Global economic growth remains strong, but market volatility rose in the first quarter of 2018, especially in February and March. The main market indexes ended the first three months of the year in negative territory.
Despite international trade tensions, the bull market seems to want to continue.
Focus on the past month
Overview of global equity markets
- In the U.S., the S&P 500 Index fell 2.7% in March, as even tech stocks lost ground.
- The Canadian market’s benchmark index, the S&P/TSX, was down 0.5%, with the energy sector tumbling 10.4% during the period.
- Stock market performance was also negative in Europe (-2.4%), in Japan (-4.1%) and in emerging economies (-2.2%).
- The threat of a trade war between the United States and China continued to weigh on the markets, as both global trading powers announced possible tariffs.
- The scandal surrounding the use of Facebook users’ personal information and frictions between the U.S. president and Amazon fueled the decline in tech stocks and eroded investor confidence, which is now negative for the first time since last September.
- The Purchasing Managers’ Index (PMI) in Europe came in lower than expected. However, it is still in positive territory, which means the European economy is still expanding.
- The Consumer Price Index (CPI) in the United States was in line with expectations, so inflation is not an issue for now. U.S. industrial production was also stronger than forecast.
- The U.S. Federal Reserve raised its benchmark rate by 0.25% in mid-March, and the market anticipates two or three more rate hikes by December, suggesting more pronounced inflation in 2018.
Performance of our funds
Our funds performed well in an environment of higher market volatility. The good returns they generated are due to our management style, which focuses on quality security selection.
Our strategic monitoring
Main risks to consider
Here some risks that we will be keeping a close eye on in the coming months.
- Rising inflation, combined with weaker economic growth, could result in a period of “stagflation”, in other words, higher prices in a stagnating economy.
- Certain geopolitical risks are still present, i.e. the possibility of a trade war between the U.S. and China, the shelving of NAFTA, and troubles in the Middle East.
The key fundamental indicators – economic statistics and market data that dictate the strategies of our portfolio managers – were generally stable in March. However, two of these indicators moved somewhat.
In the second half of the month, investor confidence about the future direction of the markets went from positive to slightly negative. This trend means that investors are less complacent about the market.
Stock market valuation
Despite expectations of higher corporate profits this year, the market decline in March reduced price/earnings ratios to a level closer to the historical average. At the end of the month, stocks were thus less expensive than at the beginning of the year.
After benefiting from the rapid market rise in February, we reduced the equity weighting of our FDP Tactical Asset Allocation Private Portfolio. Discussions concerning the proposed protectionist measures in the U.S. suggested that an increase in volatility was imminent.
For the next few months, our positioning could vary according to the pace of U.S. monetary tightening. We are currently maintaining our strategy of overweighting equities in our Private Portfolio Management and Private Securities Management approaches for the following reasons:
- Economic conditions remain favourable.
- The risk of recession and inflation is still low.
- Revenue and earnings growth is sustained.
- Stock valuations are lower than in the past few months.
François Landry, CFA Senior Vice-President and Chief Investment Officer
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.