For friends and clients of Barbara & Terry Triskan, Investment Advisors
Monthly Market Commentary – May 2017
Getting more defensive and lowering exposure to the Energy sector
After outperforming the S&P 500 Index in 2016 for the first time since 2010, the Canadian market is back to its lagging ways. According to the BMO Nesbitt Burns Portfolio Advisory Team, the reason lies squarely with the weakness seen in oil prices and base metals (especially copper). As often noted, the correlation between oil and copper prices, and the S&P/ TSX Composite Index and Canadian dollar are extremely high. This means that when oil prices go down, so does the Canadian stock market and the Loonie.
Adding to these concerns, North American markets are still close to all-time highs, there is uncertainty over U.S. President Donald Trump’s ability to deliver on some of his more investor-friendly promises (a huge corporate tax cut in particular), as well as potential for upcoming seasonal weakness in the markets. Consequently, the Portfolio Advisory Team believes being more defensive is the right approach for the next few months/quarters. This is consistent with their decision to reduce equity exposure by 5% in March, and increase cash by 5% within their recommended investor asset allocations. From a longer-term perspective, they continue to view stocks positively, as inflation is under control, economic momentum is still solid globally, and corporate earnings are re-accelerating.
The Chinese economy has clearly been slowing down and is the root cause of base metals weakness, most notably declines in copper and iron ore prices. Despite a recent increase in government spending, last year’s increased regulation dampened housing demand (a huge consumer of basic materials), and a higher sales tax impacted auto sales. These factors have visibly slowed Chinese economic growth; the key driver for industrial metal prices. Case in point, the all-important Purchasing Manager’s Index (a good proxy for economic momentum based on a real world survey) fell in April, a trend that could continue for the next few months at least.
Looking at the Energy sector, despite the Saudi Arabia engineered supply cuts, global and North American oil inventories remain very high. This is due, in part, to weaker refined product demand and because higher prices have incented U.S. producers to increase production quickly. Also ominous is the fact that oil prices failed to rally following statements from Russia and Saudi Arabia, the world’s largest crude producers, stating publicly for the first time that they would consider prolonging their output reductions past the six-month extension, widely expected to be agreed to at the next Organization of Petroleum Exporting Countries (OPEC) meeting on May 25.
Please contact the office if you have any questions or wish to discuss your investments.
Barb & Terry
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