Global equity markets had a rather disappointing performance, but they did manage to end the third quarter of 2018 with a gain. Steady corporate revenue and earnings growth, favourable economic conditions and the low short-term risk of recession remain encouraging for stock market investors.
Focus on the past month
Overview of global equity markets
- U.S. equity markets traded in negative territory in September, with the S&P 500 Index losing close to 0.4% of its value, versus 1.6% for the Nasdaq.
- In Canada, the S&P/TSX fell 0.9%, with consumer staples and energy the main drags. To date in 2018, Canada’s benchmark index is up 1.4%.
- Most international stock markets also struggled during the month, as reflected by the 0.06% drop in the EAFE Index.
- Emerging markets and China lost ground as well, falling 1.5% and 2.3%, respectively.
*All the percentages in this section reflect results in Canadian dollars.
- After many months of arduous negotiations, Canada and the United States finally signed an agreement in principle on a trade agreement that will replace NAFTA. Called the United States-Mexico-Canada Agreement (USMCA), it is raising some concerns in Quebec and the rest of the country, as the Trudeau government made major concessions, particularly concerning imports of U.S. dairy products and exports of automobiles. Note that the tariffs imposed by the United States on Canadian exports of aluminum and steel will be the subject of further discussions, outside the USMCA framework.
- Washington announced the coming into effect of a new series of 10% tariffs on $200 billion of Chinese imports. Beijing was quick to retaliate with 10% tariffs of its own on more than $60 billion of U.S. imports. These new measures were greeted positively by the markets, which feared much higher tariffs. However, these tariffs could rise to 25% on January 1, 2019, unless the two global superpowers manage to iron out their differences by then.
- Government of Canada bonds across maturities were down 0.8% for the month, bringing their cumulative return to -0.2% year to date in 2018.
- As far as monetary policy is concerned, the U.S. Federal Reserve (Fed) raised its benchmark rate by 0.25% in September. A further rate hike is expected in December and three more should follow in 2019. The Bank of Canada also anticipates three policy rate increases next year, but before that, it is expected to announce a rate hike in October.
- In July, the markets favoured value stocks, but in August and September, growth stocks were back in favour again. Note that U.S. growth stock returns are closely correlated with the yield curve, which flattened recently.
Performance of our funds
In September, our funds continued their strong relative performance in the Morningstar rankings, particularly our equity funds. Our FDP Canadian Equity Portfolio has performed exceptionally well, maintaining its 5th percentile position in Canada since the beginning of the year. The sub-managers of this fund are Fidelity Investments Canada ULC, Triasima Portfolio Management and Manulife Asset Management Ltd.
Our strategic monitoring
Main risks to consider
The trade war between the United States and China continues to escalate and remains the main risk to global growth. Here are some of the other risk factors that we are closely monitoring.
- Although the agreement in principle on USMCA calmed the markets, they would be vulnerable if the U.S. Congress does not approve the agreement in the event that the Democrats take control of the House of Representatives in the U.S. mid-term elections.
- Stronger-than-expected inflation, combined with weaker economic growth, could lead to a period of stagflation, i.e. rising prices in a stagnating economy
- By raising its benchmark rate too quickly, the U.S. Federal Reserve would likely hamper American and global GDP growth.
- Tensions in the Middle East in the wake of the U.S. withdrawal from the Iranian nuclear deal could create market uncertainty.
In September, the main fundamental indicators were little changed. While the strength of the U.S. economy is still the key driver of the markets and of global economic growth, political and economic instability in Italy and Spain continues to dampen investor enthusiasm.
Current financial conditions are prompting us to maintain our strategy of overweighting stocks and underweighting bonds. This decision is based primarily on the following factors:
- Economic conditions are favourable and the risk of recession is low.
- The unlikelihood of a threat of uncontrolled inflation.
- The sustained growth of corporate revenues and earnings.
- Reasonable stock market valuations.
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.