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The International Monetary Fund (IMF) forecasts global growth of 3.5% in 2017 and 3.6% in 2018, but certain geopolitical and trade risks could change the outlook.

Disappointing first quarter

For a third consecutive year, U.S. gross domestic product (GDP) disappointed in the first quarter, slowed notably by weak consumer spending growth and inventory reduction. However, a rebound of the U.S. economy is likely in the coming months and this, combined with the strong performance of the euro zone and certain emerging economies, should have a positive impact on the global economy.

U.S. Federal Reserve to gradually reduce its balance sheet

Following the 2008 financial crisis, the Fed adopted an unconventional monetary policy that led to the introduction of substantial quantitative easing measures. Today, the U.S. central bank’s balance sheet has swelled to unprecedented levels, as can be seen in the chart below.

At their latest meetings, the Fed’s governors indicated that a gradual reduction in its portfolio of Treasury bonds and mortgage-backed securities would likely begin later this year. Occurring more quickly than investors had expected, this move could result, among other things, in a rise in interest rates, as well as increased credit spread volatility. The Federal Reserve mentioned, however, that it would move forward with this strategy only if the economy performs according to its expectations and when the normalization of the benchmark rate is well under way.

April stock market performance: high and lows

April saw stock markets rise in all regions of the globe, the MSCI All Country World Index even setting a record during the month. The results of the French elections were generally favourable for equity markets in Europe and elsewhere. In the United States, the S&P 500 and Dow Jones indexes were up by about 1% in April, while the S&P/TSX, weighed down by the energy and bank sectors, eked out a gain of 0.2%.

Geopolitical situation

U.S. generates confusion and uncertainty

The first 100 days of Donald Trump’s presidency have already passed and the results are mixed. The absence of a consensus in the Trump cabinet and the frequent about-faces since the Republicans took power are sowing confusion on the financial markets, which is generating increased uncertainty and volatility. Here are some of the main risks associated with the policies and strategies of the new U.S. administration:

  • Possibility of a military conflict with North Korea
  • Frictions with Russia and China
  • Difficulty implementing many electoral promises (repeal of Obamacare, massive tax reductions, construction of the Mexican wall)

Renegotiation of various free trade agreements, including the agreement with Canada and Mexico.

All eyes on France

The results of the election in France seem to have reassured stock markets worldwide. In all likelihood, the French voted to prevent extreme right candidate Marine Le Pen, who was in favour of taking France out of the European Union, from taking power.

For pro-Europeans, the election of Emmanuel Macron is good news, as it suggests a possible weakening of populist and nationalist movements on the other side of the pond. It could also bring a little stability to the euro zone, which would be favourable for European and global markets. However, a number of risk factors remain in that part of the world, including:

  • Elections in Germany this fall
  • Still unknown consequences of Brexit
  • Scotland’s desire to hold another referendum to separate from the U.K.

What the fundamentals say

At April 30, 2017, many fundamentals are still positive, which means that the risk of recession remains low for the next 18 months. Positive indicators include U.S. earnings growth, job creation and new orders, as well as the purchasing managers’ index. However, growth of the money supply, benchmark interest rates in the U.S., and high U.S. equity valuations are among the factors that bear watching.

Strategic perspective

Although we remain optimistic about stocks, we believe the equity market currently offers modest return potential. However, good stock selection in certain specific sectors could be profitable. For now, we continue to favour stocks, which are slightly overweighted―by about 1%―in the balanced portfolios. Bonds are less attractive because of their low return prospects.

As always, we will keep a close eye on the economy and the financial markets so as to adjust our investment strategy as developments warrant. Of course, we will notify you of any changes we may make in the funds you hold with Professionals’ Financial.


François Landry,CFA
Senior Vice-President and Chief Investment Officer


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