Market Commentary: A Time to Offset Pessimistic Precedents


Highlights this Month

 

January In Review 

Markets started the year on a weak note, with most risk assets losing ground in January. In equities, the S&P 500 lost 0.7% (all returns in Canadian dollar terms) while the S&P/TSX declined 0.3%. Losses in the major equity indices were a little top-heavy, however, with the S&P 500 Equal Weighted index down only 0.5%, while the smaller-cap Russell 2000 Value ETF actually gained 10.5%.

Energy, Healthcare, Real Estate, and Consumer Discretionary helped offset losses in other sectors, with consumer staples and industrials having a particularly tough month. In both Canada and the US, most of the damage was done in the second half of the month, with healthy gains in the first two weeks of the year being more than enough to offset the new weakness at the end of the month. We saw a similar pattern in credit, with spreads widening into month-end.

The January Market Barometer.

Loses in the first month of the year can be particularly ominous given the market adage “as goes January, so goes the rest of the year”. Even worse, according to CIBC, February has been the second worse month of the year (since 1920) and has been even weaker during the first year of a Presidential cycle. Offsetting these pessimistic precedents, however, was Goldman Sachs’ observation that the odds of positive returns during the first year of an economic recovery have historically been overwhelmingly positive.

As for the January barometer, negative returns in January haven’t been quite so bearish lately, with eight out of the last nine negative January’s providing positive returns over the final 11 months. We believe 2021 will make it 10 for 11, with markets recovering from January’s slow start to end the year firmly in the black. Not that there aren’t any potential negative catalysts to drive returns lower. Speculative asset bubbles, higher inflation, and continued COVID-19 issues could all derail the market, but as long as the Federal Reserve is committed to keeping financial conditions easy and President Biden and his fellow Democrats continue spending, markets should keep moving higher. Sure, we might see the odd setback as we saw in January, but the path of least resistance is still higher.

Fear of a stock market bubble last month.

Probably most unnerving for traders last month was the feeling a market bubble was forming and a dotcom style bust was coming ever closer. According to a recent Wall Street Journal article, Google searches for “stock market bubble” reached an all-time high last month while Citigroup Inc.’s proprietary Panic/Euphoria index has spiked to record euphoric levels, even exceeding the euphoria attained during the 2000 tech bubble.

Bespoke Investment Group’s “ludicrous index” confirms the market froth, reporting 80 companies have seen their shares double over the past three months while sporting price to sales ratios above 10 times. While any company trading above 10 times the price of sales and doubling in value over the span of 90 days could be deemed ludicrous indeed, there were 120 companies fitting this description in February 2000.

Bitcoin was the “mother of all bubbles”.

There have been a number of hot flaming waves investors/speculators have been riding, in fact. Bitcoin probably tops the list, referred to in a recent Financial Times article as the “mother of all bubbles”. Special Purpose Acquisition Vehicles, or SPAC’s, have also continued to be popular, with nearing $26 billion in new SPAC money raised in January alone, a new monthly record. Also favoured by traders have been green or renewable energy companies, which have been exhibiting strong performance since the start of 2020.

GameStop and a classic short squeeze.

While all these assets are remarkable in their own way, none of them quite prepared market veterans for what happened in January to a select group of heavily shorted companies. Traders short stock, meaning they borrow stock they do not own and then sell it, in order to hopefully buy it back later (cover their short) at a lower price, thus pocketing the profit.

Rather than a decline in price last month, however, the most shorted names in the S&P 1500 increased 12.0% while the least shorted names were virtually unchanged. Even worse for the professionals, the Goldman Sachs Industry VIP ETF, which is comprised of a basket of top Hedge Fund holdings, declined nearly 2% last month. It’s not supposed to work this way. Rather than the Hedge Fund Pros picking the winners and shorting the losers, the tables were turned, with Main Street retail investors driving the price of popular shorts higher while simultaneously pushing Wall Street closer to the ledge.

The Hedge Fund Pros who short stocks run the theoretical risk of infinite losses given they must eventually buy back the stock they have sold, and nowhere was this risk more in evidence last month than in GameStop, and the 1,745% gain it racked up by market close on January 27th. In a classic short squeeze, retail investors acting on masse, drove up the price forcing Hedge Fund managers to lose billions. Hedge Fund Melvin Capital, in fact, is reported to have lost $4.5 billion, or 53% of its capital.

