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Market Update for April 2017 – Are GICs still safe?

By Isaac Schweigert | May 12, 2017

Stock markets were generally positive in April, and the TSX continued its record string of positive months.  Meanwhile, troubles at Home Capital made some question the safety of their GICs.

 

April 2017 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

 

*Absolute change in yield, not the return from holding the security.

 

The S&P/TSX Composite was up +0.4% in April, its fifteenth positive month in a row.  This is the longest positive streak on the TSX since 12 positive months in 1982-1983.  The S&P500 was was up +1.0% and European stocks performed similarly at +1.1%.  Emerging market stocks performed better at +2.2%.

On the Canadian bond side, the broad FTSE TMX Universe Bond Index was up +1.4% in April, while the short-term bond index was up +0.4%.  US bonds also performed well, with higher rated credits performing the best.  High yield bonds were also positive, and emerging market bonds were the best performer up +4.0%.

Oil was down again (-2.5%) while gold was up +1.7%.  The broad Bloomberg Commodity Index was down again at -1.6%.

The Canadian dollar slipped again in April, and was down -2.6% against the US Dollar and -4.7% against the Euro.

Commentary

Many savers who don’t want to take any risk put their money in Guaranteed Investment Certificates (GICs), happily accepting the low returns.  GICs are available with terms of up to 5 years and come with many different features, including being cashable or linked to a stock market index.  Your initial investment (principal) is guaranteed to be returned to you at the end of the term along with some interest.

With interest rates at historic lows, some people have been investing their savings in other investment vehicles in search of better returns.  While others have moved beyond GICs offered by the Big 5 banks and bought GICs from banks linked to alternative lenders such as Oaken, Home Trust, and Equitable which offered higher interest rates.  Those lenders offered higher interest rates to entice savers away from the big banks, and it worked.  Equitable’s online EQ Bank made a big splash with a 3% interest rate and were flooded with applications for new accounts.

When a homebuyer doesn’t qualify for mortgage financing from one of the big banks they go to one of those alternative lenders.  With a large war chest to lend from they could be aggressive in growing their mortgage business and their mortgage books have been growing in leaps and bounds.  Out of those alternative lenders Home Capital is/was the biggest.

At the end of March 2017, the OSC made allegations against Home Capital executives regarding deficient financial disclosures, particularly around their mortgage underwriting standards.  Since then the balances in high interest savings accounts at Home Capital subsidiaries have declined to $130 million, down $1.4 billion in just the last 2 weeks.  The company’s stock has dropped by over 75% over the last few months leading many to speculate on the company’s demise. So what does that mean for the $13 billion in GICs?

How safe is a GIC really?

A GIC is only as safe as the bank that issues it.  If the bank fails you do have some protection from the Canada Deposit Insurance Corporation (CDIC) which covers bank accounts and GICs up to $100,000.  If you had $120,000 in an account or GIC at a bank, you would not be insured on anything in excess of $100,000 and would become a creditor for that $20,000.  In the event of a bankruptcy you would be looking at getting pennies on the dollar.

Deposits at credit unions are covered under a similar program.

How can you protect yourself?

If you are going to hold your money at a bank that is not one of the Big 5 banks, make sure you don’t have any more than $95,000 with them in a single accoun.  That allows a little room for interest to build up before you have to make a withdrawal or for a GIC to mature.  And make sure that they are insured by CDIC!

With interest rates at historic lows and GICs not keeping up with inflation, now is a good time to make sure that your investments are growing and that you’re on track to meet your goals. For many that means taking a little more risk with a diversified portfolio of stocks and bonds tailored to your individual needs.

In Canada the vast majority of investment accounts like RRSPs and TFSAs are held at financial institutions that are a member of the Canadian Investor Protection Fund (CIPF).  Accounts held at CIPF member firms are protected up to $1 million in value.

At ModernAdvisor, all of our clients’ accounts are held at Credential Securities, which is a CIPF member. In the event that Credential ran into difficulty, our clients’ accounts would be protected up to that $1 million value.

 

April Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate ticked up to 6.7% in March despite 19,400 full time and 1,000 part time jobs being added.  The labour force participation rate rose slightly to 65.9%.

Housing prices across Canada rose 0.9% in March.  Hamilton (+2.1%), Toronto (+1.8%), and Victoria (+1.0%) all provided the gains greater than the national average.

The number of new housing starts rose +18.4% in March to 253,700, the highest level since April 2012.  Building permit activity in February declined -2.5%.

The inflation rate was +0.2% in March, or +1.6% on an annual basis.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +1.3% for the last year, the lowest level since February 2014.  Retail sales declined -0.6% in February.  The decline was attributed to a -1.7% decline in new car sales and a -5.5% decline at other car dealers.  Compared to a year ago, retail sales were up +4.7%.

GDP was flat in February as declines in manufacturing, mining and oil & gas, and retail sales offset a rise in constructions and financial services.  The Bank of Canada left the benchmark interest rate unchanged at their April 12th meeting.  The next meeting is scheduled for May 24th.

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics


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Isaac Schweigert

Isaac Schweigert

Isaac is a CFA charterholder and is Portfolio Manager and Chief Compliance Officer at ModernAdvisor. He has over 11 years of investment industry experience, including asset allocation, portfolio management, due diligence, compliance and reporting.