Global equity markets ended the month of August up slightly, held back by various geopolitical tensions originating in the United States and elsewhere around the world. Global economic growth continued in the second quarter and through July and August, thanks to the synchronized economic expansion in many nations worldwide. However, various factors suggest a possible plateauing of GDP growth in 2018.
Market situation at August 31, 2017
- In the United States, the S&P 500 Index rose by about 0.3% in local currency, bringing its year-to-date return to 11.9%. Note that the benchmark U.S. index has now gone more than 300 days without a decline of at least 5%, a performance witnessed only a few times in recent decades. Once again, it is technology stocks that enabled Wall Street to end the month in positive territory.
- Still slowed by the drop in oil prices, the Canadian stock market advanced very little during the period. At mid-August, the S&P/TSX Index was down 1.6%, but it then strengthened to end the month with a slight gain of 0.5%, thanks in part to the solid performance of the basic materials sector. The S&P/TSX has posted one of the worst performances for the first eight months of this year, due primarily to the energy sector.
- European equity markets lost ground, with the MSCI Europe Index retreating 0.8% in local currency. The stock markets of Europe reacted negatively to the strength of the euro, which hit an 18-month high against the U.S. dollar.
- Emerging markets did well again, as evidenced by the 2.3% gain in Canadian dollars posted by the MSCI Emerging Markets Index. Continuing their uptrend, the stock markets of these countries are leading the way in 2017 with a return of 28%, with the countries of Latin America largely contributing to this strong performance
- The increase in rates caused bond prices to fall, particularly in Canada.
- Investors seem to be overestimating the rise in longer-term bond yields. We believe bond yields will remain low, without necessarily falling into negative territory.
- The Canadian dollar fluctuated slightly, dropping to US$0.78 in mid-August and ending the month at US$0.80, practically the same level as at the start of the month. To date in 2017, the loonie has climbed close to $0.06 versus the greenback, which has reduced returns on U.S. stocks for Canadian investors.
- The U.S. dollar fell again relative to all currencies. Year to date it has lost 13.3% against the euro, 10.1% against the Australian dollar, 6.3% against the yen and 7.6% against the Canadian dollar.
- The price of a barrel of oil dropped from $48.75 to $47.25 between August 1 and 31, with a low for the month of $45.75. This downtrend had a negative impact on Canadian stock markets.
- Many basic commodities saw their prices rise, including copper (7%), nickel (15.6%) and aluminum (10.5%). These increases are due in part to the weakness of the U.S. dollar, the synchronization of economies and the reacceleration of growth in China.
Spotlight on Canada’s economic performance
Economic growth data for the second quarter, published in August, surprised more than a few analysts, with Canada’s GDP growing at a very respectable 4.5% from April to June. However, it is highly likely that this expansion will cool in the coming months, for the following reasons: :
- The tightening of Canadian monetary policy and the resulting rise in interest rates
- The strength of the loonie
- The high consumer debt level in the country
- Measures put in place to slow soaring home prices in Ontario
Relying on encouraging domestic economic data, the Bank of Canada announced on September 6 a new 0.25% increase in its policy rate, which is now at 1%. Economists believe another rate hike could occur before year end, because of the strength of the Canadian economy.
A glance at our portfolio returns
Despite new highs on the U.S. stock market, the monthly return of the balanced portfolios remained weak. The strong loonie once again reduced the return on U.S. stocks held by Canadian investors, while bond prices continued to fall due to the rise in interest rates.
We are continually assessing all the factors that could influence the positioning of our portfolios, including the pace of monetary tightening in Canada and the United States.
- For now, we are maintaining our current strategy, which calls for a slightly overweight position in equities. We believe conditions are favourable for this asset class, with businesses posting good revenue and earnings growth and paying attractive dividends.
- Foreign equities are favoured over Canadian stocks, which are hurt by the strong loonie.
- Bonds appear less attractive to us due to their low return prospects.
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.