Entering 2018, the world’s major stock exchanges got off to the best start in any year since 1997. Up to September, the markets cast aside uncertainty and short-term disruptions, gaining from the favourable economic context, a commitment by central banks to a cautious and gradual process of monetary tightening, the effects of the U.S. tax reform and the prevailing mood of optimism. But the longest bull market in history was not immune from the contradictions to which financial markets are sometimes prone. Despite a lull in November, market developments throughout the quarter were driven by the anticipation of a slowdown in economic growth, escalating trade tensions, rising U.S. interest rates, recurrent geopolitical tensions and the failure of technology stocks. At the close of a devastating month of December, the worst since 1931 for the S&P 500 Index, the losses clearly were significant, emanating worldwide from the key economic sectors.
The malaise afflicting the financial system also reached the credit market, as reflected in a sharp rise in spreads averaging nearly 35 basis points for the fourth quarter in Canada. All sectors were hit, including the energy and communications sectors, which had the worst performances. Preferred shares experienced just as tough a quarter. These lower share prices resulted from the same basic factors affecting world markets as well as from credit spreads.Two other factors more specific to this market also contributed to this decline: the sale of shares by retail investors seeking to lock in year-end tax losses, and a reduction in the liquidity of the secondary market for preferred shares.
The S&P/TSX (Canada), S&P 500 (United States) and MSCI ACWI (all country world) indices produced returns of -10.1%, -9.0% and -8.1% respectively (in Canadian dollars) in the three months ended December 31, 2018. In the fourth quarter, emerging markets posted negative returns but outperformed other regions of the world. However, these markets, plagued by the sharp rise in the U.S. dollar and the threat of a trade war, performed poorly in 2018. Equity markets in Europe and the Far East were unable to gain momentum in 2018 and, like other markets, ended the last quarter on a strong negative note.
During the quarter, asset allocation subtracting value from Global Series portfolios. Our underweight position in fixed-income assets contributed to the strategy’s negative yield following a decline in interest rates in the final months of the year. Indeed, the upward movement in interest rates that began in the third quarter went sharply into reverse in the fourth quarter of 2018. Canada 10-year bond rates reached a threshold below their 2017 year-end level after declining by 45 basis points. As regards stock selection, a major correction in the preferred share index affected performance for the quarter despite the portfolios’ low exposure to this asset class. Finally, the Invesco S&P 500 Equal Weight Exchange-Traded Fund (RSP) suffered a decline due primarily to negative yields in the industrial and energy sectors. The Canadian oil industry is encountering strong headwinds, notably in response to fears of a global economic slowdown and to excess commodity inventories.
The Canadian equity portion of the Global Series portfolio outperformed its benchmark index. Advancing issues included Alimentation Couche-Tard (+5.3%) and Québecor (+11.2%). Québecor presented excellent quarterly results. Alimentation Couche-Tard stock continued a rise begun in the previous quarter. In late October, the company announced its new strategic goal of doubling EBITDA in the next five years. Even without considering potential acquisitions opportunities, we believe Couche-Tard can draw upon its global scope, Circle K brand recognition and its excellent abilities as an operator to stimulate internal growth. Adverse factors include the disappointing performance of stocks in the energy sector (-18.2%). The decline in oil prices, with WTI down about 38% for the quarter, combined with the shortage of pipeline infrastructure in Western Canada, affected stocks such as ARC Resources (-42.9%) and Suncor (-23.1%).
|3 months||YTD||1 Year||3 Years||5 Years||2018||2017||2016||2015||2014|
|Sample Account footnote 1||-4.0%||-2.9%||-2.9%||4.0%||4.0%||-2.9%||6.1%||9.2%||1.6%||6.7%|
|Benchmark Index footnote 2||-3.6%||-1.6%||-1.6%||4.3%||5.4%||-1.6%||7.5%||7.3%||3.8%||10.7%|
The return of each portfolio represents the return of the model portfolio. The real return obtained by investors may vary according to the time of their investments. The return of each portfolio is compared to that of its benchmark index. Monthly benchmark index data is from Desjardins Securities. All results shown are before management fees. These results reflect past returns and are not indicative of future returns.
In the short term, caution is called for. The prevalent uncertainty, exacerbated by trade and geopolitical tensions as well as by the partial closing of some U.S. government departments and the imminent completion of the Mueller report on Russian interference in the U.S. presidential election, are obvious sources of concern for investors. However, some will argue that the economic setting remains generally positive and that the recent downturn represents an opportunity to boost the portion of portfolios allocated to certain risky assets that have attractive relative valuations. In this context, the positioning of the Global Series portfolios has been adjusted slightly at the end of the fiscal year in favour of an overweight position in emerging countries. During the quarter, we added the FTSE Emerging Markets All Cap Index (VEE) ETF. The purchase was financed by cash.
Portfolio Management Team
DESJARDINS GLOBAL ASSET MANAGEMENT (DGAM)
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