The Globe and Mail - 08.04.2020

B10 OTHEGLOBEANDMAIL | WEDNESDAY,APRIL8,2020

GLOBEINVESTOR

T

he coronavirus pandemic
is hitting older Canadians
hard on two fronts: health
and wealth. Those with regis-
tered retirement income funds
(RRIFs) are facing the further
problem of the mandated RRIF
minimum-withdrawal schedule,
which will force them to cash out
some of their investments during
a serious market downturn.
Canadians are required to con-
vert their registered retirement
savings plans (RRSPs) into RRIFs
by the age of 71 and are then
mandated to withdraw a mini-
mum amount each year from the
conversion date onward. The
minimum required withdrawal
rate increases at each age – from
5.28 per cent at the age of 71, up
to 20 per cent for those 95 and
older. The government’s re-
sponse to the current COVID-19
crisis was to reduce the required
minimum withdrawals by 25 per
cent for 2020.
There is, however, a way for ol-
der Canadians to work around
the minimum withdrawal issue if
they don’t need all of the money
this year for living expenses. Ac-
cording to my research at the Na-
tional Institute on Ageing, in
partnership with FP Canada Re-
search Foundation, seniors in
this position can reinvest the un-
needed after-tax RRIF income in-
to their tax-free saving accounts
(TFSAs).
So long as the senior remains
in the same income tax bracket,
this workaround will deliver the
same after-tax money to spend
down the road as if they’d never
withdrawn the unneeded money
from their RRIF in the first place.
If they believe their invest-
ments will recover, they could re-
purchase the same portfolio mix.
Should stocks rebound, this
strategy could potentially leave
them with large tax-free capital
gains.
A simpler solution would be
for government to suspend the
minimum RRIF withdrawal re-
quirements altogether during
this volatile financial environ-
ment, as the U.S.government has
done for its corresponding
“401(k)” program.
However, this requires forfeit-
ing further tax revenue this year,
which may not be feasible for the
public purse.

The great RRIF debate

The argument around the right
level of minimum RRIF with-

drawals is a long-standing one.

The schedule was most recently

adjusted downward in 2015, rec-

ognizing that the minimum

withdrawal calculations were out

of step with today’s lower invest-

ment returns and greater longev-

ity among Canadians. Lowering

the required withdrawal rates

was a move in the right direction,

but perhaps not enough to pro-

vide sustainable income

throughout retirement.

How many Canadians are

grappling with the RRIF mini-

mum withdrawal rules? There is

no public data source to answer

this question. However, we can

piece togethergovernment and

industry data to get a high-level

picture.

Statistics Canada’s 2016 Survey

of Financial Security found that

60 per cent of older Canadians

have RRSP/RRIF savings, with a

median balance of about

$93,000.

In 2019, Sun Life found that

approximately one-third of their

universe of retirees takes the

minimum payment from their

RRIFs each year.

Putting these together, it ap-

pears as though about one in five

older Canadians is affected by

the RRIF withdrawal schedule.

The TFSA workaround

According to analytics provider

Club Vita, a typical 75-year-old

Canadian female (let’s call her

Gaby) can expect to live another

15 years. In the current environ-

ment of rock-bottom returns on

safe investments, if Gaby were to

make withdrawals according to

the revised 2015 schedule, her an-

nual income would be 40 per

cent less at 90 (her life expectan-

cy) than at 75. And if she lives

longer, that income would be

even lower.

However, Gaby could work

around the minimum withdraw-

als using TFSAs.

Suppose 75-year-old Gaby is

required to take out $10,000 of

her RRIF in 2020. Her daily ex-

penses are minimized from be-

ing restricted to her home – pos-

sibly for many months; there-

fore, she only needs half of those

funds.

This leaves $5,000 (less appli-

cable personal income taxes of

$1,500) to reinvest in her TFSAs.

With that $3,500, she can invest

in new securities in her TFSA, or

she can hold on to the same port-

folio mix as in her RRIF account

by taking advantage of an “in-

kind” transfer.

Should stocks rebound and

Gaby’s TFSA investment doubles,

she’ll have $7,000 to spend – tax-

free. Had the money been al-

lowed to stay in her RRIF in the

same assets, the original $5,000

investment would have also dou-

bled to $10,000.

But this money is taxable and,

after a 30-per-cent income tax

hit, Gaby would again have had

$7,000 to spend. In essence, this

TFSA strategy works around the

RRIF minimum withdrawal and

postpones the need to cash out

investments until after the crisis.

There are no withdrawal re-

strictions on her TFSA, meaning

she can delay drawing on that in-

come until her RRIF – now re-

duced because of the larger with-

drawals she was required to

make – will no longer support

her spending needs.

