Mackenzie Asset Allocation Team
Equity and bond markets generally ended higher for the quarter but if not for hawkish central bank statements at the end of the June from the European Central Bank, Bank of England, and Bank of Canada, which sent both equity and bond markets lower, returns may have been significantly better. In equity markets, we saw very strong performance from emerging markets with the MSCI Emerging Markets index returning 6.6% in local currency and 3.5% in Canadian dollars. Eurozone equities (+5.1% in CAD) also performed well, boosted by the euro’s 4.4% appreciation against the Canadian dollar. US equities rose 3.1% in USD but a weak US dollar wiped out most gains. Domestically, Canadian equities were down for the quarter with the S&P/TSX returning -1.6%. The Energy (-8.3%), Materials (-6.4%) and Financials (-0.9%) sectors were the main detractors of performance.
In bonds, yields were generally flat or trending down until the end of the quarter when they spiked. Despite the last moment move in yields, bond markets ended higher. Canadian bonds, as represented by the FTSE TMX Canada Universe Bond Index rose 1.1%. Global bond markets were also higher with the Bank of America Merrill Lynch Global Broad Market Index Hedged to CAD returning 0.9%. High yield bonds was the best performing bond asset class with the Bank of America Merrill Lynch US High Yield Index Hedged to CAD advancing 2.0%.
Outlook & Strategy
Our view for the third quarter changed little from the previous quarter. Our moderate overweight stocks versus bonds that we initiated in Q4 last year continued to reward our investors. For example, the S&P 500 is up over 12% since we made that recommendation at the time of this writing. Despite some negative political events like the surprise UK election and the Trump-FBI controversy, equity markets generally continued to ascend. The MSCI World Index returned 1.48% in the last quarter. The Bloomberg Barclays Multiverse Index, hedged to the Canadian dollar, returned 0.94%.
Entering Q3, we maintain our overweight stocks versus fixed income. Based on our valuation models, both stocks and bonds appear expensive, with fixed income being relatively pricier. On the macro front, while it is true that the Fed is in a tightening mode, we often have to remind people that liquidity and central banking need to be viewed on a global basis. Money easily crosses borders. From that perspective, when including other central banks such as the Bank of Japan, the Bank of England, and the European Central Bank, global central banks are still net providers of stimulus; however, it should be noted that they have recently adopted a hawkish tone, which is not positive for either stocks or bonds.
More importantly, our sentiment metrics are currently supportive of equities, as highlighted by the chart below. There is still a fair amount of skepticism around this bull market, which is positive for equities; large corrections are instead typically preceded by over optimism and euphoria.
In terms of relative equity, we continue to see the best opportunity from UK stocks, though we have pared back our overweight position from the previous quarter by taking some profit. An attractive valuation, along with supportive macro and sentiment readings from our models, underpin the view. We are now slightly overweight emerging markets, as they too have support from the three pillars of our tactical models. We are most bearish on Japanese equities, which are expensive, and our assessment of sentiment is negative.
We continue to see more conflicting forces in currencies than usual, leading us to find less opportunities at this point in time. That being said, we are bullish the Euro. Our models suggest that the Euro is slightly undervalued and our gauges of market sentiment are fairly supportive.