MARKET COMMENTARY

A Cautionary View of Investor Euphoria

As investors celebrated the first months of 2019, we remained prudent in navigating an environment where sentiment turns on a dime. Take a closer look at our strategy at work.

04.25.2019 - Scott Guitard, Vice President, Portfolio Manager

A Cautionary View of Investor Euphoria

By Scott Guitard,
Vice President,
Portfolio Manager

Global stock markets soared in the first quarter of 2019, erasing 2018 losses. Positive investor sentiment—influenced by themes such as optimism about an imminent United States/China trade deal and central banks’ dovish attitudes—powered bond and equity prices higher. Despite recent investor euphoria, we remain cautious navigating through 2019.

Money Market/Cash Equivalents

In Q1, the Canadian yield curve inverted with longer-term bonds yielding less than shorter-term equivalents. This situation was caused by long-term bond yields plunging to a level that we believe is close to the bottom of a near-term range. We viewed this as an opportunity to take profits, placing them in cash equivalents.

Fixed Income

Canadian bonds performed well in Q1, particularly the corporate bond sector, aided by both lower government yields and tighter spreads. Outperformance generated by our overweight commitment to investment grade corporate bonds was offset by Templeton Global Bond Fund performance, which produced negative returns for the quarter.

Equities

In a complete reversal of Q4, 2018, global equities surged higher during the period. Canadian and US stocks outperformed International equities and “growth” stocks outperformed “value” stocks. Both themes weighed on Q1 performance. Relative valuations continue to support our slightly overweight position in stocks outside of North America, particularly in Europe.

Fixed Income Sectors

Canadian Investment Grade Corporate Bonds

Investment grade corporate bonds outperformed government-issued bonds. Moving in step with equity markets’ upward climb, Canadian investment grade corporate bond spreads narrowed. We remain committed to our structural overweight in high-quality corporate bonds. They provide a higher yield and are less sensitive to interest rate moves, which in our view are especially attractive features given current market conditions.

Government Bonds
Government bonds appreciated in Q1 as investors priced out policy rate hikes in 2019. We do not find federal government bond yields attractive at current levels. However, we do hold a modest position as a “hedge” against an unforeseen collapse in “risk” assets.

Global Bonds

Templeton Global Bond Fund performance was hindered this quarter by the loonie’s appreciation against the US dollar. The Fund’s short duration and low correlation with other portfolio exposures remain attractive in this uncertain interest rate environment.

Equity Markets

Canadian Equities

Looking at absolute returns, the Canadian equity component was the best performer in Q1. However, our Canadian equity holdings underperformed the S&P/TSX Composite Index. This was due to security selection in the Information Technology sector and nonparticipation in the Health Care sector where cannabis-related equities skyrocketed this period. Despite the impressive quarter, we need to see positive momentum on pipeline developments before getting too excited.

US Equities

US equity holdings outperformed the S&P 500 Index this quarter. Our overweight commitment to Industrials and strong security selection within the sector were the main contributors to relative performance. Valuations remain elevated; however, we think a dovish US Federal Reserve Board, a potential US/China trade deal and a president committed to capital markets will support US equities in the near term.

International Equities

Once again, a softening stance on monetary policy set the tone in Europe. The European Central Bank comforted investors with the assurance that rates would stay put in 2019. Security selection in the Consumer Staples sector led to underperformance. We remain overweight International equities as we expect some clarity around Brexit to emerge in Q2 and stimulus in China to boost the local economy, in turn benefiting their emerging market trading partners.

Asset Allocation Process

Asset allocation decisions result from ongoing discussions within our Private Client Investment Strategy Committee. We begin by making strategic investment decisions against an internal benchmark—for example, the Balanced Growth Benchmark Portfolio—that’s based on a neutral asset mix and stable market conditions.1 The difference between our investment strategy and the benchmark portfolio reflects our active commitment to effectively managing risk and generating superior long-term returns. In updating our investment strategy, we review our investment portfolio and benchmark and complete any required trades.

 

 

 

 

NOTES:

1 The Balanced Growth Benchmark Portfolio is comprised of40% fixed income assets and 60% equity assets.

 

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