Managing the known unknowns

The right schedule of mandatory

RRIF minimum withdrawals is

open to debate.

And the full financial market

implications of COVID-19 – and

how they will vary from person

to person – are still significant

unknowns.

But what is clear is that the

unpredictable and dramatic mar-

kets drops are causing a lot of

anxiety, and even panic, among

investors.

Worried older Canadians who

don’t need their RRIF money at

this time should consider rein-

vesting into TFSAs. This financial

strategy can protect their invest-

ment portfolio by buying time

through the crisis.

BONNIE-JEANNEMacDONALD

ISTOCK

OPINION

PhDFSAFCIA,directoroffinancial
securityresearchattheNational
InstituteonAgeing,TedRogers
SchoolofManagementatRyerson
University

Seniorswhodon’tneedtheir

RRIFmoneyshouldconsiderthis

H

ow long can brands stay
top of mind in the absence
of traditional marketing
channels and open stores?
AskNikeInc.in a year and they
might have the answer.
With the spread of COVID-19,
the company has shuttered many
of its outlets worldwide. Addi-
tionally, its regular avenues for
major advertising, including the
Olympics, National Basketball
Association and other organized
sports leagues, are also on pause
for the foreseeable future.
How does Nike, or any global
retailer for that matter, navigate
such a challenge?
There is no shortage of bears
who view these dual threats as a
major issue for enterprises such
as Nike (NKE).
Moody’s has revised Nike’s
credit outlook to negative, and
analysts are slashing 12-month
stock price targets. Some see los-
ing the Olympics and profession-
al sports seasons as a lost oppor-
tunity for increased international
expansion and exposure. Fur-
thermore, coming quarterly reve-

nue and net income projections

are plummeting as the rate of

store closings rises.

The investment community is

bracing for an ugly income state-

ment. Indeed, retail analysts for

many product categories are pos-

ing similar questions as to what

upcoming quarterly financials

will look like.

Though the situation will

probably get worse before it gets

better, there is a contrary and bul-

lish case to be made for Nike.

Given its large presence in Chi-

na, the company was one of the

first affected by issues related to

COVID-19. During the peak of the

Chinese outbreak, Nike had to

close 5,000 of its roughly 7,000

stores and operated with reduced

hours and staff at the locations

that remained open. While this

dramatically decreased in-store

traffic, Chinese e-commerce grew

by 30 per cent, and the number of

weekly active Chinese users on

Nike apps grew by 80 per cent by

the quarter’s end. Nike’s success-

ful pivot to digital suggests it re-

mained relevant to customers de-

spite reducing stores and losing

key marketing venues, such as

the NBA. Since the end of the

quarter, China has reopened 80

per cent of its locations and shop-

ping activity is slowly – very slow-

ly – returning.

Now that North America and

Europe are in the grips of the pan-

demic, Nike is rolling out the

playbook it developed in China.

Stores are being shut, and the piv-

ot to e-commerce and apps is go-

ing full steam. Though each coun-

try is different, the organization

may well duplicate its Chinese

tactical success here in North

America, as well as in Europe.

Moreover, when the crisis does

pass, the company will have a

good idea of how it can best revi-

talize retail operations thanks to

the experience in China.

Nike’s brand appears resilient

enough to weather the storm, but

investors also need to ask, “Is the

balance sheet clean enough to get

them through a crunch?”

One can point to the famous

bankruptcy filing by General Mo-

tors in 2009 as proof that an icon-

ic symbol alone is not enough to

endure a crisis.

Though GM has long since re-

listed, the car maker’s storied 100-

year history did not protect its

shareholders during the dark

days of the Great Recession. For-

tunately for Nike, its balance

sheet is in good shape. Net debt is

low, current assets are nearly

double current liabilities and the

organization has ample liquidity.

This provides the enterprise with

a lot of ammo to fight through the

current downdraft.

Finally, investors must wonder

about Nike’s relative perform-

ance versus peers. It’s too soon to

say what Nike’s relative brand

ranking will look like versus oth-

ers, such as Adidas AG, Under Ar-

mour Inc. and Reebok Interna-

tional Ltd., once the COVID crisis

is over. Nevertheless, it’s clear this

Oregon-based firm continues to

connect with customers in a mea-

ningful way through this period.

It’s possible they come out

ahead; at the least, their compet-

itors are facing all the same chal-

lenges too.

A year from now, investors

may know a lot more about how

elite multinationals can maintain

their images in the absence of tra-

ditional marketing channels and

bricks-and-mortar retail. This

year will be rough – perhaps, for

some, even devastating.