That the financial prospects for the video game retailer are questionable given the industry is moving away from cartridge-based game platforms GameStop deals in are irrelevant. Retail investors are not concerned with such details. Sure, GameStop might join the ranks of other disintermediated retailers like Blockbuster video, which went bankrupt in 2010, but so what, bankruptcy doesn’t scare this new brand of trader. Profits? That’s so 2010! Case in point, there is still one remaining Blockbuster store left in receivership, in Bend Oregon. Renamed BB Liquidating Inc., the stock still trades and on January 27th increased 774% to 11 cents on record volume. Caveat emptor folks, it’s all fun and games until someone loses an eye.

Signs that the markets are becoming unhinged.

As an investor, this kind of market action is unnerving. It is a sign markets are becoming unhinged with earnings apparently playing little to no role in how a company’s stock trades. The Goldman Sachs Non-Profitability Tech Stock Index, which was started in September 2014 and traded virtually sideways until March of last year, has inflected sharply higher as retail investors search for the next tech unicorn and bid these non-earners ever higher.

The P/E multiple for the Russell 2000 topped 10,000 in early January, largely due to the fact its constituent companies in the small cap index have no earnings, though this didn’t stop it from rising 5% in January. Before we join the Hedge Fund managers on the ledge, however, we would point out these examples are still the exception, and most companies still trade based on fundamentals and earnings, mostly.

While it is true there are more US stocks trading with negative earnings than any other time in history, and markets are valuing them at seemingly incomprehensible levels, as a share of the total US market, it’s still a reasonably small part of the market. According to Goldman Sachs, only 5% of the US market has had negative earnings over the last 12 months, and only 2% have lost money over the past 3 years. When valued using EV/Sales, only 9% of US stocks trade above 20 times. Yes, this is still high, but nowhere near as high as at the peak of the Dot-Com bubble. Currently, only 11% of S&P 500 stocks trade with earnings yield lower than that of 10-year yields, which Goldman Sachs defines as excessive valuation. At the peak of the Dot Com bubble, 43% of S&P 500 stocks traded at these levels, comprising 80% of the total market capitalization. Heck, in comparison, this market is downright cheap!

Technology Stocks have appreciated.

Technology stocks have appreciated, but unlike their dot com bubble counterparts, so have their earnings. The market weight of the technology sector in the S&P 500 has continued to move higher, but so has its earnings weight. As for the market in general, as we highlighted last month when adjusted to reflect the low-interest-rate environment, valuations start to look more reasonable. There is an inverse relationship between stocks and interest rates, with stocks generally trading at higher valuations as interest rates move lower.

It’s not exact, however, and stocks have traded at higher levels than today, despite interest rates also being greater. During the late 1990’s and early 2000’s, for example, interest rates were upwards of 6% and valuations were much higher. Despite this, from June 1997 to December 1999, the S&P 500 gained 74%. What finally burst the tech bubble wasn’t necessarily high valuations but progressively higher interest rates and lower earnings. This is what we need to stay focused on, not get distracted with asset bubbles in stocks that really don’t matter. Only if valuations and asset bubbles cause the Fed to tighten monetary conditions does it become a problem for the market, and Chairman Powell isn’t raising rates because of GameStop. And as for earnings growth, stocks are looking pretty good as S&P 500 companies continue to beat estimates and the trajectory of earnings for 2021 and 2022 remain upward sloping.

The key to earnings growth is the economy and continued progress in conquering the pandemic.

So far, US GDP is rebounding faster than it did during the Great Recession and quicker than forecasters predicted earlier in the pandemic, with the IMF recently increasing its 2021 US growth forecast in January to 5.1% versus 3.1% in October of last year. For the World in total, the IMF now sees global growth in 2021 coming in at 5.5% versus October’s 5.2% forecast, which would be the best year for global growth since 2007. It wasn’t all good news, however. Closer to home, the IMF lowered Canada’s 2021 growth rate from 5.2% to 3.6%.

The biggest downside risk to these growth estimates remains our success in successfully reaching herd immunity and opening up the economy to pre-pandemic levels of activity. While it’s been a hard winter, trends appear to be moving in our favour, with hospitalization rates moving lower since peaking in early January.

