enr market outlook january 2018 executive summary

January 2018 ENR Market Outlook

Executive Summary:

• Global equities ranked as the top-performing asset class in 2017, outpacing fixed-income securities, currencies,

commodities, and most alternative investments, including hedge funds and Commodity Trading Advisors;

• The MSCI World Index posted its best calendar year since 2013, gaining 20% in 2017. The MSCI Emerging Markets

Index logged its best annual return since 2009, surging more than 34%. The S&P 500 Index gained a cumulative

22%, including dividends, in 2017 -- its best performance since 2013;

• Bonds, as measured by the Barclays Aggregate Bond Index (investment-grade securities) gained 3.8% in 2017.

High-yield debt as measured by the Merrill Lynch High-Yield 100 Index, gained 6.6%. The J.P. Morgan Emerging

Markets Bond Index rallied 9% in 2017;

• The Reuters-CRB Index of raw materials gained 0.7% in 2017, posting its second consecutive calendar year increase

since 2011. The energy-heavy S&P Goldman Sachs Commodity Total Return Index (GSCI) holding 62% in energy

futures, gained 15.5% in 2017. West Texas Intermediate crude oil rallied 12% in 2017. Brent crude gained 18%;

• The U.S. Dollar Index posted its first calendar year loss since 2012, declining 10% and its biggest annual decline

since 2007. Most European currencies gained versus the dollar, especially those in Eastern Europe. Emerging

market currencies also rallied; the Chinese yuan posted a strong year versus the dollar, rising 6%;

• The Credit Suisse Hedge Fund Index gained an estimated 7.5% in 2017 as the median hedge fund once again failed

to beat the S&P 500 Index. Hedge funds as a group have failed to beat the market for more than 15 years;

• On December 22, President Trump signed into law the most important tax legislation since 1986. U.S. corporate

tax reform is the big driver of the Trump tax cuts. In the past 30 years, almost every other rich country in the OECD,

except the United States, has cut its corporate tax rate to attract investment. Starting in January, that rate drops

from 35% to 21%, once the highest in the OECD, to somewhere in the middle. For the next five years, businesses

will be able to deduct capital equipment immediately instead of depreciating it over several years. The hope

among GOP lawmakers and the President is that significant corporate tax cuts will spillover into the labour market

and grow jobs, lift capital spending and boost wages;

• Shareholders are big winners amid U.S. tax overhaul. U.S. multinationals holding cash overseas will repatriate a

big chunk of that cash-pile, benefiting investors by means of stock buybacks and special dividends. Domestically-

focused companies will also benefit from lower tax rates, including small-cap equities;

• Exchange-traded-funds (ETFs), have dramatically changed the investment landscape. In 2017, ETFs drew more

than $465 billion dollars, a record. Active managers suffered another year of redemptions. But the broadest ETFs

focusing on global advanced and emerging market large-cap stocks now hold a disproportional weighting in

technology stocks. The real test for passive investing will come amid a bear market and how investors and market-

makers will react to tumbling stock prices and possibly, liquidity challenges in a panic;

• U.S. sales at online retailers, brick-and-mortar stores and restaurants rose 0.8% in November and 5.8% year-over-

year – the largest yearly November increase since 2011, according to The Wall Street Journal. However, spending

has been so strong that it is outpacing income gains. According to the Federal Reserve, total consumer credit

owned and securitized now sits at an all-time high at roughly $3.85 trillion dollars;

• The savings rate in the United States continues to fall. The personal savings rate or savings as a share of after-tax

income, fell to 2.9% in November, its lowest level since late 2007. In an environment of record-high consumer

ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com

2 ENR Market Outlook

confidence and strong retail sales over Christmas, a falling savings rate will make further gains in discretionary

consumption more challenging. Rising rates will also put pressure on record-high outstanding credit balances;

• The list of expensive markets continues to grow. Stocks, bonds, real estate, fine art, collectibles, private equity,

leveraged loans and of course, Bitcoin. The majority of the world’s major asset classes hit new all-time highs in

2017 and high valuations threaten the prospect of future returns amid ‘bubbles’ across many core markets.

Irrational investor exuberance is exemplified in large-cap and small-cap equities, most fixed-income markets, high-

flying art prices and prime real estate. The phenomenon isn’t just confined to U.S. asset prices, either. It’s a global

trend that spread rapidly in 2017 as investors chased markets deemed less expensive and in some cases, still

supported by central bank asset purchases in a super low interest environment;

• The CBOE Volatility Index (VIX), continued to hit multi-year lows in 2017 and finished the year at its lowest level

since 1993 as investors abandoned portfolio protection. By some measures, the volatility in the U.S. equity market

hit its lowest levels since 1964;

• The real threat to financial markets in 2018 is the fixed-income market. Investors are heading into 2018 assuming

bond yields will remain historically low and won’t move much higher. Three factors might tilt this complacency

into financial market pain: The first is synchronized global economic growth. China, the euro-zone, the United

States and even Japan are all recording rising GDP growth rates, threatening higher rates. Second, the passage of

U.S. tax reform in late December will likely help to stimulate economic growth as companies boost wages and hire

more workers. And finally, we have the potential for inflationary pressures as labor markets get tighter;

• The endgame for the markets might be a cocktail of accelerated growth, rising inflation and wage pressures,

helping to push the yield on the benchmark ten-year Treasury bond much higher. The ten-year T-bond closed the

year yielding 2.40% compared to 2.44% on January 1, 2017. The ten-year Treasury bond hit its lowest yield on

record in the summer of 2016 at 1.37%;

