Deciphering Mixed Messages

Equity markets started and ended Q2 on a positive note. See how our strategy worked despite the volatility that occurred in between.

07.23.2019 - Scott Guitard, Vice President, Portfolio Manager

Deciphering Mixed Messages

By Scott Guitard,

Globally, equities started and ended Q2 on a positive note, in spite of mid-quarter volatility sparked by waning investor optimism about a China/US trade deal. Central banks worldwide remained dovish, pushing global bond yields lower. Heading into Q3, markets remain focused on the two items affecting investor sentiment most significantly year-to-date—global trade risks and monetary policy.

Money Market/Cash Equivalents

The Canadian yield curve’s downward slope steepened further in Q2, as investors priced in future rate cuts in longer-term bonds. The very short-end of the curve remained anchored by the Bank of Canada’s current policy rate. Cash weighed on the portfolio’s relative performance. Holding more cash than usual, we’re patiently waiting for higher bond yields or more attractive entry points for global stocks.

Fixed Income

Bond prices appreciated due to lower government yields and tighter corporate spreads. The Templeton Global Bond Fund detracted from portfolio results, prompting modest relative underperformance. Fixed income weights were unchanged in Q2. Despite lower longer-term bond yields, we remain committed to holding these safe-haven assets as protection against potential weakness in other areas of the portfolio.


In terms of absolute returns, equities finished Q2 on solid ground despite May’s volatility. Canadian and US stocks outperformed International equities, while “growth” style stocks outperformed “value” stocks. These themes weighed on Q2 relative returns; however, we believe our approach—underweight Canadian and US equities and a bias to “value” stocks—remains prudent given current market conditions.

Fixed Income Sectors

Canadian Investment Grade Corporate Bonds

Investment grade corporate bonds continued their solid performance in Q2, outpacing government-issued bonds. We remain committed to our overweight position in high-quality corporate bonds as spreads have narrowed, but continue to hover above long-term averages.

Government Bonds
Government bonds yields moved lower in Q2, especially those with long-term maturities. We believe bond yields will trade in a tighter range for the remainder of 2019, as we don’t see the Bank of Canada having enough conviction to move their policy rate in the near term.

Global Bonds

The Templeton Global Bond Fund’s US dollar exposure and short-term maturities hurt Q2 performance. Moving forward, we believe the Fund’s absolute return focus will support performance, as global bond yields continue to test recent lows.

Equity Markets

Canadian Equities

From an absolute return perspective, Canadian equities performed well; however, holdings lagged the S&P/TSX Composite Index. Security selection in the Information Technology sector was the largest negative contributor to relative performance, followed by the combined overweight position and security selection in the Consumer Staples sector. Despite recently improving economic data, we believe our underweight position in Canadian equities is justified by the ongoing lack of energy infrastructure and potential for escalating trade conflict.

US Equities

The S&P 500 Index—the US equity component’s benchmark—achieved an all-time high in Q2. The portfolio’s relative performance was also positive, led by strong security selection in the Information Technology and Health Care sectors. The recent run-up in US equity prices is more attributable to increased valuations versus higher earnings. We’ll continue to be underweight US equities until we see further reason to be optimistic about future earnings.

International Equities

Similar to North American markets, central bank hints of more monetary policy easing boosted International equities. Developed markets outperformed, as global trade tensions weighed heavier on emerging markets. Though investor sentiment remains depressed in the euro zone, we believe current valuations support an overweight position in International equities, especially in comparison to North American valuations.

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.






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



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