With fewer people testing positive for COVID-19, the burden on the health care system should continue to lessen. Interestingly, markets are also becoming less responsive to news flow around the pandemic, likely for the same reason hospitalization rates and new infections have started to retreat, namely targeted vaccinations are starting to have a positive impact, and the market is more confident vaccines will successfully get us to herd immunity.

The timing of achieving herd immunity is very much up for debate.

While we certainly hope this will eventually be the case, the timing, in our opinion, is still very much up for debate. Vaccinating an entire country is a monumental logistical challenge. Vaccinating the entire World, which is what will be necessary to fully open the global economy, is in another league.

After getting off to a slow start, the US appears to lead the pack of countries when it comes to vaccinations with Israel, the UK, and the UAE. On a recent conference call hosted by Goldman Sachs, former FDA Commissioner Scott Gottlieb thought it was possible to vaccinate 300 million Americans by the end of June and believed the US will be in a surplus vaccine position by April.

Canada, unfortunately, is lagging further behind, struggling to secure promised supplies from manufacturers in Europe. It’s every country for itself right now, and not having the ability to manufacture the vaccine in our own country has put Canada at a disadvantage. We suspect this is largely the reason behind the IMF’s negative view on Canada’s 2021 GDP growth rate.

Prime Minister Trudeau has promised every Canadian would have the opportunity to be vaccinated by September, but an aggressive ramp in vaccinations will be needed based on our current pace. It will happen, we will get vaccinated, but the timeline could slip. It’s still not clear, however, how many people will agree to get the vaccine even if it’s available. According to a January survey by the Kaiser Family Foundation, while the number of people intending to get vaccinated has increased since the previous survey in early December, 20% of US adults still indicate they won’t get the vaccine, and 31% are taking a wait and see approach. Distressingly, the skeptics include many health care workers, who we desperately need to keep healthy.

Normally, we wouldn’t be so concerned with the timing of administering the vaccine or how many people agree to get it. New mutations in the virus detected in the UK, South Africa, and Brazil, have injected some urgency, however, as they appear to have higher infection rates, it could lead to another spike in cases if even stricter social distancing restrictions aren’t implemented.

Even worse, there is some question whether the vaccines will be as effective against the new mutations. Already data on the Novavax vaccine is exhibiting lower efficacy rates in the UK and South Africa than predicted, and less promising results from JNJ’s vaccine trials might also be due to the mutations. They still work and they should still be administered, but it highlights time is of the essence as the virus will mutate and the chances of vaccines becoming less effective increases over time.

The longer the virus is left to spread and find ways to out-smart attempts to eradicate it, the greater the chance new vaccines will need to be formulated. The good news on this front is the timeline to develop new vaccines will become shorter as existing platforms will only need to be tweaked. It’s going to require a global effort, however, if we want to put the virus completely behind us.

Herd immunity can never truly be reached if the virus is left to grow and mutate in some parts of the world, not unless we are willing to live with travel restrictions indefinitely. If this is the case, what does this mean for economic growth and corporate earnings? Can we truly get back to pre-pandemic normal life, and if so, when? Markets have priced in normalcy and don’t appear to be concerned with the exact timeline. But what if normal is a lot further off? How will consumer behaviour adapt to a world where some fear of the virus remains? All good questions that frankly no one knows the answer to.

The markets appear more immune to virus news flow.

As we stated above, markets appear more immune to virus news flow, despite growing fears over mutations and their potential impact on vaccines. One of the reasons is government spending has stepped up and appears ready to bridge any gap required to bring the economy back to full employment, and then some. Though Congress approved $900 billion in aid just before the election, upon being sworn in as President on January 20th, Joe Biden promptly announced more was needed.

Biden claimed he preferred a bipartisan deal and wanted to work with Republicans, and then quickly announced a mammoth $1.9 trillion dollar package that virtually ensured no Republican support. While it will require a little congressional trickery, Biden likely has the votes to get most of what he wants to be approved. The new President believes the economy still needs support to fight the impact of the pandemic, though he probably doesn’t mind overshooting a little if it helps reduce inequality, another big Democratic party goal. In the minds of most Democrats, now is the time to go big, and additional spending on infrastructure is likely to follow in the not too distant future.

