As a whole, equity markets had a positive second quarter, despite the US imposing tariffs on a variety of Chinese imports as well as tariffs on steel and aluminum exports from Canada, Mexico and Europe. With the June G7 meeting filled with political rhetoric and verbal shots being fired at allies, it appears that a global trade war is likely just getting started.
So far the markets have not been reacting very negatively to these recent developments. When you look at the amount of tariffs imposed relative to the size of US GDP, they are so far very small; for example, the $34 billion imposed on July 6 is only 0.17% of US GDP and is estimated to have a negative -0.1% reduction in GDP growth over the next 12 months. However, the real concerns and unknowns are the ripple effects through the domestic and global economies, impacting business investment spending and consumer confidence.
We continue to believe there are numerous risks to global equity markets and we are maintaining a slight under allocation to equities and a higher defensive cash position. After a significant spike in market volatility at the beginning of the year, the VIX (Volatility Index in the US) has steadily declined since then. Back in February, we reduced equity exposure across the board for all clients and we have been slowly investing only a portion of equities for all new clients since then.
On the interest rate front, current expectations are for two potential rate increases later this year by the Fed, which would then put the overnight rate at 2.5% by year’s end; however the outlook for the Bank of Canada is a little more uncertain given future developments in NAFTA talks and any potential escalation of tariffs, especially against the auto sector.
Higher US rates will likely add further strength to the US dollar, and as a result, we will be monitoring US and international equity positions to potentially increase the hedged portion if the Canadian dollar continues to weaken.
Canada – After a poor performance to the start of the year, the S&P/TSX Composite roared back in the second quarter gaining 6.8%, but overall for the year is up just 1.9%. Growth stocks led the way up 7.3% with value stocks bringing up the rear, advancing 6.7%.
United States – Equities south of the boarder had a good quarter in USD terms, up 3.9% as a whole, with small caps leading the way, up 6.2%, followed closely by growth up 5.9%; value stocks lagged, up 1.7%. A weak Canadian dollar improved these returns in CAD terms adding approximately 2.1%.
International & Emerging Markets – International and emerging markets equities were weak and mixed in Canadian dollar terms. While international stocks were up 1.0%, emerging markets fell -6.0%, erasing last quarter’s gains and turning negative for the year, down -1.8%. International growth showed the strongest performance, up 2.4% while all remaining sub-asset classes were mixed.
Real Estate – After a mixed start to the year, global real estate had a strong performance this past quarter up 9.2% with Canadian real estate up 4.7%. Year-to-date, global is up 6.0% and the TSX REITS are up 6.1%. As a whole, real estate is outperforming Canadian and International (including emerging markets) equities so far this year, with only US equity faring better.
Alternative Fixed Income – Canadian bonds returned 0.5% this past quarter and a total of 0.6% for the year. The alternative fixed income funds continued to show consistent performance with Trez up 2.0%, Productivity Media up 1.8% and Cortland up 1.2%. Year to date the funds are up 4.2%, 3.6% and 2.6%, respectively. The Stewardship Alternative Income Fund was down -3.9% for the quarter and is down -1.6% year-to-date. This is due to a single investment in Fincanna Capital Corp, a BC based income royalty company that is focused on investing in the licensed medical cannabis industry in the United States, with a specific focus on the California market. So far this year, Fincanna has declined -41.7% below its cost and we believe there are two major factors contributing to the price weakness: First, the Canadian cannabis sector has been under pressure this year with the Marijuana Index down 23.8% for the six months ending June 30; secondly, investors have not yet recognized Fincanna’s value. We believe this is due to the fact that Fincanna is not a direct grower or distributor of cannabis products, but once the first cash distribution is made, investors should start to recognize its value.Gold – Gold has been on a gradual decline since mid-April’s high of $1,369.40 USD ($1,720.35 CAD), down 8.4% in USD terms but the weaker Canadian dollar has helped cushion the fall, down -4.3% in Canadian dollars. We continue to hold gold bullion as a defensive hedge in an environment where we perceive there to be heightened potential risks, both economic and geopolitical.