MARKET & ECONOMIC SUMMARY
Volume 3, Issue 3 – July 2015
SECOND QUARTER HIGHLIGHTS
MARKET SUMMARY
Second Quarter 2015
S&P/TSX Composite TR
Q2
1.6%
YTD
0.9%
1 year

S&P 500 price index hits record high of 2130.82 on May 21st

S&P/TSX Comp price closes down 5.8% from its 2015 peak on June 30th

Canadian dollar climbs 8.4% closing at $0.806 USD on June 30th

WTI Oil price hits 2015 high of $63.61 USD per barrel on May 5thth

Bank of Canada drops overnight rate to 0.50% (3rd quarter – July 15th)
1.2%
SUMMARY
S&P 500 TR (USD)
Global capital market volatility increased during the second quarter of 2015 as
Q2
0.3%
YTD
1.2%
1 year
investors considered slower economic growth, delayed interest rate increases,
and later in the period, the potential for a Greek debt default.
7.4%
Earlier in the quarter, economic indicators showed an improving outlook in the
MSCI EAFE GR (C$)
U.S. and Europe, and demand for global bonds softened. The Bank of America
Q2
0.6%
YTD
1 year
Canada Broad Market total return bond index declined by 1.8% in the second
14.1%
12.7%
quarter. U.S. Treasury yields rose through to mid-June, while Eurozone bond
prices also began to decline after a long rally that started in late 2013. Interest
B of A Canada Broad Market TR
rates were held steady in the United States and Canada (with the Bank of
Q2
Canada announcing a 0.25% drop in the overnight rate early in the third
YTD
1 year
quarter just before publication of our report), while the European Central Bank
1.8%
2.4%
6.4%
continued its aggressive quantitative easing program designed to stimulate
economic growth. Government bond prices rebounded later in the period as
investors shifted their focus to the fractured negotiations between the Greek
government and its creditors.
Many global equity markets ended the period slightly lower, as gains made
early in the quarter were offset by broad declines through the month of June. The U.S. Federal Reserve decision to hold
the line on interest rates initially dampened the value of the U.S. dollar relative to other world currencies and supported
the U.S. equity market. This trend reversed, however, as the Greek debt crisis dragged the euro lower and investors sold
equities in favour of the perceived safety of government bonds. The MSCI EAFE Index was down 0.6% for the quarter
when measured in Canadian dollars, U.S. equities as measured by the S&P 500 Index registered a modest increase of
about 0.3% (-1.4% in Canadian dollar terms), and World equity markets also dipped.
Canadian stocks as measured by the S&P/TSX Composite Index started the quarter positively but also traded weaker
through May and June to finish the quarter with a loss of 1.6%. The Canadian index has underperformed most other
developed markets since the start of 2015, based on low commodity prices and subdued global growth forecasts.
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Emerging market equities struggled with the expectation of higher U.S. interest rates, currency volatility and slower
growth in several emerging market economies. In China, the Shanghai Composite Index initially continued its rally and
hovered near a seven-year high before beginning a sharp decline in mid-June. The Chinese market ended the threemonth period with a 14.1% gain in local currency terms, but continued to lose ground early in the third quarter. The
index fell 30% from its peak in June before government intervention stopped the plunge in early July.
Although the Greek debt crisis and Chinese stock market sell-off have dominated recent headlines, the actual impact of
these events on global growth is expected to be limited. Greece accounts for only about 2% of the Eurozone economy,
while its lenders, including the European Central Bank and International Monetary Fund, have significant financial
resources. In China, the fact that investment in mainland Chinese equities remains largely inaccessible to foreign
investors should help to contain the impact. The underlying Chinese economy, meanwhile, continues to expand.
It is also important to view these events through a longer-term lens. Equity markets rarely move forward without periods
of volatility. The S&P 500 Index in the U.S. has gained more than 200% since March 2009, and has been trading above its
pre-crisis highs for more than two years. There have been several market declines and recoveries over the past six years,
but the trend has been broadly upward, based on steady global economic growth, fundamental improvement in business
conditions, and the gradual willingness of investors to re-enter the market.
“It’s not the currency denomination of your account that matters, it’s the
currency by which your securities are valued in.” – Cy Korun
STRATEGIC NOTES
I’ve had many investors ask me about having more US dollar accounts within their portfolio. I’m not opposed to US dollar