• China is also a credit ‘wildcard’ with some $4.4 trillion dollars outstanding in shadow banking loans. China’s banks

are trying to lighten recent government regulations aimed at tightening shadow banking rules. The People’s Bank

of China and four financial regulators jointly issued draft rules in November to eliminate implicit guarantees,

regulatory arbitrage and maturity mismatch in the asset management industry. With Chinese ten-year

government bonds yielding 3.93% -- the highest such yield in almost four years, investors would be wise to monitor

credit developments in the world’s second-largest economy;

• Among value-based areas of the market, financials, energy and airlines offer the most attractive multiples. These

sectors will also benefit from corporate tax reform. Among defensives, the consumer staples sector is trading near

its low for the year and ranks as one of the worst-performing groups in 2017;

• We begin the New Year with the third most expensive stock market in history, only surpassed by 1999 and 1929.

The Shiller CAPE Ratio, which we regularly quote because it’s a ten-year inflation-adjusted matrix, sits north of

31.5 times earnings. Since 1877, the median ratio is 16.2 times earnings;

• International stock markets continue to offer better relative values compared to the United States, but that gap

is much less compelling heading into 2018. Foreign bourses enjoyed their biggest advance since 2009 last year

and are no longer cheap, but remain less expensive than the S&P 500 Index. The MSCI EAFE Index (Europe,

Australasia and the Far East) trades at 18 times trailing earnings and the MSCI Emerging Markets Index sells at

15.3 times trailing earnings. Based on a combination of the lowest P/E multiples and lowest price-to-book value



ratios, Portugal, Hungary, Poland, the Czech Republic, China, Brazil, Turkey and Russia offer the best relative and

absolute values now;

• We continue to recommend avoiding most bonds, especially high-yield debt, emerging market bonds and

leveraged loans. Credit spreads for these and other high risk fixed-income securities have compressed markedly

in 2017 and offer poor risk-adjusted values. Spreads for most credit products now trade at their narrowest gap

since late 2007. We prefer floating rate investment-grade bonds, Treasury-Inflation-Protected Securities (TIPS),

high quality municipal bonds and short-term Treasury bonds heading into 2018. Investors are advised to maintain

short durations or avoid most bonds altogether in favour of cash. T-bill yields keep rising. 90-day U.S. Treasury

bills yield 1.39% compared to just 0.50% 12 months ago and 0.23% 24 months ago;

• Stocks should continue to outpace bonds again this year. Bonds are vulnerable to an inflation jolt and rising

economic growth later in 2018 following the passage of corporate tax cuts. U.S. tax cuts are potentially bearish

for bonds. Fixed-income securities also offer poor inflation-adjusted returns and in some cases, negative real

returns, mainly in Europe and Japan. Also, the European Central Bank is likely to begin trimming its bloated

balance-sheet later this year, possibly triggering a 2013-type ‘taper tantrum’ in the global bond market;

• Commodities have been upgraded heading into the New Year as capacity cuts, rising demand and a sluggish dollar

all support the distressed complex. Copper prices are surging and hit their highest levels in December since 2010,

up 26%. We are neutral on the U.S. dollar in 2018 and bearish on Bitcoin and most other cryptocurrencies following

a spectacular advance in 2017;

• ENR’s growth-based portfolios, ENR Global Contrarian and ENR Aggressive Growth, hold 67% and 73% in global

equities, respectively, as of December 27. Both programs also own hedges in gold and silver, Swiss francs and

Japanese yen amid an expensive market and ‘bubbles’ in global credit. The ENR Global Contrarian Portfolio gained

10% in 2017 and the ENR Aggressive Growth Portfolio rallied 18%, net of all fees;

• ENR 2018 Investment Strategy Presentation and Global Market Outlook: Please join us on Thursday, February 1

at 1pm EST for our annual 2018 PowerPoint Investment Presentation and Market Outlook. Please contact Ms.

Melissa Silva at our office to reserve your presentation and log-in information at [email protected]

Era of Low Volatility Unprecedented

Bitcoin and ETF Mania Point to Late Stage Market Cycle

Heading into 2018; Beware of USD Recovery

Investors begin 2018 with the global economy in synch, the Federal Reserve still tightening, the U.S. Treasury yield-curve

flattening and stock markets hitting new all-time highs. In addition, the credit cycle is peaking, volatility is at extreme

historical lows coupled with investor complacency and excessive valuations across most asset classes. There’s also an

undeniable credit ‘bubble’ still inflating in China, other parts of Asia and in Europe where loan covenants protecting

investors have eased over the past three years as issuance skyrocketed. This backdrop is very similar to 1988, 1999 and

2007, which all followed secular bear markets in banking, real estate, stocks and credit.

mailto:[email protected]



Investors holding risk-based assets would be prudent to apply some hedges in their portfolios as the economic cycle heads

into the latter stages of expansion.

