Q2 2018 Commentary – Mackenzie Cundill Team | Mackenzie Investments

Q2 2018 Commentary

Mackenzie Cundill Team

Market Review, Outlook & Strategy

  • Global capital markets in the second quarter have been dominated by continued threats of trade war, political uncertainty in Europe and developments in the energy markets.
  • Trade wars do not pose systemic risks like a financial crisis or bank failure. In fact, they happen behind the scenes daily. It's just that the instrument deployed is usually not so blunt or transparent as a tariff. Trade wars can take the form of intellectual property theft, currency manipulation, industry subsidization, and bureaucratic filibustering. In general, over the medium and longer term, trade restrictions of various forms are manageable by corporate management.
  • In our opinion, what we are currently seeing is consistent with a negotiation pattern. Countries with large trade deficits with the US (such as China and Germany) will likely bend somewhat to accommodate US demands. We currently do not own any Chinese exporters, and have no exposure to any German stocks.
  • The market is currently focused on potential U.S. tariffs on autos and consumer electronics. These are only potential for now. On the auto side, the EU currently imposes 10% tariffs on auto imports, higher than the US' 2.5% duty. The US administration is threatening the EU with 20% tariffs on autos if they don't align their tariffs with the US. China has now implemented a 25% tariff on US auto imports. Our holding Fiat is well positioned, as most of its China sales are manufactured in China.
  • On the materials side, the US now has a 25% tariff on steel imports and a 10% tariff on aluminum imports. Our holding in the South Korean steel-making company POSCO has less than 4% of total volume going to the US and accordingly we don't anticipate a significant effect on the company's bottom line.
  • With that being said, one consequence of trade restrictions could be inflation, which benefits the value style.
  • In terms of European politics, The Five Star movement in Italy has agreed to form a coalition government with the Northern League. The two parties are on different ends of the political spectrum, with Five Star wanting to have a minimum "citizen income", while the League wants a flat tax and has been anti-immigration in its positioning. It's early days in terms of how they would function. The capital markets will be focused on Italy's government finances in the near term. We do not believe an Italian exit from the Eurozone is likely in the near to medium term as most of the Italian population is pro-Euro. In Spain, the prime minister was ousted after a non-confidence vote due to corruption charges within his cabinet. The situation in Spain is dissimilar to the Italian political instability, as Spain has been growing its GDP at near 3% and there is no discussion about leaving the Eurozone. Both Euro area PMI and inflation data continue to point to growth for the region.
  • In the UK, Elizabeth May continues to table an agenda of "soft-Brexit", and despite some high-profile defections from her government, she retains party support at the moment. Recent UK service sector growth has improved in June and we do not currently see a high risk of recession in the UK.
  • Over in Asia, China's growth seems to have slowed down slightly as a response to government engineered monetary tightening earlier in the year. However, the Chinese consumer is in healthy shape and wages continue to rise. There are also some signs of wage gains in Japan.
  • In the energy markets, global inventories have steadily dropped to below five-year average levels. We see robust demand, coupled with likely declines in Venezuela and Iran production, and pipeline bottle-necks in the Permian, to be supportive of crude prices despite increased production from Saudi Arabia and Russia in the near term.

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 March 31, 2018 including changes in unit value reinvestment of all distributions and do and 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 the 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, 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.