accounts from a convenience perspective (I need to withdraw money from my investment account to pay for an
obligation that is denominated in US dollars and I don’t want the hassle and expense of converting my withdrawal from
Canadian dollars into US dollars to meet this obligation).
However, when I dig deeper into why the investor wants the US dollar account, it is often based on the premise that they
want more exposure to the US currency to benefit from potential rises in the US dollar relative to the Canadian dollar. In
this circumstance, the dollar denomination of your account won’t make any difference. What will matter is what dollar
denomination is used to value an investment within your portfolio.
To benefit from an increase in the US dollar your portfolio needs to hold securities that are valued in US dollars. This can
include shares in US domiciled corporations, bonds or debt issued by the US government or globally valued commodities
like Oil or Silver.
To illustrate this, let’s say you buy 1 unit of XYZ US Equity Fund (CAD) in a Canadian Dollar and 1 unit of XYZ US Equity
Fund (USD) in a US dollar account. Let’s assume you buy both at a time when the US and Canadian dollar are at par ($1
CAD = $1 USD) and the unit value of each fund are the same (say $1,000 per unit). The securities in this fund are US
domiciled equities so their prices will be determined in US dollars. Let’s say over the next year, the average security
increased in value by 10%. During this same period, the Canadian dollar depreciates by 10% relative to the US dollar ($1
CAD now equals $0.90 USD). What happens to each of your accounts?
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The US dollar account is pretty straightforward. The unit value of the fund will increase by 10% to reflect the appreciation
in the valuation of the securities in the fund and your account balance will be $1,100 USD.
The Canadian dollar account will also increase by 10% to reflect the appreciation in the valuation of the securities. In
addition it will also increase by another 11.1% when the US dollar denominated securities are converted into Canadian
dollars ($1.00 CAD / $0.90 USD) to provide your account balance. The total balance of this account will be $1,222.22
CAD.
If you now wanted to buy US dollars with the proceeds from your Canadian dollar account, you would withdraw your
$1,222.22 CAD and convert it into USD ($1,222.22 x $0.90) which gives you a total of $1,100 USD.
As you can see both accounts would provide you with the exact same amount of US dollars, regardless of the currency
the account was denominated in.
To be fair, this is a rather simplified example. In reality, a US dollar account does have some practical advantages besides
the added convenience of receiving redemption proceeds in US dollars. When you sell an investment fund, the trade
takes 3 days to settle before you receive the proceeds. If the Canadian dollar depreciates further during this period you
wouldn’t be able to purchase the full $1,100 of US dollars (although the flip side is also true in that you could purchase
more US dollars if the Canadian dollar appreciated during this period). In addition you need to convert currency through
an intermediary (typically a financial institution) who will, in most circumstances, charge a spread between their buy and
sell rate of various currencies. This would result in you not receiving the full $0.90 USD for
every $1.00 CAD you convert.
But for the fundamental purpose of having exposure to US dollars in your portfolio, this is
accomplished primarily through holding US based investments and not by selecting a
currency denomination for the investment account.
Our portfolio design specifications have a minimum exposure to US domiciled investments
of 15% with a maximum range of up to 35% of total portfolio holdings. While the most
quantitative reasons for this are for additional growth opportunities, diversification and
risk reduction, we also recognize that many investment objectives require the use of US
dollars at some future date and this provides a degree of protection against any currency
swings which could impact those objectives.
Cy Korun, CFA, CFP
Director of Private Clients
& Wealth Management
The information in this letter is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset
Management, Globe and Mail, National Post, Bank of Montreal Economics, Yahoo Canada Finance and Trading Economics. Index information was
provided by Morningstar, TD Newcrest and Bloomberg. This material is provided for general information and is subject to change without notice. Every
effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness.
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