Democrats have a two-year window to make as much progressive change as they can.

From the Democrat’s perspective, they have a two-year window to accomplish as much progressive change as they can. The Republican Party is in disarray, but who knows what will happen at the 2022 mid-term elections. Barrack Obama came to office with Democrats in control of Congress, only to lose the House two years later in the 2010 mid-terms. Vice-President, Joe Biden had a front-row seat and is well aware the opportunity to make changes can be fleeting. With interest rates at historically low rates, borrowing money has never been as easy. Most forecasters don’t believe the Federal Reserve will start to raise rates until at least mid-2023, maybe even 2024. Most Economists don’t even believe the Fed will start tapering their QE bond-buying program until next year.

Federal Reserve Chairman Jerome Powell has certainly done nothing to convince the market otherwise, claiming the Fed isn’t even thinking about raising rates. While this is comforting, the key, of course, is inflation. If inflation moves meaningfully higher, Powell will indeed have to start thinking about raising rates. Or at the very least, thinking about it. You get the point. So far, the coast is clear. Most economists expect inflation to remain subdued this year, staying below the Fed 2% target, like it has for the past decade. Most of Jay Powell’s colleagues at the Fed (FOMC Participants) still believe risks to inflation targets are either broadly balanced or weighted to the downside. The market, however, is a little more concerned. In a January survey of Strategas’ institutional investor clients, 70% are more concerned about inflation than deflation over the next 12 months.

The bond market is an excellent barometer to gauge inflationary pressure.

The bond market is perhaps the best barometer to gauge any building inflationary pressure and last month traders exhibited some growing concerns. As of early February, 10-year Treasury yields were up 23 basis points so far in 2021, rising above the 1% level for the first time since March 2020.

With the Fed securely anchoring short-term interest rates, the rise in 10-year rates causes the yield curve to steepen to levels not seen since 2017. A steeper yield curve is typically a harbinger of higher rates. Most of the increase in rates and steepening of the yield curve was due to higher inflation expectations, with 10-year inflation break even rates up nearly 20 basis points to 2.18%. Because the increase in 10-year rates was largely a reflection of higher inflationary expectations, real rates were virtually unchanged, and have been range-bound since the summer. Consistently low real rates are one of the reasons investors haven’t been concerned with increasing 10-year rates.

This won’t always be the case. At some point, traders will start to drive real rates higher in anticipation of the Fed tightening monetary conditions in response to higher inflation. With low-interest rates being used by investors to justify today’s historically high equity valuations, higher rates could provide a challenge to risk assets and the current market rally at some point. The key question is, at what level? A majority of Strategas clients believe 10-year rates over 2% would be needed before interest rates become a concern, while 43% wouldn’t be concerned until rates rise above 3% or more.

Given 62% believe rates will end the year at 1.75% or less, interest rates aren’t seen derailing the market this year. A similar Goldman survey was even more bullish, with 73% believing rates wouldn’t end 2021 above 1.5%. Goldman also pointed out the speed at which rates rise can have a major impact on what equity markets do. In analyzing S&P 500 returns since 1965, only when 10-year rates increased more than 2% in a month did equity returns move materially lower on average.

There is potential for a short-term spike in inflation.

While we still believe we are at least a year away from a sustained increase in inflation, we do believe there is the potential for a short-term spike in demand to push inflation higher in the short term. This could provide a challenge for a market seemingly priced for protection. We don’t think the Fed will raise rates even if inflation moves a little higher in the short term. They have essentially said they want inflation to move higher and they won’t be too concerned if the yield curve steepens a little. Bond Traders are likely to test their resolve, however, and this could rattle the market in the short term.

We wouldn’t be surprised if the market takes a bit of a break at some point before continuing to move forward, and it certainly wouldn’t be unprecedented. Strategas recently observed how similar the current rally off the March 2020 lows looks compared to both the August 1982 and March 2009 rallies. In the August 1982 rally, the S&P 500 peaked 14 months later after rising 70%, consolidated for 10 months by declining 14%, then continued to rise until mid-1984.

