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Back in the land of stocks, it looks like it is getting more expensive for technology companies to continue to expand via acquisitions. Some of the more successful Canadian tech companies, such as Open Text and CGI Group, have been built on a combination of organic growth and strategic acquisitions, which added new products and expanded customer bases. But the cost of these takeovers is rising, as shown in the chart below. At the peak of the last cycle in 2007, the average price paid was about a 15.3 multiple of enterprise value (total value of stock plus debt) to EBITDA (operating cash flow). That multiple dropped to about 8.0 times after the financial crisis, which allowed many companies to make very accretive acquisitions over the next few years. The lack of large target companies and the consolidation of the industry reduced those opportunities and pushed valuation multiples higher. The EV/EBITDA multiple for completed deals has risen to 17.5 times in the past year, higher than it was during the last market peak. While we still favour the technology sector as the best for long-term growth opportunities at reasonable valuations, the economics of ‘growth by acquisition’ has clearly become more of a headwind in the short term. 
While commodity prices have rallied in the post-election euphoria over increased spending and resurgent growth, we do not see a strong fundamental underpinning for the spike in copper prices. Expectations of fiscal stimulus are supportive, but at only 8% of the global market the ultimate effect on global copper demand from U.S. spending will likely be modest. China still remains the major player in the copper market, accounting for almost 40% of global demand. But growth continues to slow down in China and it is also shifting from capital spending (which uses a disproportionately large amount of copper) to consumer spending, which is better for services and retail goods. On the supply side we also see more headwinds as new production will keep the copper market well supplied through 2018. North American copper equities have rallied sharply in the past month and are fully valued relative to copper prices. Average copper valuations are approaching 100% of net asset value (NAV). Without an increase in copper prices to $3.00 or above, we would not expect the shares to trade above NAV. Copper’s rally in November appears to have already hit a roadblock as China’s imports of the metal shrank last month. Overseas purchases of refined copper plunged to the lowest level in more than three years in October, contracting 45% from a year earlier, customs data showed.
Finally, the world remains awash in $10.4 trillion of negative-yield debt, a level that Fitch Ratings warns poses a substantial threat to investors. U.S. government debt levels have sky-rocketed over the past ten years and are now in excess of US$15 trillion, with President-elect Trump ready to add to these debts with aggressive fiscal spending plans. As U.S. interest rates have started to work higher, we wonder how the ‘servicing’ (interest payments) of this massive global debt position can be dealt with and are we setting up for another potential financial crisis? Even Canadians have not acted in their typically ‘financially conservative’ ways and have amassed substantial debt over the past decade. The chart below shows that Canadian household debt as a percentage of total GDP in Canada is now the highest among the G7 countries. 
While much of this new debt is probably related to mortgage debt to finance purchases in the rising housing market, it still remains a risk if the housing market suffers any sort of downturn or if interest rates start to head higher. This data supports the negative view that many foreign investors have of our banks and why they have established such aggressive short positions on Canadian lenders. Domestic bank earnings have thus far been able to rise above these worries as wealth management, corporate lending, investment finance and foreign acquisitions have allowed continued earnings growth. But when the ‘tide’ of economic growth and low interest rates starts to recede, investors may be disappointed in how little protection they have in the Canadian financial system. This is another reason why we remain wary about the outlook for financial markets and overall economic conditions. These thoughts are echoed by the Paris-based OECD which, in a recent report, projected that Canada’s economic growth will increase to only 2.3% in 2018, higher than the 1.2% in 2016, but below the long-term average. While non-energy exports, business investments and private consumption are expected to lead that growth, the OECD says a major housing market correction is the “main downside risk” to those projections. The report also suggests that ‘this could result from an external shock that results in higher mortgage rates and/or unemployment, making it difficult for some financially stretched households to service their mortgage commitments”. Such a correction would reduce residential investments, private consumption and, “in an extreme case could threaten financial stability.” At least we can’t say that we weren’t warned!