As part of our regular warning on the markets over the last several months, growth portfolios should hold some hedges

at this stage of the economic cycle. We realize it’s been unnecessary over the past 24 months. But markets don’t rise

forever. We finished 2017 with an economic expansion that’s 102 months old, now the third longest in U.S. history. This

is a late-cycle rally for stocks. Equities haven’t endured a 20% decline since August 2011; the deepest sell-off following

that bear market plunge was a 13% correction starting in late 2015 that bottomed in mid-February 2016 (see S&P 500

Index chart below). That marked the take-off point for the ultra long period of low volatility we’ve all enjoyed. The cause

for this almost unprecedented period of low volatility is a series of bullish macro events; these include President Trump’s

pro-business mantra of less regulation and recently passed tax cuts, a reinvigorated euro-zone economic recovery and

China’s steady, if not spectacular economic growth since 2015. But one thing is certain: market cycles eventually succumb

to duration and exhaustion.

If you have a portfolio consisting of 65% or more in equities, consider buying hedges; a true hedge will provide you with a

negative correlation to stocks in a down market. It’s insurance. The deeper the sell-off, the better the odds of strong

performance from things like Swiss francs, the Japanese yen and gold. We recommend Swiss francs, yen and gold now.

And by the way, despite a stellar year for risk assets in 2017, these three hedges all gained in value. Hedges usually decline

amid stock market euphoria; that wasn’t the case last year as gold prices climbed more than 13%, the Swiss franc rallied

4% and the yen gained 3.5%. However, investors who shorted the market buying put options or reverse-index ETFs all lost

money as stocks continued their ascent.



China, Inflation and USD Big Wildcards in 2018

As global markets shortly approach their 24-month anniversary in February marking the last correction in risk assets,

investors should expect renewed volatility. We’ve long made the case for defensive asset allocation over the last several

months following a blistering advance accompanied by super-low volatility. The primary trend for stocks remains intact

but sudden shifts in sentiment can occur; an expensive market like this one is vulnerable to a vicious sell-off.

How expensive are stocks? The price-to-tangible book-value of the S&P 500 Index is sitting at 9.2x – well past the 2007

peak of 6.3x and even surpassing the 1999 peak of 8.7x. Also, at 2.1x sales, the S&P 500 Index is also well past the 2007

peak and is just shy of the dot.com peak in 1999, according to David Rosenberg of Toronto-based Gluskin Sheff.

Valuations alone don’t kill secular bull markets. Four global macro wildcards are likely to engulf markets at some point,

possibly in 2018. These include:

1. China’s credit growth now represents more than 200% of GDP at a time when her economy is slowing since 2015.

The last time we saw a growth scare in China was back in August 2015 when she modestly devalued the yuan;

markets immediately swooned, and not just in China. Her fixed-income markets are now ranked as the world’s

second-largest, and stocks in Shanghai and Shenzhen are now worth more than $10 trillion dollars. President Xi

Jinping has vowed to control rampant credit growth. If China suffers a policy error or tightens too much, credit

will freeze and trigger a dislocation. Government of China bonds already yield above 4% -- the highest in three

years. There’s a real risk to investors in 2018 that China’s credit markets temporarily freeze or at best, suffer a

steep correction;

2. Inflation risk has been sidelined as a threat to markets for more than a decade. The financial crisis and the

subsequent destruction of credit fed the deflation monster for years. Plus, huge excess industrial capacity

following the crash has yet to be fully digested. Even massive central bank QE asset purchases haven’t been able

to meaningfully boost inflation above 2% in most advanced economies since 2009. But labour markets in the

United States are at levels pointing to future inflationary pressures. Companies continue to grow their margins in

the absence of inflation and that’s bullish for stocks. Plus, corporate tax reform is potentially inflationary because

it should boost wages for employees and free more capital spending. Inflation rearing its head would be totally

unexpected and derail the markets in 2018 with bonds highly vulnerable to an inflation surge.

Wage inflation remains benign as we shortly close 2017. However, it has probably bottomed. At 2.5% now, wage

inflation becomes a big problem for the markets at 4%, according to market veteran, Byron Wien, vice-chairman

of Blackstone Advisory Partners;

3. In a major reversal since 2009, the Federal Reserve and other central banks are now a threat. New Fed chairman,

Jerome Powell, is likely to follow the same mandate as his predecessor, Janet Yellen. Even the Japanese are

debating loosening their QE blitzkrieg. But more than any other external factor, the Fed has been responsible for

triggering most economic recessions since its birth in 1913 and it’s been hiking rates for two years. It’s not



impossible the Fed might overshoot on interest rates and create a ‘liquidity trap’ or something similar to 1994

when the bond market plunged. Also, the European Central Bank (ECB) has already voiced its approval to cease

asset purchases sometime in 2018, if growth trends persist and inflation grows.

The removal of ECB stimulus will also drive longer term rates higher, possibly triggering a liquidity crisis in

European bonds. We surmise, at this point, that central banks worldwide have successfully staged a remarkable

recovery in financial assets since the financial crisis. Yet, it’s also possible they’re pushing their luck. The odds are

growing that one or more central banks will create a policy error, triggering a bond market fiasco and causing the

collapse of some of the largest credit-focused leveraged hedge funds, other institutions, an emerging market or a

U.S. municipality. Since commencing quantitative easing in 2009, central banks have helped to boost global stock-

market values to close to $100 trillion dollars for the first time ever, according to BNP Paribas.



