1ST HALF 2018
The first half of 2018 was filled with what would generally be believed as unthinkable challenges to the world order and liberal democracy as we have known it for most of our lives. A return to protectionism on the part of the US, the subversion of existing trade rules, the future of NATO, the European Union, the WTO, IMF, the World Bank, NAFTA – the undermining of any of these institutions could have a profound impact on the prosperity of the world as a whole, individual nations, and the growing number of people around the world who already feel left behind.
Yet, through all the noise, equity markets held their own albeit with greater volatility than we have grown accustomed to in recent years. Since bottoming in April, the TSX has risen more than 7%, a rare display of outperformance that resulted in a first half total return of 0.4%. Financials, Telecom and Utilities pulled the index lower, which was offset by strength in Energy, Industrials and Technology.
In the US, the S&P 500 returned 1.7% (6.5% in C$ terms) which was driven exclusively by Technology. Outside of Technology and Consumer Discretionary, now represented by Amazon and Netflix, the S&P 500 was down 2.1%. As a group, the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) are up almost 40% year-to-date, and Facebook has fully recovered the value it lost in March on the misuse of user data.
After being stars in 2017, Emerging Markets have felt the brunt of economic uncertainty this year with the MSCI Emerging Markets Index down 8% year-to-date in local currency. Most notable, however, has been China which entered official bear market status the end of June when its index dropped 20% from its January peak.
The US economy is showing no signs of strain and BMO Capital Markets Economics upgraded their estimate of Q2 growth to 3.7%. Economics believes the US could clock in with 3% growth for all of 2018 which is being driven by a comeback in business investment, fuelled in part by the massive tax package.
In Canada, Economics is looking for an absolute middling year of 1.9% GDP for the year, a big step-down from last year`s exceptional 3% rate of growth.
The Bank of Canada continues to believe that policy rates should move higher and indeed hiked rates 25 bps this month as expected, focussing on the economic backdrop rather than the increasingly concerning trade headlines. Economics believes the BOC will follow up with another move in October, but have pared back their call for 2019 to two rate hikes instead of three in recognition of the heightened economic risk posed by potential US trade policy.
In the US, Economics believes the Federal Reserve will continue to follow a quarterly rate-hike pattern, reaching the longer-run neutral range in the 2.75%-3.00% range in June 2019. The US President has, however, recently weighed in on the Fed’s policy that “considerably stronger” Q2 growth means the Fed should “keep gradually raising” rates, leading to uncertainly as to the impact that might have on the Fed`s future moves.
On the currency front, the US Dollar rebounded by ~3% on a trade-weighted basis through Q2, buoyed by GDP growth as well as trade tensions. On the other hand, the Canadian Dollar dropped by almost 5%, even in the face of strong oil prices, burdened instead by deepening trade concerns.
Brian Belski, BMO CM Chief Investment Strategist, believes that investors should stay focussed on facts and fundamentals rather than rhetoric and trade noise. He notes that despite all the speculation around trade, Chinese and European growth has been slowing for several quarters, well before US tariffs were announced. Meanwhile, US growth continues to accelerate and is now the key engine to global growth, a trend he expects to continue. In Canada, he believes analysts have remained too pessimistic on Canadian equities as EPS revisions trends and earnings surprises have been consistently positive for several quarters. He believes Canadian equities will likely see renewed inflows in the back half of 2018 as strong growth is a net positive for Canadian equities. He remains overweight US equities and believes investors will continue to reward high quality brand-named companies with US domestic exposure, levered to higher interest rates and an improving North American economy.
Do not hesitate to give either of us a call at 416 359-7565 or 416-359-7564 or email Sharon Kubicek or Alisa Carli if you have any questions respecting your portfolio and the prevailing investment, economic and political issues at play today.
Sharon and Alisa
BMO Capital Markets Economics “Focus” – June 29, 2018
BMO Economic Research “Global Economic Weekly” – June 22, 2018
BMO Capital Markets “Rates Scenario” – July 4m, 2018
BMO Portfolio Advisory Team “2018 YTD Price Returns for S&P TS and S&P 500 – July 3, 2018
Financial Post Investing “World Stocks…” Marc Jones – June 30, 2018
BMO Capital Markets “Canadian Strategy Snapshot” – June 28, 2018
BMO Capital Markets “US Strategy Snapshot” – June 28, 2018