May 2016

The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on some of the people at MacNicol & Associates Asset Management (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


“In economics, things take longer to happen than you think they will, then they happen faster than you thought they could.” – Rudiger Dornbusch


Market Commentary: Regulation Nation



As of March 9th, 2016 the current bull market for US equities officially turned seven years old, minting itself as the third longest uptrend in US stock market history; less than two months later, the US economy posted an annualized GDP growth rate of 0.5%, its lowest figure in two years. This dichotomy is striking, ostensibly counter-intuitive, and remains a key point of discussion in contemporary media broadcasts, couching a rebounding economy as the key to a continued bull market. Given the importance of the topic, we thought that this month we would discuss the relationship between economic growth and the stock market, as well as detail theories of how to ‘fix’ slow economic growth.


The link between underlying economic growth and stock market appreciation should be seemingly straightforward; stock prices depend on earnings and revenues, which depend upon consumer and corporate spending, which are key aspects of economic activity, especially within developed countries. It is such an ideology that translates into the ubiquitous discussion of rebounding US economic growth, and whether it will propel stock markets towards new all-time highs. Conclusions of notable research studies, however, articulate a relationship which is much more complicated. Exhibit 1 is a chart, compiled by MSCI Barra Research, which illustrates what we are alluding to; it charts real stock price returns versus real GDP growth of various countries, across a time period of 1958 – 2007 and 2008.


Exhibit 1:


The conclusions from the chart are a confront to seemingly conventional wisdom – not only are stock market returns relatively uncorrelated to economic growth, in certain instances they are actually negatively correlated. This is not to say that we will stop placing importance on economic data; the growth and health of an underlying economy remains vitally important in regards to gauging sentiment, consumer financial health, long-term growth prospects and numerous other integral aspects of capital markets analysis. However, the important conclusion to glean from such analysis is the idea that the underlying economic data does not necessarily have to improve in order for the stock market to move higher. Other factors such as rock bottom interest rates, high market liquidity, rebounding individual net worth, low oil prices and emerging technologies all have – and will likely continue to have – important impacts on the stock market, and could collaboratively serve to march the major stock indices higher, even if economic growth does not meaningfully rebound in the near term.


As a corollary, though, and in order to inform an opinion on the viability of economic growth in both the US and globally moving forward, it is important to delve into why we are seeing slow economic growth, as well as what can be done to fix it.

Unfortunately, lagging economic growth – at least in the Western world – is not a new phenomenon. From 1950 – 2000, for example, US GDP grew at an average rate of 3.5% per year. Since then, the growth has been at an average rate of 1.8%. To put this in perspective, American citizens in 2008 were ‘better off’, in terms of higher personal incomes, by a factor of 300% compared to their counter-parts in 1952. If the GDP growth average over this same period was 2%, rather than 3.5%, Americans would only have improved their personal incomes by 50%. The difference in seemingly minor GDP growth rates has a staggering long-term effect on the growth of standard of living of citizens.


Many theories have been put forth as to why GDP growth has slowed. One theory suggests that most of the ‘game changing’ and revolutionary technologies and innovations, which have served to vastly improve our productivity as a civilization, were created or at least proliferated in the 19th and 20th centuries. Gas-powered vehicles, televisions, the internet, mechanized factories; all of these innovations served to transform our economy and lives as a population. Proponents of this theory point to recent innovations and technologies as vastly inferior in their ability to increase productivity and add societal value. Other popular theories detail increasing indebtedness of citizens and an aging population, both of which are key tenets of Larry Summers’ notable ‘Secular Stagnation’ theory. Another view which has been put forth to us by John Cochrane of Stanford and frequent MacNicol collaborator Dr. Woody Brock, however, concerns an interesting viewpoint that we thought would be worth detailing; they state that the slowdown in economic growth is all about regulation, and more specifically, too much of it.


Exhibit 2 below is a chart which summarizes the crux of the argument fairly well. The chart plots per capita income on the Y-axis and the World Bank ‘Ease of Doing Business’ rating on the X-axis. The readily discernable trend is that the easier it is to create or operate a business, the higher the per capita income of citizens, for the most part. The metric is meant to address the facilitation of creating small business in the particular nation, which is vitally important to an economy in terms of job creation. For context, over 80% of all jobs created annually in the US are as a result of small businesses. The measure is an ambiguous score, but Mr. Cochrane notes how it serves to represent and encompass the tax code, social programs, and government involvement in business. Specifically it demonstrates how these factors facilitate or hinder the creation of new businesses.


Exhibit 2:


While creating this chart, Mr. Cochrane has controlled for enough variables and ensured that the data is tailored to measure causation, and not correlation. This belief has been firmly instilled within our company through Woody Brock, who notes that almost all problems can be solved by increasing productivity and job creation. To demonstrate the effects of regulation and the power of good policy, consider the following examples that Dr. Brock put forth to illustrate the point portrayed in Exhibit 2.