The Fed is also effectively putting pressure on the yield curve (see chart on Yield Curve, page 6). The difference

between short-term and long-term rates should be widening amid a Fed tightening and an economic expansion;

but that’s not the case since the beginning of 2017. A persistently narrowing spread points to market danger. The

difference between two and ten-year T-bonds closed the year at 0.51%; it began 2017 at 124 basis points. This is

something every investor must monitor regularly because it has historically pointed to future economic

recessions. The last time the yield curve inverted was back in the fall of 2007 – an accurate warning in hindsight;

4. The U.S. dollar is another major wildcard. We started 2017 with the most bulls in years as investors climbed aboard

the USD bull market train after two huge advances in 2014 and 2016. That bullish call was wrong. In 2017, the USD

Index posted its biggest annual loss in ten years, dropping 10%. Heading into 2018, the consensus among traders

is additional dollar weakness. Exactly 12 months ago in our Market Outlook, we thought overwhelming USD

bullishness heading into 2017 was misguided and heavily one-sided. And that proved to be true as the dollar

declined sharply starting in the first quarter. We think the same is true in January as the investment community

remains overwhelmingly dollar-bearish.

In addition to the Federal Reserve still mulling rate hikes, there are concerns the U.S. tax changes could lead to a massive

repatriation of offshore dollars, adding upward pressure to the USD. In 2005, the year after a foreign tax-repatriation

holiday, the USD Index gained 13%. The Fed was also in tightening mode back in 2005. According to The Wall Street Journal,

American companies in 2004 had the opportunity to repatriate capital. Those companies that brought cash home at a

lower tax rate returned $0.94 cents of each dollar to shareholders. The Trump tax cuts will slash the corporate tax rate

from 35% to 21%, its lowest rate since 1939. The dollar could easily resume its rally if dollars flood back home.

A strong dollar is bearish for most risk assets abroad, especially the emerging markets and heavily indebted dollar-based

borrowers. It’s also bad news for dollar-based investors venturing into foreign assets because a rising greenback strips

away local currency returns when converted back to dollars for unhedged FX investors.



International equities outpaced Wall Street for the first time since 2012. If the dollar recovers this year, foreign stocks will

probably struggle to repeat last year’s big gains. Nevertheless, we continue to favor international equities in 2018 because

of compelling valuations, a still supportive ECB in Europe and Bank of Japan, and stronger earnings growth in EAFE

constituent countries and the emerging markets.

In the United States, growth stocks have significantly outpaced value-based equities since the onset of the economic

recovery. That huge disparity might change this year. The U.S. tax package might finally provide the boost needed to

narrow that discount. In 2017, the Russell 3000 Value Index gained just 10.5% compared to a whopping 28% return for

the Russell 3000 Growth Index.

High-tech stocks like Amazon, Alphabet, Apple and Facebook were responsible for the bulk of the growth index’s returns

last year. These days, value is associated with mostly financial and energy shares, which have lagged technology stocks.

According to Pacific Life Fund Advisors, companies in the Russell value index derive 75% of their revenues in the United

States compared to 65% for the growth index. Value-based companies might therefore benefit more than growth stocks

this year because of the decline in effective tax rates for domestic companies.

That doesn’t mean value equities won’t succumb to a steep correction when the broader market eventually falls. But

there’s usually a greater margin of safety in value names compared to high-priced growth stocks. That’s why we like the

iShares Russell Top 200 Value ETF (NYSE-IWX). The Fund includes only those securities harbouring value characteristics,

including large holdings in financials, healthcare and energy – all laggards in 2017. The cheapest part of this historically

overvalued market lies in these sectors. They’ll also benefit from corporate tax cuts this year, particularly the financial and

energy industries.

The Fund’s expense ratio is 0.20%. Top names include Berkshire Hathaway, J.P. Morgan, Exxon-Mobil, Johnson & Johnson

and Bank of America. BUY the iShares Russell Top Value ETF (NYSE-IWX) at market up to $55.



Global Equities

Europcar Group Poised to Grow amid M&A Push

With over 65 years’ experience and approximately 5.5 million drivers in 2016, Europcap Groupe (Paris-EUCAR) is the

European leader in rental vehicles. With operations in over 130 countries and territories, Europcar Group offers its

customers one of the largest vehicle rental networks, both directly and through its franchises and partners. The group

operates through three main brands, Europcar, InterRent, the Group’s low-cost brand, and Ubeeqo.

With an 18% market share in 2016, Europcar is the largest player in the European car rental market. In recent years, it’s

pursued significant inorganic growth, buying competing rental companies in its core markets and helping to drive the

recent acceleration in revenue growth. Relative to the American market, where three operators represent 95% of the

entire car rental business, the European car rental market is highly fragmented; the largest five operators control only

60% of the market. As a result, Europcar has increasingly focused on the potential for consolidation by acquiring both its

franchisees and smaller companies in the industry. This trend has gained traction over the past 18 months following the

purchases of Locaroise in France, GoCar in Ireland and the acquisitions of Buchbinder and Goldcar. Europcar’s €550 million

acquisition of Goldcar, one of the largest low-cost car rental companies in Europe, increases its exposure to the

Mediterranean region, the leisure segment and to low-cost rentals. Goldcar has a strong market position in Spain (30%

market share) and Portugal (25%) and delivered 17% revenue growth per annum between 2008 to 2016.

Europcar also maintains a capital-light model, meaning unlike U.S. operators, Europcar purchases roughly 90% of its fleet

through buyback agreements with OEMs and purchasing cars with a guaranteed price for resale within 5-8 months of the

purchase date. These buyback agreements provide two key advantages: the guaranteed resale price allows Europcar to

fund its fleet with leverage, increasing cash generation and secondly, increases its fleet and cost flexibility with 20% of its

car fleet capable of being returned to the manufacturer in any given month.



