In the third quarter of 2018, the main international stock indices benefited from the strength of U.S. markets to post a positive yield, consolidating the modest gains accumulated in the first half of the year.
The S&P/TSX (Canada), S&P 500 (United States) and MSCI ACWI indices produced returns of -0.6%, 6.0% and 2.8% respectively (in Canadian dollars) in the three months ended September 30, 2018.
To begin with, the major exchanges worldwide gained from the beneficial effects of global growth, the strength of the U.S. economy and the sense of general optimism that are pushing investors toward risky assets despite prevailing uncertainty. However, the emerging market indices showed the weakest performances for the second quarter in a row. The high value of the U.S. currency, the decline in commodity prices and the threat of a trade war led investors to move away from emerging markets. Meanwhile, European markets continue to stagnate. Despite attractive relative valuations, they posted only modest advances and are showing a deficit for 2018.
In August, geopolitical tensions in Turkey and a sharp decline in some commodity prices hurt the advance of international markets, though without weakening U.S. indices. Indeed, the current bull market officially became the longest in history when the S&P 500 passed the 3,453-day mark with no decline of more than 20%. Apple also made history by topping $1 trillion in market capitalization.
Rising trade tensions, the imminent hike in U.S. interest rates and developments surrounding the U.S. mid-term elections remain risk factors. As for the Canadian bond market, upward movement in short-term interest rates was emulated in the longer portion of the federal government bond yield curve throughout the quarter. Ten-year bond rates rose 25 basis points to 2.42%, their highest level in 20 quarters. The good economic news in the United States, backed by steady increases in key rates, lies behind this trend. Corporate bond valuations remain unattractive late in this cycle due to the tightening of credit spreads.
During the quarter, asset allocation added value to the Global Series portfolios. Our more cautious orientation toward the fixed-income asset class, in response to the rise in interest rates, contributed to the yield. However, the overweight position in the Canadian equity market subtracted value, due in particular to delays in the negotiation of a trade agreement between the United States, Canada and Mexico, which culminated at the end of the quarter. The Canadian oil price index also suffered an unexpected setback when the Federal Court of Appeal reversed approval of the Trans Mountain pipeline, affecting yields in the energy sector. On the other hand, favourable allocation to the U.S. equity market helped add value.
The Canadian equity portfolio underperformed its benchmark index. Among advancing issues, Alimentation Couche-Tard (+13.5%) jumped in response to quarterly results that exceeded expectations in various regards. The company experienced a higher-than-expected rise in comparable per-store sales in the United States, reducing investors’ concerns over the company’s organic growth. The overweight position in the financial sector also boosted the relative performance. We can point to the performance of Intact (+15.9%). Among declining issues, we note the disappointing performance of Goldcorp (-26.9%) and Teck Resources (-6.9%) resulting from pressures on the materials sectors during the quarter. U.S. trade wars had the simultaneous effect of increasing investors’ nervousness regarding China along with the emerging markets generally and of stimulating the valuation of the U.S. currency. This combination is broadly unfavourable to the prices of several commodities both on the base metals side and the precious metals side. Moreover, the absence of cannabis stocks from the portfolio hurts its relative performance. These stocks rose following the increased ownership stake taken by the giant Constellation Brands in Canopy Growth (+67%).
|3 months||YTD||1 Year||3 Years||5 Years||2017||2016||2015||2014||2013|
|Sample Account footnote 1||-0.1%||1.2%||4.7%||6.4%||5.8%||6.1%||9.1%||1.6%||6.7%||8.8%|
|Benchmark Index footnote 2||0.0%||2.1%||5.7%||6.4%||7.2%||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, tensions related to potential trade wars and the tightening of monetary policy by the U.S. Federal Reserve continue to nurture the fears of investors who are wondering how long the bull market will last. However, economic indicators and corporate profits remain solid. These phenomena cause us to note a precarious balance in market sentiment that could lead to a period of increased volatility. The positioning strategy therefore remains broadly defensive, maintaining a neutral bias on spreads for the majority of global stock exchanges.
Portfolio Management Team
DESJARDINS GLOBAL ASSET MANAGEMENT (DGAM)
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