We’re still dealing with Covid-era distortions in tech fundamentals: Portfolio manager Kevin Burkett

July 24, 2023

Kevin Burkett, portfolio manager at Burkett Asset Management, tells BNN Bloomberg that valuations are very rich in the tech sector and that YTD gains in this sector are all driven by companies with more resilient earning streams. He believes that the mega cap tech and health care sectors could be vulnerable to political pressures from the U.S. elections in 2024. He also discusses the impact of rate hikes on Canada’s housing market.

S&P/TSX composite moves lower Thursday despite energy gains, U.S. stock markets down

July 13, 2023

Strength in energy stocks Thursday wasn’t enough to keep Canada’s main stock index from posting a loss amid weakness in tech and other sectors, while U.S. markets also declined.

It feels like there’s a bit of a change in tone after the second quarter as markets search for direction following a very strong start to the year, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

“I think the next four to six weeks are going to be really critical to send the markets either on its continued growth path or maybe cool things off,” he said.

The S&P/TSX composite index was down 86.84 points at 19,812.23.

In New York, the Dow Jones industrial average was down 290.91 points at 34,474.83. The S&P 500 index was down 33.97 points at 4,370.36, while the Nasdaq composite was down 157.70 points at 13,316.93.

Thursday saw a continued “summer drift” downward, but underneath the quiet day of trading there’s a continued sectoral shift happening, said Burkett.

The S&P/TSX composite’s loss Thursday came despite the energy index rising 1.45 per cent.

With energy prices much higher than they were earlier this summer, the sector is contributing to a shift away from the growth stocks that fuelled this year’s rally, and toward value stocks, said Burkett.

Last year “was all about value outperformance relative to growth,” he said. Then growth stocks, led by tech, rallied in the first half of 2023 and took back some of their 2022 losses.

“We’re starting to see in the late summer some of that begin to unwind a little bit. And I’d say today has been a strong value outperformance day relative to growth.”

That’s despite the pressure on commodities being felt as weakness in China’s economy increasingly makes itself known.

“I think some of the stories we’re hearing out of China are raising concern about whether the Chinese economy really is going to continue to kind of be the engine of the commodity supercycle that we’ve seen, really, since the early 2000s,” said Burkett.

That’s weighing on commodities, but cuts from OPEC plus are continuing to buoy oil prices, he said.

Bond yields stayed elevated Thursday as investors increasingly see interest rates staying higher for longer in the face of economic resilience, said Burkett.

In yet more signs of that resilience, fewer U.S. workers applied for unemployment benefits last week than expected, while a survey of mid-Atlantic manufacturers showed unexpected growth.

The Canadian dollar traded for 73.94 cents US compared with 73.98 cents US on Wednesday.

The October crude contract was up 88 cents US at US$79.90 per barrel and the September natural gas contract was up three cents at US$2.62 per mmBTU (million British thermal units).

The December gold contract was down US$13.10 at US$1,915.20 an ounce and the September copper contract was up three cents at US$3.69 a pound.

With files from The Associated Press. This report by The Canadian Press was first published Aug. 17, 2023.

Why the FHSA isn’t just a homeownership game-changer

July 26, 2023

The First Home Savings Account has been open to Canadians for a few months, and it’s already gaining traction among young Canadians eager to jumpstart their own homeownership journey. But according to two experts, the newest registered savings plan on the block raises some other interesting planning possibilities.

“This works like an RRSP, because you’re able to claim income tax deductions on contributions you make into the account,” says Mark Halpern, CEO at WEALTHInsurance.com (pictured above, left). “It also works like a TFSA in that qualifying deposits grow tax-free and withdrawals you make from the FHSA are tax-free.”

In the months before FHSAs were introduced, Kevin Burkett, portfolio manager at Burkett Asset Management, did a podcast based on preliminary information from the federal government.

“I think now we’re seeing other interesting planning possibilities based on allowable transfers between FHSAs and other registered plans,” Burkett (above, right) says.

