertain, we'll continue to look for the highest probability returns without compromising risk while rebalancing judiciously.

In the review queue

David and Goliath - by Malcolm Gladwell: MalcolmGladwell uses the iconic story of David and Goliath as a metaphor for how some perceived disadvantages could actually be advantages. The book highlights well-crafted modern stories such as those of CEOs with dyslexia and leaders of the civil rights movement. Although I found the book engaging, its over-reliance on anecdotes gave it more of a pop-science feel. I'd still recommend it, but more as an introduction to the idea of disadvantages being more than they seem.

How to Get More Grit in Your Life - by Freakonomics: A great podcast featuring Angela Duckworth, whose research has led to grit being a household term. In the podcast, Duckworth walks the listener through what grit is and the advantages of having it. Just as important though, she also discusses grit's limitations and the danger of treating it as a panacea.

Water for Elephants - by Sara Gruen: A wonderfully written novel about a depression-era travelling circus. This book reminded me of how much I miss reading good fiction and had me rushing back to it whenever I had a spare moment.

Raising the Average - By Seth Godin: A short blog post by the brilliant Seth Godin. It highlights how we are the average of the people we spend time with and the experiences we choose, while highlighting how tiny compromises can lead to mediocrity.

Going viral

Nintendo's new virtual reality game, Pokémon Go, has taken over the Internet , becoming more popular than Tinder and matching Twitter. Just make sure you watch where you're going!

Rolling Stone rank ed 141 SNL cast m embers over the years. You'll likely have issues with some of the choices, but that's half the fun going through a list like this!

Matthew Lekushoff, CIMA

Financial Advisor

Raymond James Ltd.

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www.Matthewlekushoff.ca

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