Putting Diversification to Work
Economic fundamentals remain on solid footing with the global recovery broadening out to Europe and Asia with particularly encouraging data out of China in recent weeks. Thus, the medium-term backdrop for global markets remains constructive.
|April ’17||Y-T-D||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||+ 0.25%||+ 1.95%||+ 11.72%||+ 2.08%/yr.||+ 4.86%/yr.||+ 1.51%/yr.|
|S&P 500 (C$)||+ 3.56%||+ 8.10%||+ 25/52%||+ 16.42%/yr.||+ 18.71%/yr.||+ 10.83/yr.|
|MSCI EAFE (C$)||+ 4.96%||+ 10.53%||+ 17.75%||+ 5.69%/yr.||+ 10.83%/yr.||+ 0.11%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of April 29, 2017
The tables above and below are a strong reminder of the benefits of diversification. The Canadian stock market represents less than three percent of the world’s stock market capitalization. Limiting one’s portfolio to Canadian equities ignores ninety-seven percent of the investment opportunity set. Viewed in a different way, follow the Canadian equity performance relative to other investment options over the past ten years.
Recession risks continue to remain low for the coming year. This is corroborated by the facts that in the U.S., about one third of the S&P500 constituents have reported their first quarter 2017 earnings per share thus far and some clear trends are emerging. According to Bloomberg data, based on reported earnings and earnings estimates, forecast EPS for Q1 is running at a 10.1% year-over-year pace. Of those that have reported, 75.7% have posted better-than-expected EPS with energy, financials, technology and materials sectors recording the strongest EPS gains. The current reporting season is showing the strongest year-over-year earnings gains since the third quarter of 2011 for the S&P500 index.
Global stock indexes also firmed almost universally since the results of the first round of the French Presidential elections. The success of pro-EU candidate Emmanuel Macron diminishes the risk of France following in Britain’s footsteps but there is still a runoff election between Macron and the anti-EU Le Pen on May 7 so the enthusiasm we see now in the charts is liable to temper a little ahead of that date.
With lower oil prices and the threats against the softwood lumber and dairy industries, the loonie has weakened. Scotia Economics continue to forecast our currency will trade in a narrow band between $0.725 and $0.775 for the time being. The Bank of Canada has indicated that they are getting slightly more optimistic about the overall economy and may increase interest rates in the second quarter of 2018.
The biggest geopolitical worry continues to be North Korea. That country continues to taunt the world with their missile tests. The Chinese appear to be willing to be more “influential” in taming North Korea, and the ever unpredictable U.S administration has stated that they would be willing to “go it alone” if need be.
Globally diversified portfolios are expected to return mid-single digit returns over the next twelve months. Expected market pullbacks should be viewed as buying opportunities for long-term conservative investors.
Mailey Rogers Group is here to help and we welcome any questions you may have.
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group