However, the financial aspect

of Nike’s position is robust, and

the famous swoosh is unlikely to

disappear from the minds of con-

sumers. The company continues

to connect with cooped up cus-

tomers through their fitness

apps, driving online sales. When

stores finally reopen and leagues

like the NBA get up and running

again, Nike will still be there, and

the brand will arguably remain as

relevant as it is now.

The market may be coming

around to this thesis; NKE has re-

gained nearly half of its recent

losses and its performance is sig-

nificantly better than many peers

in the retail space.

Nosports?Noproblem.Whyit’stimetobuyNike

PHILIPMacKELLAR

OPINION

INSIDETHEMARKET

WriterfortheContratheHeard
InvestmentLetter

| REPORTONBUSINESS

A

U.S. dollar drought that’s defined the financial stress

of coronavirus is being met with a dam burst of liq-

uidity from the U.S. Federal Reserve. The resulting

flood of dollars could sink the greenback over the

coming years as economies normalize.

While funding stress will likely remain high as virus-strick-

en investors and companies around the world scramble to

secure dollar funding, some strategists and a growing body of

speculators are betting that the Fed’s intervention could

eventually reverse two years of exchange rate gains.

According to Friday’s data from the Commodity Futures

Trading Commission, hedge funds and other players built a

net short U.S. dollar position against major and emerging

market currencies alike to its highest since May, 2018 – show-

ing a powerful countertrade to the recent trend of dollar

strength.

And for some senior strategists such as Andreas Steno Lar-

sen at Nordic banking giant Nordea, that’s no short-term

punt. The Fed’s action to hose the world with U.S. dollars will

have big exchange-rate implications once the panic-driven

demand subsides.

“Everyone with a need of dollars will get it in size and this

should prove to be a game changer for the dollar, once we are

out of this mess,” he said in a research note, adding the green-

back could face a hit of more than 15 per cent over the coming

12 to 24 months once the global economy stabilizes.

That view is far from where the market sees the coming

months at least. More than two-thirds of 63 strategists polled

by Reuters last week said they expected the U.S. dollar to re-

tain recent gains or rise further over the next three months.

But Mr. Steno Larsen argues the Fed is on course to have

more than doubled its balance sheet by the end of this quar-

ter, and will by the end of the year expand it to almost a fifth

of GDP, or twice the European Central Bank’s equivalent.

This will be a significant net negative for the dollar if or when

funding pressures dissipate by midyear.

For two years, the world economy has been sapped by a

slowly rising greenback – spurred by relatively higher U.S. in-

terest rates and a protectionist push in Washington that led

to a trade war and sizable repatriation of U.S. multinationals’

cash piles.

White House resistance to the stronger dollar was vocal

and routine, often blaming the Fed for keeping rates too high

and lambasting U.S. trading partners for artificially subduing

their currencies for trade gain. The Fed, as always, insists it

has no target for the exchange rate and only looks to keep

inflation in check and sustain employment.

But a rising dollar tightens financial conditions globally

because of vast amounts of dollar debt in the world. Dollar

credit to non-banking entities outside the United States hit

US$11.5-trillion last year – or 13 per cent of annual world out-

put, according to the Bank for International Settlements.

As a sudden stop in economic activity in response to the

coronavirus led many companies and investors to scramble

for cash, many measures of dollar funding, such as cross-cur-

rency basis swaps, skyrocketed to levels not seen since 2008’s

crash. That was the widening dollar hole worldwide that the

Fed rushed to fill as it increased standing dollar swap lines

with five other big central banks and extended new lines to

nine mainly emerging central banks.

Last Tuesday, it also broadened its securities repurchase

agreements with foreign central banks, allowing them to ex-

change holdings of U.S. Treasury securities for overnight dol-

lar loans, a move mostly aimed at stressed emerging market

central banks.

The combination of an opening of these dollar taps, a re-

turn of interest rates to zero and a relaunch of the quantita-

tive easing program has in just three weeks has seen the Fed’s

balance sheet balloon to US$5.86-trillion, and it is rising.

The Fed’s moves have successfully flattened and even re-

versed the spike in cross-currency basis swap rates.

The speed with which the Fed can and will want to unwind

these emergency moves may dictate the eventual outcome.

But the scale of the hit to world output being forecast for 2020

as a whole means it will be in no rush to jam on the brakes,

and it will get no thanks from Treasury for any moves to lift

the dollar.

REUTERS

AftertheU.S.dollardrought,

recentfloodcouldundermine

greenback’sstrength

MIKEDOLANLONDON