In the more recent March 2009 rally, the market rose 80% in 13 months before enduring a three-month 17% correction, and then never looked back. In addition to the 2009 recovery, RBC found similar patterns after the 1990 and 2001 recessions, with market corrections averaging 17% and lasting an average of 4 months following 10-month rallies of nearly 50%. On average, the market eventually went on to increase another 19%. We are about 10 months into the current rally, with gains of about 70%. Because monetary and fiscal stimulus is so strong and expected to remain in place for the foreseeable future, we would view a pullback in the market as a buying opportunity. This assumes, of course, we remain on track in taming the virus. The virus will remain the big unknown in 2022, but the market is telling us it would take a major setback to derail this rally.

Nicola Wealth Portfolio Results

Returns for the Nicola Core Portfolio Fund were +0.5% in the month of January. The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Pooled Funds and Limited Partnerships. Actual client returns will vary depending on specific client situations and asset mixes.

The Nicola Bond Fund returned 0.7% in January. Credit spreads tightened in Canada helping to support both East Coast and Marret. The Nicola Bond Fund is currently positioned with short duration exposure and was able to avoid losses stemming from the yield curve steepening. The yield curve mainly steepened from 6 years out with 10-year Government of Canada bonds moving from 0.68% to 0.89%. Retail flow into investment-grade credit remains strong with inflows into ETFs during the month while new issues continue to be met with still high albeit subsiding demand. Relative returns were also supportive from lower quality BBB outperforming AA credit during the month.

The Nicola High Yield Bond Fund returned 1.9% in January. Currency contributed 0.2% as the US dollar strengthened versus the Canadian dollar. The general high yield market traded sideways for the month as significant amounts of new issuance supply weighed on markets. Default rates remained unchanged and sector returns were mixed as Energy outperformed but leisure sold off. All our main strategies contributed to the outperformance for the month, with Apollo Offshore Credit Strategies and Pimco Tactical Income Fund leading the way with returns over 3%. Specific credit selection has driven returns for both funds recently. Despite having lower net exposure, Apollo’s position in names such as Hertz has helped returns while Pimco’s exposure in the securitized market has helped returns. Pimco currently trades at a large premium to NAV and if this persists, we will likely use this opportunity to reduce our position and take profits.

The Nicola Global Bond Fund was flat in January. Templeton Global Bond sold off -0.5% for the month which was offset by gains in BlackRock Securitized Investors and our investment in TIPS, or Treasury Inflation-Protection Securities. We continue to be constructive on Emerging Market debt as government bonds yield 4% and look comparatively attractive, particularly regarding currency exposure. However, given the current economic environment, we believe it is prudent to be selective in terms of countries. The impact of COVID-19 on countries varies widely, and some countries have raised significant levels of US-dominated debt and will be hurt if the US dollar rises. Other countries have deep domestic capital markets, lower budget deficits and lower debt to GDP compared to developed countries, potentially leading to outperformance.

Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.6% and 0.5% respectively in January. A loan in the Nicola Primary Mortgage Fund previously in default was re-valued higher as it is now under a forbearance agreement, which resulted in the Nicola Primary Mortgage Fund outperforming the Nicola Balanced Mortgage Fund. Cash levels were 3% in the Nicola Primary Mortgage Fund and 18% in the Nicola Balanced Mortgage Fund at month-end. Current annual yields, which are what the Nicola Balanced Mortgage Fund and the Nicola Primary Mortgage Fund would return if all mortgages presently were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.1% for the Nicola Primary Mortgage Fund and 5.1% for the Nicola Balanced Mortgage Fund.

The Nicola Preferred Share Fund returned 3.9% for the month while the Laddered Preferred Share Index returned 3.5%. Preferred shares saw strong returns for the month despite ETF’s suffering redemptions. Dwindling supply continues to be the narrative driving returns higher as Pembina announced their intention to redeem preferred shares, Atlantic Power agreed to be taken private and offered to redeem their 3 preferred shares at $22 and Scotia Bank will be redeeming two issues in early February. Many banks preferred shares are approaching fair value, but value remains in both insurers and non-financials.

The S&P/TSX was -0.3% while the Nicola Canadian Equity Income Fund was -1.6%. Investors seemed to be weighing the long-term positives of the vaccine against the short-term prospects of more lockdowns. The best performing sector for the TSX was Healthcare as investors turned to marijuana stocks. The combination of President Biden’s election win, as well as a Democratic Senate majority and recent M&A in the sector, has led to higher valuations.