Starting from when they first set up their FHSA, an aspiring Canadian homeowner has 15 years to purchase a home. If they end up not using the money in their FHSA by then, they can consider a few options. One option, according to Burkett, is to transfer the balance into their RRSP.

“That creates some opportunities for folks who may not even be considering a home purchase to use the FHSA to boost the room in their RRSP, because I don’t believe that transfer from your FHSA into your RRSP counts against your RRSP room,” he says. “So let’s say you’re a young 22-year-old professional trying to decide between an RRSP and a first home savings account, I think the FHSA is your best option in almost every case.”

When someone makes a withdrawal from their RRSP accounts, Burkett says, every dollar withdrawn is counted as taxable income. But with the FHSA, Canadians can avoid that penalty by instead transferring funds from their RRSP to their FHSA, which are not subject to income inclusion.

“If you transfer $40,000 to the FHSA first, you’ll then have the opportunity to draw out for that home purchase without paying any tax on the RRSP balance,” he says.

“There’s also a loan mechanism for RRSP holders to withdraw from their RRSP for a home purchase through the Home Buyers’ Plan,” Burkett says. “The First-Time Home Savings Account, in my opinion, is far superior to the Home Buyers Plan, in terms of its ability to get you a down payment on a nice home.”

While many older Canadians may make plans to leave a portion of their wealth as a legacy to help future generations, the FHSA also creates a fresh opportunity for those who want to make a generous gift to help their family today while they are alive.

“Parents or grandparents could gift $8,000 to their grandchild. If it’s in cash, there’s no taxable attribution on the gift, so it won’t come back to bite them,” he says. “If the adult child then makes an $8,000 contribution to their FHSA, they get an RRSP-type receipt, which helps them save around $4,000 in taxes. That money will now grow tax-free.”

As Halpern notes, FHSA owners can put in a maximum of $40,000 in their accounts and have the money professionally invested. That means down the line, two young Canadians who’ve been making FHSA contributions with their parents’ or grandparents’ help and also have their RRSPs and TFSAs running could potentially make a strong first step toward owning a home together by the time they get married.

“Imagine a new couple each have an FHSA and have each maxed out their contribution room, and their accounts have grown to $80,000 apiece,” he says. “Through the Home Buyers’ Plan, each spouse can take a $35,000 tax-free withdrawal from their RRSP. So they’ll potentially be able to put down a downpayment of $230,000 or more.”

While Burkett mostly works with older, wealthier clients who are ineligible to use FHSAs, he says he would readily advise young Canadians to use them.

“If I did meet a new client, a young person unsure on a home purchase, I would be recommending a First Home Savings Account regardless of intention,” he says.

S&P/TSX composite up more than 200 points, U.S. stock markets also rise

August 17, 2023

TORONTO – Canada’s main stock index gained more than 200 points Thursday, led by strength in tech, metals, financials and utilities, while U.S. markets also rose as investors digested a positive inflation print from the day before.

U.S. markets rose with another day of growth stocks outperforming equities more broadly, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

“In general, markets have turned very risk-on given yesterday’s encouraging U.S. inflation data,” said Burkett.

The S&P/TSX composite index was up 206.87 points at 20,277.64.

In New York, the Dow Jones industrial average was up 47.71 points at 34,395.14. The S&P 500 index was up 37.88 points at 4,510.04, while the Nasdaq composite was up 219.61 points at 14,138.57.

The Nasdaq led the main U.S. indexes Thursday, rising almost 1.6 per cent. Tech stocks were pulled higher by big names including Google and Nvidia, while cyclicals and consumer discretionary names also had a good day, Burkett said.

U.S. inflation data released Wednesday showed price growth slowed to three per cent in June.

Markets continue to be “obsessed” with the macroeconomic picture, said Burkett.

“I think people are paying more attention than ever to indication that inflation is continuing to moderate and it was really yesterday’s CPI print that I saw changing … risk odds of interest rate decisions on both sides of the border,” he said.

On Thursday, new data also showed that producer price growth slowed in June, even as applications for jobless benefits fell again last week.

