In an environment where global economic growth remains on track, most global equity markets continued to rise in April. The energy sector performed particularly well, which benefited the Canadian stock market.
This uptrend should continue in 2018, but various factors are raising some doubts, including international trade tensions.
Focus on the past month
Overview of global equity markets
- The U.S. benchmark index, the S&P 500, posted a small gain of 0.4% in April.
- In Canada, the S&P/TSX Index did well, rising 1.8% for the month thanks to the excellent performance of energy stocks.
- The performance of international equity markets was also generally positive, with Europe up 5.1% and Japan, 3.6%.
- Emerging markets ended the month in negative territory, with a decline of 0.6%.
- The price of oil climbed 5.7% in April, bringing its year-to-date price increase to 13.4%. A robust oil price, combined with strong economic growth, would make the Canadian stock market more attractive for foreign investors.
- In the United States, job creation was weaker than expected, as were upward wage pressures. The markets fear a rapid rise in wages, which would result in inflation higher than the corporate growth rate and lower profit margins. The Federal Reserve would then be forced to raise its benchmark rate, which would have a negative impact on stock market returns.
- At the time of writing, most of the U.S. companies in the S&P 500 had reported their first-quarter results, with earnings and sales beating expectations. Canadian companies seem to have had more difficulty, with higher-than-forecast sales but earnings that fell short of expectations.
- Trade issues remain a concern. The probability of a trade war between China and the United States is still high. At the same time, the renegotiation of NAFTA, including the trade dispute resolution mechanism, has yet to be completed.
- As for monetary policy, the Bank of Canada decided in mid-April to leave its rate unchanged, but the market is expecting one or two rate hikes between now and year-end. In the U.S., the Federal Reserve raised its rate in March, but left it at the same level in early May. We will likely see two or three more rate hikes by year-end in the United States.
Performance of our funds
In a still volatile environment, our funds performed well during the month. The returns obtained 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.
- Inflation should be more pronounced in 2018 and this situation, combined with a possible stagnation of economic growth, would result in a period of stagflation. Rising prices and a slowing economy do not augur well for consumers, businesses and the markets.
- Many geopolitical risks could still have negative consequences on the global economy and equity markets. These include the possibility of a trade war between the United States and China, the possible failure of negotiations on a new version of NAFTA, and troubles in the Middle East.
The fundamental indicators did not change much in April. The Purchasing Managers’ Indexes are still in positive territory, while investor confidence, which had fallen slightly in the past two months, seems to be slowly returning to a more neutral level.
Fundamental indicators are economic statistics and market data that our portfolio managers use to establish their investment policies and to make adjustments as needed.
As has been the case for some time now, the positioning of our Private Portfolio Management and Private Securities Management portfolios will vary according to American monetary policy developments. U.S. monetary tightening that exceeds investor expectations could compress stock market valuations.
We are closely monitoring the yield curve in the United States, because an inversion of the yield curve (short-term rates higher than long-term rates) would have negative repercussions on the economy. For now, the U.S. Federal Reserve intends to continue to gradually raise its benchmark rate. The Fed also mentioned recently that market expectations were in line with its strategy.
We currently favour equities and will continue to do so as long as:
- economic conditions remain favourable
- the risk of recession and inflation remains low
- revenue and earnings growth continues
- stock valuations are equal to or lower than their historical average
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.