Energy was also a strong performer in the month. The Nicola Canadian Equity Income Fund had strong performance in Consumer Discretionary and Renewables but performed poorly in Industrials. Our underweight in Health Care also contributed negatively in the month as we feel there is valuation risk in this area, and we prefer the higher dividend areas of the market. The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were Ag Growth International, Park Lawn Corp and Brookfield Renewable. The largest detractors were Nuvei Corp, Air Canada, and SSR Mining Inc. There were no new additions in January. We sold TELUS.

The S&P/TSX was down -0.3% while the Nicola Canadian Tactical High Income Fund was -0.8% for January. The Nicola Canadian Tactical High Income Fund benefited from strong performance in Industrials where our position in Ag Growth International contributed positively. Utilities were also strong due to our exposure to renewables. This was offset by our underweight in Health Care which was the best performing sector driven by hot money flowing into the marijuana sector. Not having exposure to Reddit darling Blackberry also hurt relative performance in the Technology sector. The Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 92%. In the month, we sold our position in Intertape Polymer Group. There were no new additions to the portfolio.

The Nicola U.S. Equity Income Fund returned -2.0% vs -1.0% for S&P 500. The Nicola US Equity Income Fund’s negative performance was driven by the relative overweight exposure to Consumer Staples, Industrials and Financials, which were among the worst-performing sectors last month. Stock selection was mixed with the positive contribution in technology, industrials, and utilities, which was more than offset by negative selection within consumer staples, health care and financials.

The Nicola US Equity Income Fund ended the month with a delta-adjusted equity exposure of 98% (the Nicola US Equity Income Fund had ~6% in covered calls). The Nicola US Equity Income Fund consists of high-quality names with relatively low leverage and attractive ROIC (14% normalized).

The Nicola U.S. Tactical High Income Fund returned -1.7% vs -1% for S&P 500. While the Nicola U.S. Tactical High Income Fund benefited from stock selection within the Information Technology and Utilities sectors, the Nicola U.S. Tactical High Income Fund’s overweight in Staples and certain stocks within Industrials, Communication Services, Financials and Healthcare detracted from performance. Option volatility rose close to 50% (from 22 to 33) during the last trading week of the month; we took advantage of the high implied volatility on January 27th (index vol was at 37) by writing 6 Put options that were on average 12% out-of-the-money earning an average 12% premium. The Nicola U.S. Tactical High Income Fund had a delta-adjusted equity exposure of 60%.

The Nicola Global Equity Fund returned +0.6% vs -0.2% for the MSCI ACWI Index (all in CDN$). The Portfolio’s positive relative performance was primarily driven by regional allocation (underweight U.S. & overweight Asia) and market cap allocation (small caps outperformed large caps). Performance of our managers in descending order were JP Morgan Global Emerging Markets +3.9%, Lazard Global Small-cap +1.7%, Pier 21 Worldwide Equity +0.1%, Pier21 Global Value -0.7%, Edgepoint Global Portfolio -0.7% and Nicola EAFE -1.0%.

The Nicola Global Real Estate Fund return was +1.4% in January vs. the iShares S&P/TSX Capped REIT Index (XRE) +0.3%. While short-term pressures may persist on the public market side, we see many drivers in place to support stronger returns going forward. Recovery in the economy should allow for improvements in property market fundamentals, highly accommodative interest rates and a discounted sector valuation should bring improved investor sentiment.

The announcement of positive results from COVID-19 vaccine trials has increased our confidence in a recovery in fundamentals in 2H 2021. Long-term, we are bullish on the real estate complex and we view that the distributions paid by REITs are safe and represent a large yield pick-up vs. government bonds. We also believe that the sector trades cheaply compared to what the underlying property portfolios are worth. We continue to favour the multi-family and industrial sectors. There were no new names added or subtracted in January.

The Nicola Canadian Real Estate LP NAV per unit decreased to $129.0467 (previously $131.1066), effective January 31st, 2021. The decrease in NAV of 1.6% is a result of the monthly distribution of $0.6697 per unit and a negative return for December of 1.1%. YTD return as at December 31st, 2020 is 2.4%. Portfolio Leverage is 44.03%. The negative return was primarily a result of a decrease in value of the Hat @ East Village. Since COVID-19 restrictions commenced in mid-March, our average rent collection has been 98.72%. In comparison to the industry, this rate is high and is close to the Nicola Canadian Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate team and supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.

