Our point of view
Desjardins private wealth management’s
financial commentary
F E B RUARY 2 0 1 7
Markets running out of steam
Highlights
The main feature on the current landscape is without a doubt
Donald Trump stepping into power in the United States and his
numerous reform projects which are likely to cause shocks that
will be felt around the globe. As this is written, the President
has yet to make anything on his agenda public. Since the
election on November 8, 2016, the stock markets and interest
rates have risen sharply on the anticipated benefits spinning
off the major changes the new head of state announced during
the campaign. Now that he’s in office, the markets are impatient
to see his promises carried out. For the time being, the initial
positive effect has worn off, as shown in Chart No. 1.
The Canadian market continues to fare well, thanks mainly to
advances in commodities prices. Aluminum, copper and gold
have posted strong increases since the last month of 2016, when
the price of crude oil stabilized. On the international scene,
Europe and the emerging countries have contributed more
strongly to stock market rallies since mid-December.
$ CA
- 2.65%
OIL
$ US
+ 1.65%
CAD/USD
Data from December 23rd, 2016 to January 23rd, 2017
1
-0.13% to 1.22%
Five-year Canada bonds
1 – Financial markets (January 25, 2016 to January 23, 2017)
Generalized higher
inflation pretty much
everywhere in the world
is the second significant
feature on the landscape,
having also brought with it
a strong surge in interest
rates on the bond markets.
Chart No. 2 shows the
inflationary trend in the
United States over the
coming months.
35.00
32.50
30.99
30.00
(Total return in C$)
27.50
S&P 500
(US$)
25.00
23.11
22.50
19.91
20.00
17.50
15.04
15.00
Emerging countries
12.91
12.50
S&P 500 C$
10.00
Resources
MSCI EAFE
7.50
6.47
5.00
2.50
1.15
0.00
Bonds
-2.50
Trump effect
-5.00
-7.50
-10.00
-12.50
Jan.Feb.MarchAprilMay June JulyAug.Sept.Oct.Nov. Dec. Janv.
Market movements
S&P TSX
Rising bond rates and
mediocre bond yields
since early November are
due to expected inflation.
And inflation is due,
2016
2017
among other things, to
Sources: Bloomberg and Desjardins Investment Management
the year-over-year change
in the energy component,
Outlook
the economic recovery measures proposed by the new U.S.
President and the excellent state of health of the job market,
Donald Trump’s promises for economic recovery are raising
which is causing labour shortages in a variety of industries and
high hopes. But even if his program could be implemented
putting upward pressure on wages and salaries. According to
quickly, the results would not be felt for quite some time.
Cornerstone Macro, the inflation rate in late 2017 should fall
What’s more, the U.S. economy could be held back this year by
back to only 1% given low nominal growth in the economy and a
headwinds from several directions.
U.S. dollar that will remain strong.