As the euro-zone recovers and tourism increases, Europcar Groupe is strongly positioned for earnings growth in 2018.

Another bonus for investors: In late October, the Macron government introduced business-friendly policies aimed at

attracting investors and revitalizing the euro-zone’s second-largest economy. The French parliament adopted a package

of measures starting this year that includes scrapping the wealth levy on everything, except property assets. A 30% flat

tax rate is also being introduced on capital gains, dividends and interest.

By unleashing big tax cuts on business and most income tax brackets, France is encouraging domestic consumption – a

plus for all French businesses. That should spillover to French tourism at home where Europcar is based and the CAC-40

Index in Paris where the company is listed. Europcar’s rental volume growth is also growing substantially more than its

peers since 2016 and along with recent acquisitions, should boost earnings in fiscal 2018.

From a valuations perspective, Europcar Groupe is attractive. The stock trades at 14.6 times price-to-earnings, 0.626 times

price-to-sales and 1.88 times price-to-book. A sweetener for investors is the dividend, currently yielding 3.98%. From its

all-time high of €13.31 in September 2017, the stock trades at €10.25, down a sizable 23%.

BUY Europcar Groupe (Paris-EUCAR) at market in Paris up to €11.20. Apply a 20% stop-loss on your entry price.

Banner Year for Stocks Lifts World Markets

ENR Market Outlook Portfolio It was a great year for the ENR Market Outlook Portfolio. The bull market finally spread from the United States to overseas

in 2017 and foreign markets beat Wall Street for the first time since 2009. A big part of that advance was due to a falling

U.S. dollar, which declined across all regions. When translated back from local currencies, dollar-based investors overseas

earned at least a 20% return as measured by the MSCI EAFE Index (Europe, Australasia and the Far East). Emerging market

investors did even better, gaining 35% as measured by the MSCI Emerging Markets Index.

From our portfolio of stocks and ETFs, the top-performing open position belongs to Canada’s Dollarama Inc. (Toronto-

DOL), up 142% since February 2016. Apple Inc. (NASDAQ-AAPL) is ranked #2, up 89% followed by PayPal Holdings Inc.

(NASDAQ-PYPL), up 84%. Other winners include General Dynamics (NYSE-GD) with a 57% gain; Nestlé (Zurich-NESN) up

30%; Diageo ADR (NYSE-DEO) up 32%; Procter & Gamble Corp. (NYSE-PG) up 27%; Huntington Ingalls (NYSE-HII) up 19%

and the iShares Global Infrastructure Index (NYSE-IGF), gaining 18%.

This month, we’ve got two new recommendations – one domestically-focused on value and another in Europe.

Corporate tax reform in the United States will benefit shareholders in several ways this year. These include share buybacks,

dividends and a higher stock price. We think owning a basket of value-based companies likely to benefit from tax changes

should translate into profits. The iShares Russell Top Value ETF (NYSE-IWX) holds a big chunk in those industries that will

churn greater after-tax profits. Also, value stocks have badly trailed growth stocks for almost ten years and are much less

expensive compared to the high-flying groups that have dominated this bull market.



In Europe, Paris-listed Europcar Groupe (Paris-EUCAR) is the leading rental car company and is aggressively expanding its

reach across the region with some strategic acquisitions. The stock is down more than 20% from its all-time high at a time

when its revenues should grow markedly in 2018. Europcar Groupe is also poised to reap rewards from the boldest tax

cuts in France in decades under President Macron. The stock yields nearly 4%.

BAE Systems (OTC-BAESY) remains in the BUY zone. Europe’s largest defense manufacturer is also the most undervalued

global defense company in 2018. The stock is up 3% since our first plug last month and still trades just above its 52-week

low compared to all-time highs for U.S. and international defense companies. Though gaining more than 9% in 2017, the

British pound will increasingly face pressure from tough Brexit negotiations and a slowing economy this year. The pound

is overvalued ahead of Brexit in 2019. A weaker pound is bullish for multinationals like BAE Systems.

The Athens Stock Exchange has more than doubled off its bear market low. Greece is emerging from a deep economic

depression. We made the case in November for buying the Global X MSCI Greece ETF (NYSE-GREK), now up 10.5% since

our first plug. Most global investors have overlooked this country because of its economic problems and years of hardship.

But Greek assets are still very cheap, despite a big market advance in 2017. Hedge funds are now circling Athens and have

propped the market higher. In July, Greece tapped global debt markets for the first time since 2014. The European Union

recently indicated that Greece had made progress in bringing its finances under control. In 2018, the country is expected

to exit the last of its three bailout programs. The news out of Athens is bullish again for stocks.

For growth and income investors, Kraft-Heinz (NASDAQ-KHC) offers a conservative investment accompanied by a 3%

dividend yield. A new healthy option of prepared foods from mega-star Oprah Winfrey should help to boost flagging

revenues at this massive consumer staples giant in 2018 and 2019. Kraft-Heinz trades just above its 52-week low and yields

3.15%.



