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Lee Rorabeck
Keeley Simpson, B.Comm
Oxana Stevens, BA (Econ)

Tel: 416-928-2815

2 St. Clair Ave. West
19th Floor
Toronto, ON
M4V 1L5

Market Update


September 9th, 2015

Part of our service commitment is to provide timely and insightful information to assist you in making informed investment decisions. Below we've highlighted a few key takeaways from the August edition of Portfolio Strategy Summary, which is published monthly by our strategists in the Portfolio, Action and Research Team (PART). PART is a key partner for our business and provides ongoing fundamental and technical research support.

September 2015 Equity Strategy: After the "Made in China" Selloff-Continue to Focus on Non-Canadian Stocks

Over the last two weeks, the U.S. market experienced its first 10%+ correction since 2011. By historical standards, that's a very long time to go without a major pullback, in this case set off by the economic turbulence in China. At this point, many investors are understandably wondering where we go from here. We believe the right question to ask is what fundamental factors could turn this correction into something more sinister, such as the bear market experienced in 2008-2009. Our quick answer is that while there are no guarantees in investing, key economic momentum and liquidity indicators are light-years away from the conditions experienced during the financial crisis (in a positive way!).

As we stated in our August 21 report entitled "The Made in China Selloff", while it is human nature to fear further losses when the market undergoes a correction, it is never a good idea to sell stocks in a panic as this tends to undermine the long term performance of portfolios. Remaining focused on long-term goals-through a diversified portfolio across asset classes and geographies-and the market's ability to recover over the long-run is the best course of action. This strategy proved itself in previous corrections and based on the sharp rebound we saw on August 26 and 27, we believe that it will be the most beneficial approach once again.

Fixed Income Strategy: Time for the Fed to Raise Rates

As we anxiously await rate decisions in September from the Bank of Canada (BoC) and the U.S. Federal Reserve ("the Fed"), the Chinese-led equity sell-off temporarily muddied the monetary policy water. Data confirming the shrinking of Chinese manufacturing, ensuing interest rate cuts, and a devaluation of the yuan in an attempt to quell selling pressure sent shockwaves across world markets. Emerging markets were hard hit as were commodity markets where oil traded to below US$40, a new low for the year and its lowest level since 2009. Interestingly, fixed income markets had a more muted reaction, behaving relatively well compared to previous turmoil.

Have the recent events changed our market outlook and investment strategy? Not really. In Canada, we continue to believe the odds are tilted toward the BoC maintaining an easing bias until at least the first half of 2016 with the possibility of another rate cut if the economy deteriorates significantly. This environment could continue to benefit government bonds in the short-term although the potential for capital gains should be limited. As for the U.S., we doubt that a 25 basis point hike from the Fed would have a major impact on either the economy or the direction of future inflation. Instead, it would represent Fed confirmation that the U.S. economy is strengthening and no longer requires excessive stimulus. This would be positive for corporate bond markets and credit spreads in general, supporting our recommendation to hold both short- and mid-term investment grade corporate bonds.

Please do not hesitate to contact us if you have any questions or wish to discuss your investments. We can also send you the full report upon request.