“A moderation in inflation in the U.S. has reduced the risk of seeing another barrage of interest-rate hikes there,” said Burkett.

In Canada, the tech sector was also up, pulled by Shopify, which saw its stock rise more than six per cent.

The price of oil Thursday rose above US$77 a barrel, trading at the high end of its recent range after climbing steadily all week. The August crude contract was up US$1.14 at US$76.89 per barrel.

Production cuts announced over the summer appear to be successfully balancing the market, said Burkett: “We’re seeing oil now at mid-70s, which is probably … the most convenient place for benchmark oil prices to be.”

Friday will see the big U.S. banks release earnings in a kick-off of second-quarter earnings season.

“I think people will look to those results for clues on issues in the broader economy,” said Burkett of the banks’ pending releases.

The Canadian dollar traded for 76.17 cents US compared with 75.83 cents US on Wednesday.

The August natural gas contract was down nine cents at US$2.55 per mmBTU.

The August gold contract was up US$2.10 at US$1,963.80 an ounce and the September copper contract was up nine cents at US$3.94 a pound.

This report by The Canadian Press was first published July 13, 2023.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD=X)

Four overlooked deductions to include in tax returns

April 5, 2023

Registered retirement savings plan (RRSP) contributions and child care deductions are the biggest line items to lower net income on tax returns that can push Canadians into a lower tax bracket. But missed opportunities to reduce that net income even further still abound, tax professionals say.

“Deductions are important and in a different category than credits,” says Kevin Burkett, partner at Burkett & Co. Chartered Professional Accountants in Victoria. “In many cases, the deductions available show how tax planning overlaps with investments used.”

Here are four deductions taxpayers may overlook on their tax returns.

1. Using spousal RRSPs to split income

Spousal RRSPs work as follows: one spouse makes the RRSP contribution (using their own contribution room), but the money goes into the account in the name of the lower-income spouse, Mr. Burkett says.

“The benefit is that in the longer term, you are able to draw that out as income to the lower-income spouse,” he notes.

Tax legislation introduced in 2017 limited the ability for many incorporated business owners to split income with their spouses. These rules contained several exceptions, including when the business owner is over age 65.

Mr. Burkett says spousal RRSPs may provide relief for those under 65 who have available RRSP contribution room to achieve some degree of income splitting.

“Provided the contribution stays in the spouse’s account two more years before the money is withdrawn, the income is taxable to the plan [owner],” he notes.

2. Fees paid to advisors

Are fees that clients pay to advisors tax deductible? The short answer is it depends, says Wilmot George, vice-president, tax, retirement and estate planning at CI Global Asset Management in Toronto.

Taxpayers cannot claim commissions paid on investments or fees for advice given on registered accounts, for example. But if they have a non-registered account in which the advisor is paid for advice or management of their investments, those fees can be claimed under “carrying charges, interest expenses and other expenses” – line 22100 on the tax return.

What about fees paid for financial planning? Unfortunately, they don’t qualify to be claimed, Mr. George says.

3. Fees for borrowing money to invest

For non-registered accounts, the interest paid on borrowing money for investment purposes is generally tax deductible, Mr. George notes.

“If the money is used to generate investment income, interest, dividends, rental income … as long as there’s potential to earn income from the investment,” it can be claimed under the same place as advisor fees, he says.

4. Moving expenses

Taxpayers can write off their transport, storage, related insurance, travel expenses and other related items if they move, but there are some specific terms and conditions about who is eligible, Mr. George says.

“It matters how far you move and for what purpose,” he says.

The main qualifiers for this deduction are if the person is moving to earn income for an employer, going to school full-time or starting a business, he says.

Another sticking point is the move must be a minimum of 40 km closer to your new work location or school.

Canadian banks buoyed by mortgage boom look to spur other loans

November 29, 2021

Canada’s big banks have weathered the pandemic on the strength of the country’s heated housing market. This week, they’ll get the chance to show whether they also have other avenues for loan growth.