The Nicola U.S. Real Estate LP NAV per unit has decreased to US$162.6036 (previously S$163.0645), effective January 31st, 2021, as a result of distributions (cash distribution of US$0.8061 per unit and notional tax distribution of US$0.5322 per unit) exceeding net income for the month. Although this represents a decrease in NAV of 0.3%, December had a positive return of 0.5%. YTD Return as at December 31st, 2020 is 7.4%. Portfolio Leverage is 50.34%.

The positive return was primarily a result of increased appraised values of Park at Arville, Norfolk, Gateway North, and Links at Windsor Parke. Since COVID restrictions commenced in mid-March, our average rent collection has been 97.85%. In comparison to the industry, this rate is high and is close to the Nicola U.S. Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate team and supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.

The Nicola Value Add Real Estate LP NAV per unit has decreased to $186.3627 (previously $190.8865), effective January 31st, 2021. The decrease in NAV of 2.37% is a result of quarterly profit distribution of $3.8438 per unit, a notional tax distribution of $0.4939 per unit, and a negative return for December of 0.1%. YTD return as at December 31st, 2020 is 9.5%. The negative return was primarily a result of a decrease in the US foreign exchange rate.

In December, we funded $5.9m for IntraUrban Ontario, $4.1m for IntraUrban Colwood, $0.4m for 86 Ave, $0.06m for Railway, $0.4m for Uplands, $0.6m for Cottonwood, $0.2m for Spires Road, $2.55m USD for Chandler, $0.2m USD for Fullerton, and $0.05m USD for Hollywood Bungalows.

The Nicola Sustainable Innovation Fund returned +5.7% (USD)/ +6.1% (CAD) in January. Plug Power, Ballard Power Systems, and Ormat Technologies were the top contributors to performance while Beam Global, Itron Inc. and Vestas Wind Systems were laggards in the month. No new names were added in January; however, we trimmed back our position in Plug Power on a series of positive news releases during the month and topped up allocations to several existing names including Array Technologies, Ormat, and TPI Composites.

In his first month in office, US President Joe Biden has already signed several executive orders to address climate change, including a ban on some energy drilling on federal lands, the creation of a National Climate Task Force, and rejoining the Paris Agreement. We expect the pace of announcements will continue in the first half of the year as the Biden administration formalizes their guidance on their clean energy infrastructure plan. Given the run-up in many of our portfolio names, we remain defensively positioned with a higher cash balance awaiting tactical opportunities to add to our positions and watch list names.

The Nicola Alternative Strategies Fund returned +2.6% in January. Currency was a tailwind contributing 0.2% for the month. In local currency terms since the funds were last priced, Millennium returned +2.2%, Renaissance Institutional Diversified Global Equities Fund -1.5%, Bridgewater Pure Alpha Major Markets +1.4%, Verition International Multi-Strategy Fund Ltd +3.4%, RPIA Debt Opportunities +1.4%, and Polar Multi-Strategy Fund +3.8%. We redeemed RPIA Debt Opportunities at the end of the month as we continue to rebalance the portfolio. We believe that it is unlikely credit spreads will widen materially given central bank support, however with credit spreads close to pre-COVID levels and with many companies pre-funding liabilities and raising record amounts of debt last year, the opportunity for an active trading credit strategy is likely to be more muted in the near future. Strong returns for Verition were led by SPACs, Financial Transmission Rights, and preferred share trading. SPAC’s are special purpose acquisition companies and have recently become a more popular path for a private company to go public while Financial Transmission Rights are a form of trading in the power or electricity market.

The Nicola Precious Metals Fund returned -5.0% for the month while underlying gold stocks in the S&P/TSX Composite index returned -4.8% and gold bullion was down -2.3% in Canadian dollar terms. December saw large-cap gold stocks decouple from gold bullion prices during the month, but January saw a reversal of fortunes as weakness in both the bullion and stocks largely offset the gains from December. The push and pull dynamics of COVID and further stimulus remain. Progress on vaccines has diminished the appeal of a safe haven asset such as gold. Longer-term the potential for further stimulus and a weaker USD could push consumer prices higher and benefit gold as an inflation hedge.

 

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