Q1 2018 Commentary – Mackenzie Cundill Team | Mackenzie Investments

Q1 2018 Commentary

Mackenzie Cundill Team

Market Review, Outlook & Strategy

  • The first quarter of 2018 saw heightened market volatility amidst increased interest rate and inflation expectations. Markets seem to be preoccupied with the rhetoric of trade war between the U.S. and China. It is not in anyone’s interest to get into a full-blown trade war. We are already seeing evidence that rational heads are prevailing, and there are restraints on both sides that should lead to negotiated solutions. It was not that long ago that President Trump and North Korean Leader Kim Jong Un were threatening each other with nuclear weapons. But now we are seeing the beginnings of peace negotiations there. One thing we have learned about the US President is that he uses extreme rhetoric as a tool to achieve political aims and negotiating positions. What we should be focusing on is the fundamentals of the economy and the businesses we hold in the portfolio. In that regard we believe the global recovery is sound and our holdings are not only undervalued, but are poised to deliver earnings improvement.
  • Outlook for growth in output and profits remains favourable. We continue to be in a period of global synchronized growth and we believe there are potentials for upside surprises in inflation later this year as we see wage pressures building in many countries. The momentum of growth seems to have slowed a bit during the first quarter, as seen in business confidence in Europe and Chinese economic activity. We believe such softening is normal given the strong momentum in Q4 2017.
  • In Europe, Angela Merkel finally managed to form a government in Germany with a grand coalition between the Christian Democrats, the Christian Social Union and the Social Democrats. We are hopeful that structural reforms could be discussed between newly elected French President Macron and Merkel in the next few years. The Italian election ended with the anti-establishment party Five Star Movement emerging with the most votes, but not enough to form a government without a coalition. Discussions among party leaders over the formation of a government will no doubt take months. Given the need for a coalition government, we believe the likelihood of extreme policies remains low. We will monitor the political situation in Europe for its impact on the underlying economy.
  • Over in Asia, Chinese business activity, though growing, expanded at a slower pace in recent months. Household debt has risen and the government is somewhat alarmed. The government is also trying to tame the housing market, due to signs of speculative demand. Tightening of credit in the system could translate into slower growth.
  • By the end of 2017, Japan’s GDP would have most likely risen for eight quarters in a row, its longest spell of uninterrupted growth in 16 years. Employment has increased by more than 2.7 mil in the past five years, even as Japan’s working-age population has shrunk by over 4 mil. However due to equity ETF purchases by the Bank of Japan, the valuation of many stocks in Japan are quite lofty in our opinion.
  • With regards to central bank policies, the European Central Bank seems to be on hold until sometime next year before they normalize interest rates. The Bank of Japan is starting to think about an exit from their quantitative easing in 2019. This year is likely the peak year in terms of assets held on central bank balance sheets globally. We expect monetary policy normalization to continue worldwide into next year.

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This document includes forward-looking information that is based on forecasts of future events as of March 31, 2018. We will not necessarily update the information to reflect changes after that date. 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.