Market Outlook Stock Portfolio:

Security Listed Symbol Entry Price

Date Current Yield

Current Price

Gain/ Loss

Advice

Europcar Groupe Paris EUCAR € 10.25 Jan 2/17 3.98% € 10.25 NEW BUY

iShares Russell Top 200 Value Index

NYSE IWX $52.46 Jan 2/18 2.13% $52.46 NEW BUY

BAE Systems plc OTC BAESY $30.25 Dec 4/17 3.40% $31.47 4.03% BUY

Global X MSCI Greece ETF

NYSE GREK $9.41 Nov 2/17 2.12% $10.40 10.52% BUY

The Kraft Heinz Company⁹

NYSE KHC $77.17 Oct 3/17 3.15% $77.48 1.21% BUY

PowerShares KBW Regional Banking ETF

NASDAQ KBWR $53.35 Jun 28/17

1.60% $56.18 5.70% BUY

Daimler AG Frankfurt DAI € 64.94 Sep 11/17

4.59% € 70.62 9.29% HOLD

Huntington Ingalls Industries⁷

NYSE HII $193.55 May 30/17

1.05% $229.71 18.99% HOLD

SPDR EURO Stoxx 50

NYSE FEZ $39.07 May 8/17

2.43% $40.83 6.54% HOLD

BCE, Inc.⁸ TSE BCE CAD

57.97 Mar 8/17 4.78%

CAD 60.06

16.90% HOLD

PayPal Holdings NASDAQ PYPL $40.10 Jan 3/17 0.00% $73.70 83.79% HOLD

Pfizer Inc.⁶ NYSE PFE $32.92 Jan 3/17 3.53% $36.35 14.31% HOLD

Nestlé SA⁵ VTX NESN CHF

65.15 Dec 7/16 2.74%

CHF 83.80

29.51% HOLD

iShares Global Infrastructure Index ETF

NYSE IGF $39.57 Nov 7/16 2.95% $45.45 18.07% HOLD

Diageo ADR NYSE DEO $113.71 Jul 4/16 2.21% $145.39 32.39% HOLD

Apple Inc¹ NASDAQ AAPL $92.79 May 9/16

1.45% $171.37 88.57% HOLD

General Dynamics NYSE GD $131.37 Mar 31/16

1.61% $200.88 57.14% HOLD

Dollarama Inc² TSE DOL CAD

71.60 Feb 12/16

0.27% CAD

156.29 142.53% HOLD

Procter & Gamble³ NYSE PG $77.38 Jul 6/15 2.98% $90.94 26.23% HOLD

Disclaimer: The ENR Global Contrarian Portfolio owns BAE Systems PLC, Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Nestlé, Apple Inc., General Dynamics, Dollarama and Procter & Gamble Corp. ENR Low Risk Portfolio owns Pfizer, Nestlé and Procter & Gamble Corp. ENR Medium Risk Portfolio owns Huntington Ingalls Industries, BAE Systems PLC, Apple Inc., General Dynamics, Procter & Gamble Corp and Pfizer. ENR Global Aggressive Growth Portfolio owns BAE Systems PLC, Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Apple Inc., General Dynamics, Nestlé, PayPal Holdings and Dollarama.



Fixed-Income

Bond “Bubble” Theory to be Tested in 2018

From a peak of $12.7 trillion dollars in July 2016, the value of global government bonds now trading with yields below zero

percent is down to $10.1 trillion dollars, according to data from J.P. Morgan. That figure still represents a big chunk of the

sovereign euro-zone fixed-income market and a slice of the Japanese government bond market; almost 20% of the entire

industrialized bond market universe still trades in negative yield territory.

What defines a bond bubble? Explanations vary. But unless a bond investor today expects an outright economic

depression or another deep recession, owning bonds is a one-way ticket to the poorhouse – eventually. A security that

guarantees a loss (if held to maturity) can’t be rationally priced. Only if its yield falls further and its price rises, does it make

any investment sense. In this case, a bond buyer today is not purchasing a fixed-income security for the coupon. The only

logic driving a bond investor to purchase a negative-yielding security is the expectation of additional price appreciation.

Furthermore, the majority of bonds worldwide – both investment-grade and high-yield – barely cover the rate of inflation,

which is now in an uptrend.

In 2017, bonds continued a record run of issuance, especially overseas. According to Dealogic, companies in Asia, excluding

Japan, issued $328 billion dollars of USD-denominated debt this year as of mid-December, an increase of roughly 60%

compared to 2016. Asian debt issuance surged 33% in 2017. Nowhere is credit growth greater than in Asia, including China,

since the financial crisis.



Since the market low in March 2009, pundits and analysts, including myself, have incorrectly called an end to the secular

bull market in bonds that began in 1982. And year after year, bonds defy the naysayers. It’s undeniably true that we live

in a period of massive government, corporate and public debt, dwarfed by obligations that most issuers can never hope

to fully repay, particularly governments where debt-to-GDP ratios continue to suffocate state coffers. Since the financial

crisis, over $12 trillion dollars has been created by central banks to resuscitate the global economy with most of this vast

sum directed into financial assets. We live in a global debt ‘time bomb’ that cannot absorb a major interest rate shock in

the event of accelerated global economic growth and rising inflation.

The debt ‘bubble’ is also evident and arguably out of control in China where the debt-to-GDP ratio is more than 200% of

the economy. China has been a spectacular economic force over the past 20 years, driving prices lower as she morphed

into a manufacturing powerhouse, exporting deflation. Finally, the boom in technology and innovation has changed the

landscape for consumption, knocking out traditional retail outlets and effectively driving prices lower amid the

‘Amazonification’ of the economy. Technology is ultimately deflationary on goods and services. That’s a secular trend in

place since the 1990s.

