Q2 2017 Commentary – Mackenzie Asset Allocation Team | Mackenzie Investments

Q2 2017 Commentary

Mackenzie Asset Allocation Team

Market Review

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.        

Relative Equities

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.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of June 30, 2017 including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in investment products that seek to track an index.

This document includes forward-looking information that is based on forecasts of future events as of June 30, 2017. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

To the extent the Fund uses any currency hedges, share performance is referenced to the applicable foreign country terms and such hedges will provide the Fund with returns approximating the returns an investor in a foreign country would earn in their local currency.