During the second quarter of 2018, the main international stock indices seesawed sharply, a sign of the precariousness of the current cycle now marked by growing concerns. Markets reacted to the possibility of a trade war, the future of the Iran nuclear deal and the Trump-Kim summit. Moreover, political uncertainty in Italy and Spain, as well as talks between Saudi Arabia and Russia aimed at boosting the world oil supply, caused a weakening of markets.
The S&P/TSX (Canada), S&P 500 (United States) and MSCI ACWI indices produced returns of 6.8%, 5.4% and 2.7% respectively (in Canadian dollars) in the three months ended June 30, 2018.
A similar trend emerged on bond markets. Canadian interest rates ended the quarter almost unchanged from three months earlier. Meanwhile, the U.S. Federal Reserve continued normalizing its monetary policy by raising its key rate for the seventh time. The same dynamic could be seen in corporate credit. The Canadian picture was relatively steady during the quarter, with the spread widening by about three basis points on average. The supply of new issues hit a second-quarter record going back 10 years. The Bloomberg Barclays U.S. Aggregate corporate bond index found this performance impressive, considering that credit spreads south of the border widened by 14 basis points in the same period.
This difference in the pace of monetary policy normalizations contributed to appreciation of the U.S. currency, with the Canadian dollar down 1.8% for the period.
During the quarter, asset allocation added value to the Global Series portfolios. Our cautious approach to fixed-income securities helped boost the yield. Moreover, the portfolios gained from the upswing in natural resources sectors due to the favourable positioning of the Canadian market. In contrast, the equal-weight U.S. equity ETF (RSP +4.8%) underperformed due to a strong polarization of returns on the S&P 500 Index in favour of the technology sector.
The Canadian equity portfolio underperformed its benchmark index. Advancing issues included several stocks in the energy sector. Canadian energy stocks were able to advance in line with the price of oil. Not all stocks benefited equally from the rise in the price of black gold (+14.2%), with integrated oil companies such as Suncor (+21.1%) gaining in particular from high refining margins. Our positions in Encana (+21.3%) and Canadian Natural Resources (+18.1%) also benefited from the rise in oil prices. Among declining issues, we note the disappointing performance of Bank of Nova Scotia (-4.2%). In regard to the latter, the only Canadian bank exposed to Mexico, recent acquisitions in asset management (e.g., MD Financial Management) did not go over well with investors. Acquisitions in this segment are generally expensive, and the associated integration risk is perceived to be higher. The market values excess capital, and these acquisitions have a higher capital cost.
|3 months||YTD||1 Year||3 Years||5 Years||2017||2016||2015||2014||2013|
|Sample Account footnote 1||1.7%||1.3%||5.2%||5.4%||6.3%||6.1%||9.1%||1.6%||6.7%||8.8%|
|Benchmark Index footnote 2||2.6%||2.0%||6.1%||5.5%||7.8%||7.5%||7.3%||3.8%||10.7%||10.0%|
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, despite market resilience, caution is called for. The appreciation of the U.S. dollar presents a risk factor for emerging countries. A favourable economic context and accommodating tax policies confirm our positive outlook for U.S. stock markets. Accordingly, we have boosted our position in the equal-weight U.S. equity ETF (RSP) to benefit from the effects of the tax reform and the positive spin-offs from the repatriation of capital held abroad.
Portfolio Management Team
DESJARDINS GLOBAL ASSET MANAGEMENT (DGAM)
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