From this perspective, it’s easy to understand how the deflation bulls make the case for continued low interest rates in

the industrialized world. And markets have accepted this economic outcome as risk-based investors and speculators alike

have lunged into expensive assets, mainly because of extraordinary central bank monetary policies. The consensus

heading into the New Year is that interest rates will remain low. As for the bond market, it will be hostage to not only the

Federal Reserve in 2018 as interest rates head higher but possibly, volatility triggered by the European Central Bank (ECB)

as it approaches the end of its asset purchase program and the resultant loss of the euro-zone’s single-largest bond buyer.

We remain glued to the Treasury yield-curve for recession signals. The two-year T-bond yield closed 2017 at 1.89% while

the ten-year yield finished at 2.40%; that’s a spread of just 0.51% and the lowest such spread since late 2006. If the yield-

curve inverts in 2018, a recession signal might be on the way. An inverted curve ranks among the most accurate bond

forecasting tools. An inverted curve occurs when long dated bonds yield less than short-term bonds. This anomaly last

occurred in the fourth quarter of 2007 – just as the mortgage-backed market was coming undone. A big plunge in interest

rates would accompany a recession and its reach would undeniably be global. If corporate tax cuts feed into the U.S.



economy, pushing up wages coupled with another year of synchronized global economic growth, then the bond market is

very vulnerable to a 1994-type of sell-off or a 2013 bond market taper tantrum. We’re betting on a bond market sell-off

this year, triggered by more Fed rate hikes and perhaps a strong U.S. dollar.

In our view, the best values in bonds remain floating rate investment-grade debt and TIPS. We are bearish on most other

fixed-income securities and would maintain a short-to-intermediate bond portfolio duration of a maximum 6.5 years. Cash

is a safer option as ninety-day T-bill yields continue to rise as the Fed tightens.

Market Outlook Bond Portfolio:


Date Current Yield

Current Price

Gain/ Loss

Advice

iShares TIPS NYSE TIP $113.53 Dec 7/16 2.07% $113.62 2.03% BUY

iShares Floating Rate

NYSE FLOT $50.69 Oct 5/16 1.46% $50.87 2.15% BUY

Vanguard Intermediate-Term Corporate Bond ETF

NYSE VCIT $85.66 Jan 3/17 3.22% $87.05 4.32% HOLD

Disclaimer: The ENR Low Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond ETF and the Vanguard Intermediate-Term Corporate Bond ETF. The ENR Medium Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond Fund and the Vanguard Intermediate-Term Corporate Bond ETF.

Foreign Exchange

U.S. Tax Repatriation and Rate Hikes Set to Boost USD in 2018 The U.S. dollar posted its worst year in a decade last year with the U.S. Dollar Index dropping more than 10%. The dollar

saw broad-based losses in all regions of the world, except parts of Africa and Central and South America. Some of the

worst losses occurred versus currencies in Eastern Europe and some of the emerging markets.

Heading into 2018, markets are short the dollar. The USD continues to soften as we start the first day of trading in the

New Year, extending its losses from 2017. However, we think a reversal lies ahead as the Federal Reserve continues to

tighten and tax cuts feed through consumption and corporate capital spending later this year. As mentioned before, a

previous tax repatriation in 2004 by the Bush administration and Congress resulted in a big USD Index recovery in 2005.

Over $1.8 trillion dollars of offshore profits lies overseas, mainly by the largest American multinationals, according to

Moody’s. That cash-pile, if repatriated as we expect in 2018, should be a major driving force pushing up the dollar

combined with more Fed rate hikes.



The risk for the dollar, among others, mainly lies in an aggressive Federal Reserve. If the Fed tightens too much, it risks

sinking the economy and eventually driving the dollar into a bear market. Most U.S. economic recessions have been

triggered by an overly exuberant Fed since its creation in 1913. For this reason, we remain carefully glued to the U.S.

Treasury yield-curve for clues of economic weakness later this winter and spring.

Meanwhile, if the ECB and the Bank of Japan delay tightening and effectively announce the end of their asset purchase

programs in 2018, the dollar will generate additional gains versus these two major currency crosses. The ECB is the second

largest central bank after the Fed likely to exit quantitative easing in 2019. The Bank of Canada might be the only major

central bank to raise interest rates again this year following two hikes in 2017. The Bank of England has already started

tightening since last fall but has little leeway to aggressively tighten in this cycle because of the uncertainty caused by

Brexit and a slowing British economy. This leaves the USD as the only major currency supported by tightening, and a

further boost driven by dollar tax repatriation.

Gold Gains 13.6% in 2017

Global Currency Sandwich Gains 7% in 2017

The ENR Global Currency Sandwich, including gold, gained 6.8% in 2017 driven in large part by a big rally in gold (+13.6%)

and the Swedish krona (+10%). Other currency members in last year’s basket also logged gains, including the EUR (+5.3%

since our addition on July 1), the Norwegian kroner (+5%), the Swiss franc (+4.4%) and the Canadian dollar (+3.3%) after

its inclusion on July 1. We suffered a loss in the Brazilian real over the first half of 2017 and cut the Brazilian unit on June

30.



Effective January 1st, 2018, six participants will comprise the new equally-weighted ENR Global Currency Sandwich.

Newcomers include the Polish zloty, one of Europe’s fastest-growing economies, supported by a vibrant export market

and rising domestic consumption. Others include the Japanese yen, the EUR, Swiss Franc, the Canadian dollar and gold.

Remember to build your sandwich on an equally-weighted basis.

