Q3 2017 Commentary – Mackenzie Asset Allocation Team | Mackenzie Investments

Q3 2017 Commentary

Mackenzie Asset Allocation Team

Market Review

  • From North Korea to the chaotic Trump White House, geopolitical risks made headlines again last quarter. However, despite the headline noise, the MSCI World Index returned 3.9% for the quarter in local currency terms, a reminder that headline based investing is rarely rewarding. The index has gained for 11 consecutive months dating back to November 2016, which is tied for the 2nd longest string of positive monthly returns since 1970. This quarter, we saw very strong performance from emerging markets with the MSCI Emerging Markets index returning 7.7% in local currency and 3.9% in Canadian dollars. China, Russia, and Brazil all posted double digit returns. Canadian equities also performed well, returning 3.7%. Oil prices rose during the period, contributing to healthy Canadian energy sector returns (+6.6%). US equities rose 4.5% in USD but, a strong Canadian dollar (+3.9% vs. USD) wiped out most gains.
  • In bonds, yields were generally flat globally but, were higher in Canada. As a result, Canadian bonds, as represented by the FTSE TMX Canada Universe Bond Index fell 1.7%. In contrast, global bond markets moved slightly higher with the Bank of America Merrill Lynch Global Broad Market Index Hedged to CAD returning 0.6%. 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 1.8%.

Outlook & Strategy

Asset Mix: Global economy in high gear, supporting global stocks

We expect that the global economy will continue growing above-trend with low inflation this quarter, supporting stocks relative to lower risk government bonds for the following reasons:

  • Today, most major economies enjoy strong growth compared to the last 5 years.
  • Tax reform in the US should support US economic activity.
  • China’s leadership will aim to ensure above-target growth, particularly ahead of the National Party Congress this year
  • Resiliency in the euro zone to political shocks. Also, a loose monetary stance, reduced fiscal austerity and recovery in domestic demand will support steady job gains.
  • Japan is also expected to grow above trend, benefitting from a weak yen, strong consumer spending and public investment, and ultra-loose monetary policy.
  • Major emerging markets, including Brazil, Russia and South Africa are benefiting from improved commodity prices and easy access to foreign capital.
  • Steady economic growth with low inflation has historically favoured stock markets.

Currency: Loonie expected to strengthen further

Strong investor enthusiasm for the Canadian dollar is expected to persist this quarter as investors anticipate higher interest rates given above-trend economic growth. Factors we expect will continue supporting the dollar include:

  • Market expectations for further monetary tightening by the Bank of Canada due to above-trend economic growth will support the Canadian dollar.
  • The US dollar may be under pressure due to potential uncertainty in Fed policy in 2018 as the Fed’s senior leadership could change significantly with multiple vacancies on the Fed’s board and President Trump may also replace Janet Yellen as Fed Chair. In addition, persistent weakness in inflation may provide ammunition for a slower pace of US rate hikes.
  • The yen is expected to remain weak as the Bank of Japan continues to maintain its ultra-loose monetary policy, showing little sign of pulling back like other major central banks.

Relative Equity: Expecting a challenging environment for Canadian equities

Even though we view economic and inflationary trends as supportive of stocks in general, not all equity markets are expected to gain equally. Despite headline news of impressive GDP growth and a strong loonie, these factors are actually expected to be headwinds for Canadian equities in the near term:

  • Recent GDP growth has pushed growth expectations significantly above our estimates of potential or long-run growth makes sustainability difficult. Should realized GDP growth slow, downward pressure could build in Canadian stocks.
  • Since 30% of Canada’s economy is export-based, a stronger loonie could dampen the profit outlook of companies with export revenues.

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 September 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.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund.