Market Commentary – Q1 2016

The beginning of 2016 was looking very bleak as world stock markets continued their declines that began back in 2015. The media was awash over concerns of growth for the Chinese economy and depressing economic forecasts for Canada because of plumeting oil prices. Fast forward to today, and the dark storm clouds have moved over the horizon; while it may not be clear blue skies ahead, the future is not looking like the anticipated doomsday scenario – the TSX is leading rally in equity markets; the Canadian dollar has rallied sharply off its lows (to the detriment of US and international returns) and the Bank of Canada is revising their economic outlook with higher expected growth. 

Financial markets can turn on a dime and we have witnessed this by the sharp reversal in the trend in oil, the Canadian dollar and the TSX; all three fell precipitously in early January, while the returns for US and international markets were positive (thanks to the falling Loonie). Today, the exact opposite is now true – the TSX finished the first quarter up 17% from its lows, oil was up 46% and the dollar ralied almost 9 cents and is today flirting with 80 cents.

Global macroeconomic trends and events continue to enter into unchartered waters as governments and central banks around the world continue to grapple with spurring economic growth. The Fed continues to contemplate raising rates in June while Europe and Japan have moved into negative interest rate policies. After the Fed’s initial 25bps raise in 2015, the US economy is more of a mixed bag of good news bad news than what was originally forecasted and further rate increases in the near term are less certain than their original plans.

Outlook

Canada – The TSX has rallied strongly off the January lows, with small cap and value leading the way. We have a positive near term outlook; however, we are cautious given the high correlation of the Canadian market to the price of oil and the potential for a pullback as oil has risen over 70% from its lows to the end of April. The rally in the price of oil may be developing some legs and we will be watching this closely.

United States – Since late 2014, the US equity market has stalled and settled into a trading range; we believe there is currently more potential for some downside risk than there is for the upside. Even though the Canadian dollar is in a range where we feel it is more accurately valued long-term, currencies can be unpredictable and the rally may continue, especially if the dollar breaks through 80 cents. We are cautious of unhedged US positions.

International & Emerging – Not surprisingly, international equities have also suffered from the sharp rise in the Canadian dollar. Emerging market equity showed the best performance among all ex-North American markets this past quarter, although it was still slightly negative. Again, we are cautious given the possibility that the rally in the dollar may continue if it can break through 80 cents.

Real Estate – Canadian REITs shone this quarter while global REITs also managed to post a small gain despite the strength in the dollar. We will be monitoring this asset class as both Canadian and global REITs are approaching their previous highs. 

Fixed Income – Bonds advanced slowly this past quarter with short term gaining 0.4% and intermediate up 1.4%. While we don’t foresee any immediate risk on the horizon, we are always mindful of the damage that rising interest rates can do to bond portfolios. Should this outlook change, we are ready to adjust portfolios accordingly. Trez Capital Yield Trust US was added to portfolios in 2015 and returned 10.2% for the full calendar year. We expect continued strong performance from this unique fund given its expertise in niche mortgage financing in the state of Texas.