  • North versus South Korea is the primary example; two populations of equal heritage and starting points, but vastly different policies. Since 1955, North Korean growth estimates range from 0% to -1%, while South Korean GDP has grown an average of 8% per year.
  • China pre- and post- 1979. Entrepreneurial activity was promoted and facilitated, an idea and movement captured in Premier Deng’s famous quote “It is now glorious to get rich”. Massive useful infrastructure spending was implemented to catalyze what has been the growth story of our lifetimes. I emphasize the term useful to contrast to some of the current infrastructure expenditure exorbitance which have served to create the notorious ‘ghost towns’.
  • East versus West Germany post-1993. Difficulty surrounding the integration of the two previously-separated states resulted in Germany being labelled as the ‘Sick Man of Europe’ in the 1990’s. However, pro-business regulation and deregulation of markets allowed the German economy to become the economic powerhouse that it is today.
  • Northern Europe post-1688. Between 1000 BC and 1700AD, productivity growth, standard of living and life expectancy growth estimates are effectively non-existent. However, implementation of good policies such as patent protection, property rights and a rule of law brought on the industrial revolution and caused Northern Europe to far outpace the rest of the world in terms of economic growth.


Although some of these examples seem extreme and drastic, all have common themes – the key turning points were driven by changes to governance and pro-business laws and regulation. In contrast, both Mr. Cochrane and Dr. Brock point to the current regulatory landscape in the U.S. and other developed nations as an example of over-regulation and anti-business policies, which have served to hinder economic growth and small business creation. Requirements for business creation are too stringent, health care and labour is over-regulated, and the government has become too involved in the process. It should also be noted, however, that Dr. Brock specifically references the financial sector as an exception; Adam Smith himself, the father of Capitalism, explicitly separated the financial markets from traditional sectors of business, stating that it must be regulated to an extent.


Although likely not the exclusive reason for the recent economic slowdown in the Western world, we find this theory excessively intriguing in its simplicity and logic. One area, specifically, where we have applied this thought process is in regard to our view on India. India has recently undergone a significant change in governance and policy, with a noticeable movement towards a pro-business environment; it is such a move, combined with factors such as strong demographics that drive our bullish sentiment on the nation’s economic growth prospects. As an example, India and China both had roughly the same nominal GDP in the late 1980’s. Today, China’s nominal GDP is five times that of India; the key difference has been pro-business economic spending and policies.


Behavioural Investing:


This month’s behavioural section details the impact of the “present bias” on financial decisions. Essentially, the present bias is people’s tendency to place greater value on immediate gains than long term ones, often leading to a loss. For example, more people would prefer to receive $100 right now, rather than $110 in two weeks. Clearly, the over-valuation of the immediate reward costs the decision-maker $10. We also see the present bias in action when people are quick to drop their New Year’s resolutions. The immediate enjoyment of not having to work out three times a week, for example, is valued greater than the long-term results of a healthier body.


The present bias influences financial decisions such as retirement savings. As mentioned, people tend to under-value long-term gains which can thus lead to decreased savings for the future.

The main strategy that can be used to offset and avoid present bias is to construct an adequate long-term plan, and stick to it. Visibility and communication of long-term possibilities and scenarios is a key way to avoid short-term actions which detriment well-being. Discipline is something that is almost always easier said than done, but creating and articulating short-term schedules and action plans that allow for long-term ideal scenarios is a vital part of achieving long-term goals.




This month, we are lucky to introduce two new members to the MacNicol & Associates team, Christopher Panagopoulos and Bauvneet Sahsi. Christopher will be joining us to assist in the management of our Alternative Trust platform, while Bauvneet will be joining for the Summer from the Richard Ivey School of Business.


Christopher has over sixteen plus years’ professional experience in asset management, accounting and finance.  Prior to joining MacNicol & Associates, Christopher was a Portfolio Manager and Director of Finance with Faircourt Asset Management Inc. for 11 years where he managed or co-managed three North American equity long funds with options-writing programs and modest leverage. Prior to joining Faircourt Asset Management Inc., Christopher worked at TD Securities within the Global Derivatives Products Group. From 1997 to 2004, Christopher worked as a Senior Auditor and Manager at BDO Dunwoody LLP.  Christopher is a CFA Charter holder (2006) and a Chartered Accountant (2000), holds a B.A. from the University of Toronto (1996), and obtained his Certificate in Derivatives Market Strategies from the Canadian Securities Institute in 2015.  Christopher lives in Toronto and enjoys golfing in his spare time.


Bauvneet has just completed her third year in the Honours Business Administration program at the Ivey School of Business. Before coming to Ivey, Bauvneet spent two years in the Honours Specialization Health Sciences program where she took on two mentorship positions. Bauvneet additionally has experience in the retail environment. Next year she will be a peer mentor for the Honours Business Administration Association, and plans to major in finance. She enjoys spending time with family and friends, trying new restaurants, and shopping.


We are excited to welcome both Christopher and Bauvneet to the MacNicol team, and look forward for you all to have an opportunity to meet them at some of our upcoming events.










David A. MacNicol, B.Eng.Sci., CIM, FCSI


Portfolio Manager

MacNicol & Associates Asset Management Inc.

May 2016