RETURNS ON RE F ERENCE IN D E X ES
as at January 31, 2017*
ASSET CLASSES
(Reference Indexes)
2 – U.S. inflation — a seasonal rise
One
month *
6
months*
12
months
Money Market
FTSE TMX Canada
30-day Treasury Bill Total Return Index
0.04%
0.25%
0.47%
Canadian Bonds
FTSE TMX Universe Small-Mid Index **
0.20%
Canadian Government Bonds
FTSE TMX Canada Government Index –
short-mid term
0.06%
-1.80%
0.13%
Canadian Corporate Bonds
FTSE TMX Corp. Small-Mid Index **
0.59%
0.31%
3.79%
Canadian Stock Market – Large Cap
S&P/TSX Composite Total Return Index
0.85%
6.99%
23.55%
Canadian Stock Market – Large Cap
S&P/TSX Dividend Composite
Total Return Index
0.83%
8.22%
26.00%
Canadian High Income Equity
30% S&P/TSX Preferred +
25% S&P/TSX REITS +
15% S&P/TSX Utilities +
10% S&P/TSX Consumer Discretionary +
10% S&P/TSX Financials +
10% S&P/TSX Energy
1.06%
4.58%
20.87%
4.0
U.S. CPI — Y/Y % Dec.: 2.1%
3.5
February:
3% y/y e
3.0
2.5
2.0
-1.22%
1.19%
1.5
1.0
Canadian Stock Market – Small Cap
S&P/TSX Equity Small Cap Total
Return Index***
0.53%
3.11%
45.13%
US Equities
S&P 500 Total Return Index ajusted in CA$
-1.12%
5.87%
11.08%
US Equities
S&P 500 Total Return Index in US$
1.90%
5.96%
20.04%
Foreign Stock Markets
95% MSCI TR Gross EAFE Index in CA$ +
5% MSCI TR Europe in CA$
-0.29%
3.31%
4.47%
Completion Strategy | Combination of
the underlying ETF’s indices. in CA$
-0.95%
0.5
0.0
6
5
4
3
2
1
0
-1
-2
-3
4
1.28%
U.S. Real Consumer Spending
3 Mo. Avg. Y/Y % Dec.: 2.9% e
3
2
1
-1.91%
U.S. Real Disposable Personal Income
3 Mo. Avg. Y/Y % Dec.: 2.6% e
Assuming energy prices
remain at current levels,
the energy component
of the CPI will jump
from 5.4% y/y in
December, to 15% by
Febrary. That means
headline inflation will
likely rise to 3% y/y
in February.
This inflation
acceleration will further
slow real DPI growth,
to roughly 1.5% y/y. The
income slowdown has
been and will continue
to be a headwind to
consumer spending.
So, despite the spike in
consumer confidence,
U.S. consumer spending
is likely to slow. Stay
tuned.
If the new U.S. government were to go ahead with
its protectionist aims and engage in a trade war
with its main partners because of its intention to
renegotiate the different free trade agreements,
the financial markets could react badly.
The probabilities of a recession rose to 45%
according to Cornerstone Macro, with the
firm forecasting recessions an average of
two years in advance. The economy is likely
to experience a slowdown this year due to
higher interest rates for personal loans and
mortgages, escalating inflation caused by rising
oil prices and lower corporate profit margins
linked to growth in salaries and wages. This
situation could in turn lead to slower job market
growth. And furthermore, as long as the Trump
administration holds off setting on new rules for
businesses, they will keep their investment plans
on hold.
Strategy
In the face of today’s uncertain climate, we are
maintaining our defensive stance by keeping
portfolio cash levels high, while the portfolios
remain underweight bonds and slightly above
target to equities.
André Berberi
Vice-President
and Senior Portfolio Manager
Desjardins Private Wealth Management
111213 14 15161718
Source: Cornerstone Macro
Source: Bloomberg
Returns are non-annualized.
From February 2015 to March 31st 2016, the index iBoxx Corp 3-5 years have been
added to the Bond Fund and the Corporate Bond Fund with a respective weighting of
5% and 12.5%. Between the 1st of April and the 1st of December 2016, the index weight
of the iBoxx have been reduced to 10% in the Corporate Bond Fund. After the 1st of
December 2016, the index iBoxx has been removed from those Bond Funds. ***
Before February 1st 2015, the index was composed of 75% S&P TSX Small Cap Index
and 25% MSCI World Small Cap Index.
*
**
2
Discretionary portfolio management services are provided by Desjardins Investment Management Inc., registered as a portfolio manager and as an investment fund
manager. Trust services are provided by Desjardins Trust Inc., federal trust and financial planning firm.
Although the information provided in this document comes from sources which we believe to be reliable, Desjardins Investment Management Inc. (DIM) cannot
guarantee that they are accurate or complete. The opinions expressed herein are based on our analyses and interpretations of this information and do not in any way
represent a solicitation with a view to buying or selling the securities mentioned in this document.
OUR POINT OF VIEW