Please note you can execute this very cost-effectively at European private banks since most institutions offer a host of

foreign currency accounts. U.S. domestic discount brokers, however, don’t offer foreign currency accounts.

2018 ENR Global Currency Sandwich (Equally-Weighted):

• Gold Bullion

• EUR

• Canadian dollar

• Polish zloty

• Swiss franc

• Japanese yen

Commodities

Commodities Upgraded in 2018

We upgraded commodities to a BUY in January 2018. Commodities might provide investors with a diversification boost in

2018, even if the American dollar recovers. That’s because the global economy is now the most synchronized for growth

since prior to the 2008 credit crisis; China remains the largest net demand source for raw materials and was a strong

consumer last year. Other regions are growing and should witness rising consumption, including the rest of Asia, the Indian

sub-continent, parts of Africa, South America and the United States. The world’s largest economy would also give

commodities an added boost, if the Trump administration and Congress can pass an Infrastructure Spending bill.

Although most commodities remain significantly below their all-time highs and have struggled since peaking in July 2008,

the asset class is cheap in both absolute and relative terms compared to most financial assets. And it’s been nothing short

of a disaster. The benchmarks in this distressed asset class have all crashed about 70% since early 2011 with two positive

years of performance since their plateau. In 2017, both leading benchmarks – the Reuters CRB Index and the S&P Goldman

Sachs Commodity Index – eked out small single-digit gains, logging their second straight year of profits after a deep five-

year bear market.

We prefer a commodities futures index rather than a natural resource stock index. Commodity futures contracts correlate

directly with the underlying commodity their supposed to represent, unlike commodity equities. The latter don’t always



correlate to the sector and are subjected to broad stock-market volatility, which can deviate their performance correlation

to things like oil, gold or copper, for example. Commodity futures, on the other hand, don’t have that anomaly.

The iShares S&P GSCI Commodity-Indexed Trust (NYSE-GSG) is an index invested in a broad variety of commodity futures

contracts. It’s the largest commodity index with $1.4 billion dollars under management, charging a rather steep 0.75% in

annual expenses. That sounds high for an ETF, but remember commodity indexing isn’t cheap and requires the manager

to roll-over contracts regularly. This is a specialty product.

GSG, like the rest of the commodities complex, has been a poor performer, to say the least. Since inception in July 2006,

the Fund has tanked 70%. The chart above gives you a full five-year picture and it isn’t pretty.

The iShares S&P GSCI Commodity-Indexed Trust, however, posted its second positive calendar year return in 2017 (+5.8%)

and now trades at a modest 0.17% discount to its index-value. The Fund holds a combined 63% in energy futures, 15% in

agricultural futures, 11% in industrial metals futures, 7% in livestock futures and 4% in precious metals futures. An

investment in GSG is a wager on the energy sector.

If the global economy continues to gain momentum this year and Chinese consumption remains stable or even increases,

commodities can muster another good year. A rapid increase in U.S. interest rates or a major market sell-off will probably

take commodities down, too. Though historically providing portfolios with a negative correlation to equities and bonds,

that correlation co-efficient has been declining for the past twenty years, meaning most commodities don’t provide upside

when stocks and bonds decline sharply and in fact, decline as well.

Still, the commodities sector provides a good diversification alternative for investors at this stage of the bull market in

stocks and bonds. The asset class is deeply distressed and an uptick in inflation could be beneficial for hard assets.



BUY the iShares S&P GSCI Commodity-Indexed Trust (NYSE-GSG) at market. Place a wide 25% stop-loss on your entry

price and limit your exposure to a maximum 5% of a diversified portfolio.

Market Outlook Commodity Portfolio:


Date Current Yield

Current Price

Gain/ Loss

Advice

iShares S&P GSCI Commodity Trust

NYSE GSG $16.34 Jan 2/18 0.00% $16.34 NEW BUY

ETFS Physical Platinum

NYSE PPLT $88.54 Nov 2/17 0.00% $89.49 1.07% BUY

Inter Pipeline Ltd TSE IPL CAD

25.67 Jun 28/17

6.28% CAD

25.99 8.36% BUY

Newmont Mining NYSE NEM $17.99 Dec 31/15

0.67% $38.06 113.65% BUY

Randgold Resources

NASDAQ GOLD $61.93 Dec 31/15

1.01% $100.59 65.11% BUY

Gran Tierra Energy

TSE GTE CAD 3.18 May 30/17

0.00% CAD 3.45 17.25% HOLD

Exxon-Mobil⁴ NYSE XOM $77.95 Dec 31/15

3.66% $84.59 16.27% HOLD

Schlumberger NYSE SLB $69.75 Dec 31/15

2.97% $69.50 5.38% HOLD

Shareholder Disclaimer:

1. ENR or its employees or its access persons own shares of Apple Inc. 2. ENR or its employees or its access persons own shares of Dollarama Inc. 3. ENR or its employees or its access persons own shares of Procter & Gamble. 4. ENR or its employees or its access persons own shares of Exxon-Mobil. 5. ENR or its employees or its access persons own shares of Nestlé

6. ENR or its employees or its access persons own shares of Pfizer Inc.

7. ENR or its employees or its access persons own shares of BCE Inc.

8. ENR or its employees or its access persons own shares of Huntington Ingalls Industries.

9. ENR or its employees or its access persons own shares of Kraft-Heinz Corp.

Eric N Roseman January 2, 2018 Montréal, Canada

enr market outlook january 2018 executive summary

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