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Global Series Portfolios – Quarterly Newsletter T1 2018

In the first quarter of 2018, the stock markets nearly all stumbled. At the outset, they built on momentum from the previous year, recording their best start to a year since 1997, particularly in the wake of the U.S. tax reform in December. In contrast, February was characterized by the worst monthly performances since January 2016. The first jolts occurred in late January when the U.S. Federal Reserve (Fed) opened the way to a more aggressive approach to raising its key rate. Less than a week later, an unexpected rise in the average hourly wage in the United States revived fears of inflation, accelerating a market rout. In March, the major stock markets rallied against a backdrop of continuing economic strength and more attractive valuations. However, the spectre of a trade war resulting from the imposition of new customs tariffs by the U.S. government darkened the outlook for investors. As regards Canadian 10-year bonds, the upward rate movement continued early in the quarter only to backtrack later and stabilize at a level barely above 2.1%. Weaker-than-forecast economic data combined with uncertainty over U.S. trade policy tempered the rate hikes expected by the markets. Meanwhile, the Canadian dollar fell more than 2.7% against its U.S. counterpart, going from US$ 0.80 to US$ 0.78. This was due, among other factors, to the introduction of tariffs on steel and aluminum imports by our southern neighbour and to the uncertainty surrounding renegotiation of the NAFTA (North American Free Trade Agreement).

The S&P/TSX (Canada), S&P 500 (United States) and MSCI ACWI indices produced returns of -4.5%, 2.2% and 2.0% respectively (in Canadian dollars) in the three months ended March 31, 2018.

During the quarter, asset allocation added value to the Global Series portfolios. We took advantage of the strong market performance early in the year to reduce our market overexposure in February on profit taking. The recent escalation of the trade dispute between China and the United States is leading us again to reduce our risk taking. We are moving toward a slight overexposure to the Canadian equity market. This decision follows constructive developments in the NAFTA modernization negotiations that could produce a favourable outcome. Moreover, we are remaining overweight in Canadian bonds, taking account of upward forecasts for medium-term interest rates. This context is leading us to raise the cash level temporarily.

Positions in exchange-trade funds (ETFs) in U.S. equities (RSP +1.8%), international equities (IEFA +2.7% and DFD +2.5%) and emerging market equities (VEE +5.1%) have deftly performed well, due in particular to the depreciation of the Canadian dollar with its positive effect on funds denominated in U.S. dollars. In contrast, Canadian equity funds (ZCN -4.5% and DFC -4.2%) had a tough quarter due to uncertainty over NAFTA renegotiation.

With respect to individual Canadian equities, we note the performance of CGI Group Inc. (+8.9% since it was added to the portfolio) and Goldcorp (+11.1%). Goldcorp far outperformed other gold producers during the quarter. Among negative factors, we note the disappointing performance of Canadian National Railways (CN) (-8.7%). CN’s results were affected by congestion problems on its network.

Early in the second quarter, we are maintaining our upward bias on Canadian bond rates with a 2.5% target on 10-year bonds. The Fed’s successive rises in its key rate, followed in part by the Bank of Canada, along with the Fed’s balance sheet reduction, should enable us to meet the new targets.

  3 months YTD 1 Year 3 Years 5 Years 2017 2016 2015 2014 2013
Sample Account 1 -0.4% -0.4% 3.7% 3.9% 5.7% 6.1% 9.1% 1.6% 6.7% 8.8%
Benchmark Index 2 -0.5% -0.5% 4.1% 4.0% 7.0% 7.5% 7.3% 3.8% 10.7% 10.0%
Difference 0.2% 0.2% -0.4% -0.2% -1.3% -1.4% 1.9% -2.2% -4.0% -1.2%

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.

During the quarter, we sold the WisdomTree Europe Hedged Equity (HEDJ) and WisdomTree Germany Hedged Equity (DXGE) currency-hedged ETFs:

  • These funds were liquidated to adjust the portfolios’ foreign currency exposure. Proceeds from the sale were reinvested in the iShares Core MSCI EAFE IMI Index (XEF) international equity ETF. This fund provides greater diversification and is not hedged against fluctuations in foreign currencies, for which we see attractive prospects in the medium and long term.

Also, as regards the portfolios containing Canadian equities, we added stock in CGI Group inc. (GIB.A) and Québecor inc. (QRB/B) in late January:

CGI Group inc.

  • CGI is a rigorous operator that continually optimizes its business.
  • The company has an excellent opportunity to increase its profit margins.
  • CGI will continue to grow through acquisitions. Several opportunities exist in the US and European markets.
  • Management aims to double the company’s size in the next five to seven years.

Québecor inc.

  • Potential buyback of the shares held by the Caisse de dépôt et placement du Québec in Québecor Media Inc.
  • This share buyback could bring down the discount (5% to 10%) that the market inflicts on Québecor Inc. due to this structure.
  • The company continues to post strong results in the wireless sector and is increasing its market share.

The CGI and Québecor purchases were financed by the sale of OpenText (OTEX) stock, which we see as having a less promising outlook on a relative basis.


Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such advisor. Desjardins Securities may have previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Before making an investment decision on the basis of any recommendation made in this document, the recipient should consider whether such recommendation is appropriate, given the recipient’s particular investment needs, objectives and financial circumstances.

  1. The typical account is a balanced real account (50% stocks and 50% fixed-income). Performance is calculated before management fees billed to the client.Return to footnote 1 referrer
  2. The benchmark index consists of the FTSE TMX Canada Universe Bond Index (50% Canadian bonds), the S&P/TSX Index (25% Canadian equities) and the MSCI All Country World Index (25% International equities).Return to footnote 3 referrer

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