On March 1, we hosted our 2022 Virtual Strategic Outlook event, A Tale of Two Perspectives.
We were fortunate to have many excellent questions posed for our Q&A session but could not answer them all due to time constraints. The following are Chairman & CEO John Nicola‘s responses to some of the questions we received. Over the course of the next few weeks, we will be releasing more questions we received with responses from our experts: CIO Rob Edel, CFO Bijal Patel, & Managing Director, Nicola Wealth Real Estate, Mark Hannah.
Who determines what percent goes into private vs. public equities if you, say, invest $1M with you?
Our overall asset allocation model is reviewed by the heads of each of our major asset classes: Public Assets, Private Capital and Real Estate and also by me. However, if a client’s circumstances warrant a change, the advisor working on that client’s file will recommend changes based on the client’s specific situation.
For example, if a client invests $1M with us but has another $1M with a brokerage firm in which 80% is invested in equities, then that client’s asset allocation with us may be different from another client who may have the external $1M invested instead in term deposits.
What do you see as the impact across assets if the Ukrainian/Russian conflict expands and directly engages NATO?
We can already see the impact on public markets. Current sanctions have cut off Russian banks from the global payments system. Energy and other commodity prices have soared, and the sanctions will likely remain in place if Russia succeeds in its war with Ukraine. While all of this translates into more global inflation, interest rates may gradually increase, given how much impact these sanctions will have on the global economy. Equity markets were already expensive before the war, so a correction or bear market would be possible. Higher interest rates were also expected because of rising inflation and a recovering economy. This war has amplified trends that were already in place.
Where does a client’s primary residence fall into their portfolio when discussing capital allocation? For instance, if a client has a $3M home (assume no mortgage) in Vancouver and a portfolio with Nicola of $3M, how does Nicola reflect that existing real estate exposure?
We do not consider personal housing when making our asset allocation recommendations. We consider it instead as a personal asset, and except in the case of downsizing, it generally does not generate cash. It tends to consume cash and essentially is an expense.
What’s the plan to expand within the US markets regarding new clients?
We have several US resident clients now. Our firm is registered as an investment adviser with the SEC. Two of our advisors have earned their US CFP designations, and we currently utilize a custodial platform with Pershing. Our next step will be to potentially create US versions of our critical investment pools, and we are currently working on a plan for that.
Lightning round: Capital gains inclusion rate, Gold, CADUSD FX
We don’t speculate on the price of currencies or commodities. The CAD dollar is close to purchasing power parity with the USD. If the Ukraine War continues to create high commodity prices, that will benefit our dollar.
Our current government can certainly increase the capital gains inclusion rate to 75%. But if they do, our capital gains effective rate will be about 50% more than the US. I am not sure if they will make this change, but if they do, it will likely be in the next budget later this month or early April.
Do you expect gradual or sudden changes in tax policy in Canada as we start thinking about getting back to balanced budgets in a post-COVID economy?
I do not expect this government to ever get to a balanced budget. Since Confederation, we have generally had balanced budgets less than 25% of the time. That is not necessarily a massive danger if the overall debt as a percent of the economy stays within a reasonable range. For the last twenty years, it accomplished that. COVID changed the numbers a great deal. As long as future deficits stay below 2-3% of GDP, the debt should shrink over time as a percent of GDP, and we may not need drastic tax increases to resolve the issue.
Mr. Nicola touched on gold. Can you speak more on silver and gold over the next year or two? Thank you.
I noted in another question that I do not speculate on gold, silver or any commodity prices. They are generally doing well because of the war, low-interest rates and relatively high inflation. However, a few years ago, I compared gold returns with government bonds over the previous 100 years. As of now, the price of gold is about $2000 CAD per ounce; in 1914, it was about $20 CAD per ounce. In order to outperform inflation, gold would only need to be about $500 CAD. Therefore, you can see gold has been a good inflation hedge.
However, if I had used that $20 CAD to buy Canadian government bonds in 1914 and reinvested the interest, the value today would be almost $5000 CAD or nearly twice the value of gold. My question for investors is this: If gold cannot outperform paper money in the most inflationary century recorded in human history, then when will it?
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.