Surging home prices and strong sales have boosted Canadian residential mortgage and home-equity credit balances at the country’s six biggest banks by C$151.2 billion ($118.2 billion) in the past year and a half. That 13% growth outstrips the gain of just 2.8% for all other types of loans from the banks’ domestic divisions since before Covid-19 took hold in North America.

Housing gains, along with government support programs that prevented a wave of defaults, have helped Canadian banks return to pre-pandemic levels of profitability and put them in position to increase dividends and resume stock buybacks. As the country’s biggest lenders report quarterly earnings this week, investors are watching to see if the firms’ other business lines can pick up significantly before next year’s expected interest-rate increases threaten to cool the housing market.

“If you’re counting on growth in loans and acceptances as your story for why you’re constructive on Canadian banks today, it appears that real estate-secured balances are stretched here, so you’d need to be looking at other categories,” said Kevin Burkett, who helps oversee C$180 million in assets as a portfolio manager at Burkett Asset Management Ltd. in Victoria, British Columbia.

Growth may pick up for other consumer loans while gains in business borrowings are likely to be muted, he said. For Burkett, the stronger case for buying bank shares rests on continued improvement in credit quality, reducing provisions for potential loan losses, along with wider lending margins as interest rates climb and the potential for increased dividends and share buybacks.

The S&P/TSX Commercial Banks Index has gained 30% this year through Friday, topping the 21% advance for the broader S&P/TSX Composite Index.

The Canadian banks are set to announce their first dividend increases and buybacks since the pandemic took hold after the country’s top banking regulator gave them the green light to do so earlier this month, ending a temporary ban put in place in March 2020 to protect the financial system. 

The average dividend increase for the six biggest Canadian banks may be about 20% for fiscal 2022, with Bank of Montreal and National Bank of Canada likely to post the largest hikes, according to National Bank analyst Gabriel Dechaine. Life-insurance companies Manulife Financial Corp. and Sun Life Financial Inc., which also were subject to the payout restrictions, have already announced their increases, with Manulife boosting its dividend 18% and Sun Life raising its payout 20%.

“We had originally anticipated a multiquarter pace to move payout ratios to the midpoint of 40-50% target ranges,” Dechaine wrote in a note to clients last week. “Given what we saw from the Canadian lifecos recently, we believe the  is much shorter.”

Also being watched as banks report their results: whether the lenders continue setting aside money to cover potential bad loans, or release provisions they’ve already built up. Of the Big Six, only Royal Bank of Canada is expected by analysts to release provisions for credit losses this quarter, while the rest are projected to continue their set-asides.

However, when the six companies reported their fiscal third-quarter earnings, five of them released provisions even though analysts had projected they’d put more aside. Only Bank of Nova Scotia took fresh provisions, and the set-aside was just 71% of what analysts had expected. 

Banks’ decision to take smaller provisions or even release previous set-asides could be a main source of earnings beats in the quarter, said Barclays Plc analyst John Aiken. He estimates total provisions of C$1.3 billion for the six banks in the fourth quarter, compared with net recoveries of C$391 million in the third quarter. 

“Amidst the ongoing economic recovery and employment levels that have rebounded to pre-pandemic levels, we maintain that the banks may have managed to side-step the potential delinquencies and credit losses that had previously been anticipated,” Aiken said in a research note this month. “With the improving macro outlook, credit could come in better than expected, spurring upside earnings surprises.”

Capital Markets

Another area of focus in the quarterly results will be the banks’ capital-markets divisions. While those units benefited from a surge of volatility in markets early in the pandemic, that strength in trading has gradually faded. Increases in initial public offerings, debt and equity sales, and merger-and-acquisition advisory work have helped pick up the slack.

The banks’ capital-markets divisions may post a 2% revenue drop from a year earlier for the fourth quarter, on average, Canadian Imperial Bank of Commerce analyst Paul Holden estimated. That would work out to a 5% drop from the third quarter, he said.

“Strong capital markets-related revenue buoyed earnings during the pandemic,” Holden said in a note to clients last week. “Now the question is whether banks will be able to achieve positive pretax, pre-provision growth as capital markets normalize.”