TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
MAY 2017
In April, political headwinds receded and the reflationary trade regained some traction. Notably, centrist
and pro-euro candidate Emmanuel Macron progressed to the French presidential runoff in May, where
he is expected to claim victory versus far-right Nationalist Marine Le Pen by a wide margin - reducing the
likelihood that the trend of populism in the US and UK spreads to the core of Europe. Finally, as the end of
his first 100 days in office came to a close, President Trump unveiled some noteworthy plans for tax reform,
urging his administration to accelerate a proposal to cut the tax rate for both corporations and individuals.
APR. 28,
2017
EQUITY MARKETS
APR.
1 YEAR
% PRICE CHANGE (LC)
S&P 500
2,384
0.91%
6.49%
15.44%
S&P/TSX
15,586
0.25%
1.95%
11.72%
MSCI EAFE
1,834
2.27%
8.89%
8.30%
978
2.04%
13.42%
16.40%
MSCI EM
FIXED INCOME (%)
BASIS POINT CHANGE
US 10 Year Bond Yield
2.28
-10.7
-16.4
44.7
US 2 Year Bond Yield
1.26
0.8
7.4
48.0
CA 10 Year Bond Yield
1.55
-7.8
-17.4
3.4
CA 2 Year Bond Yield
0.72
-2.7
-2.6
2.9
CURRENCIES
% PRICE CHANGE
CAD/USD
0.73
-2.46%
-1.57%
-8.05%
EUR/USD
1.09
2.28%
3.59%
-4.86%
USD/JPY
111.49
0.09%
-4.68%
4.69%
COMMODITIES
% PRICE CHANGE
WTI Oil (USD/bbl)
49.33
-2.51%
-8.17%
7.43%
Copper (USD/pound)
2.60
-2.11%
3.63%
13.93%
1,268.30
1.68%
10.12%
-1.72%
Gold (USD/oz)
1
YTD
The global equity market hit an all-time high in April. Regionally
speaking, the S&P 500 advanced on the back of some healthy corporate
earnings results and the prospect for US tax reform. Meanwhile,
Canadians stocks lagged their global counterparts, owing to a decline
in commodity prices and as Trump adopted a tougher stance on trade
and scrutinized Canada’s lumber and dairy industries. Looking abroad,
European equities breached their highest level since 2015 following the
favourable outcome of the French elections, which helped to restore
confidence in the future of the euro bloc, while Japanese stocks soared
higher as the weaker yen boosted corporate profits and sentiment in
general. Finally, emerging market equities traded near two-year highs in
the environment of increased risk appetite, while the softer greenback
also lent some support.
Despite the ongoing resurgence in global growth prospects and receding
political headwinds, North American government bond yields declined
alongside some softer inflation results and the recent collapse in oil
prices, which saw investors scale back their bets for fed funds rate hikes
in 2017. Meanwhile, credit spreads narrowed amid some stronger-thanexpected earnings results and on speculation that President Trump
will boost corporate profits via tax reform, both of which bolstered
sentiment in the corporate and high yield space.
In currency markets, the USD retreated after Trump characterized the
currency as “too strong” and as investors pared back their wagers for fed
fund rate hikes this year. Not surprisingly, the euro posted an impressive
rebound after the French election results pointed towards a pro-euro
candidate becoming the country’s next president, while the loonie
declined owing to the subdued inflationary backdrop, waning crude
prices, and as Trump intensified the trade dispute with Canada and
imposed tariffs on imported softwood lumber.
Finally, crude oil languished below the $50-mark as stubbornly elevated
inventories and the persistent ramp-up in US production outweighed
the impact of OPEC’s production cuts, while gold prices ended the
month higher as investors pondered the political landscape in Europe
and as Trump’s first 100 days drew to a close with little in the way of
details regarding his pro-growth agenda – though safe haven demand
dwindled somewhat and bullion prices pared some of those gains as
risk appetite returned to the marketplace at month-end.
IM
FINANCIAL MARKET DASHBOARD
TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
Canada GDP (MoM)
Canada GDP (YoY)
0.6
2.5
0.4
2.0
0.2
1.5
0.0
After several consecutive months of
healthy gains, the Canadian economy
took a breather in February - though
remains on track to post an impressive
advance for the first quarter of 2017.
-0.2
-0.4
-0.6
DEC. JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. OCT. NOV. DEC. JAN. FEB.
2015
2016
US GDP (QoQ, SAAR)
2.5
2.0
1.5
While the US economic expansion
moderated somewhat in the first
quarter, leading economic indicators
are suggesting that growth should
rebound in the second quarter.
1.0
DEC. JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. OCT. NOV. DEC. JAN. FEB. MAR.
2015
2016
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
China GDP (YoY)
7.3
The European economy continues to impress, with momentum
broadening out to both the services and the manufacturing sectors, while
China’s economy has reaccelerated on the back of strength in housing,
infrastructure investment, exports, and retail sales.
7.2
7.1
55
7.0
54
6.8
6.9
6.7
53
52
6.6
DEC.
JUN.
2015
2
MAY 2017
SEP.
DEC.
MAR.
The Canadian outlook remains reasonably bright, thanks to a healthy
consumer backdrop, still-accommodative monetary policy, and the
gradual recovery in oil prices. Somewhat worrisome, however, is that
President Trump appears to be making good on his “America First”
pledges, with Canada’s lumber and dairy industries coming under
particular scrutiny as of late. That being said, while the import duty
on softwood lumber will negatively impact the forestry industry,
the overall impact on Canada’s economy should be fairly negligible.
Furthermore, while President Trump plans to renegotiate NAFTA,
Canada remains an unlikely target due to its relatively balanced
trade relationship with the US, while Canada remains the number
one destination for US goods.
USA
While first quarter growth came in on the softer side, leading
indicators such as the ISM Manufacturing index, initial jobless
claims, factory orders, and capital spending intensions are suggesting
that GDP growth will bounce back in the second quarter. Indeed,
measures of both consumer and business confidence remain at
levels consistent with stronger growth and should translate into a
resurgence in spending going forward. Meanwhile, Federal Reserve
officials appear to be looking through first quarter weakness as
transitory in nature and remain firmly committed to their forecast
for two more rate hikes this year, while rumblings around balance
sheet reduction are also looming in the background.
2017
Eurozone Composite PMI
56
0.0
US Leading Economic Indicator (MoM)
3.0
57
0.5
2017
3.5
0.5
1.0
CANADA
JUN.
2016
SEP.
DEC.
MAR.
2017
6.5
INTERNATIONAL
The European economy continues to exhibit signs of resilience
even in the wake of the uncertain political backdrop. Notably,
surveys are indicating that both corporations and consumers have
shrugged-off recent political aberrations, with business sentiment
rising to its highest level since 2011, while consumer confidence
also accelerated to a two-year high. Not surprisingly, the UK
economy appears to have lost some steam after PM May triggered
formal Brexit negotiations last month, with confidence dwindling
amid rising consumer prices and uncertainty over future trade
agreements. Finally, China’s economy gained some considerable
momentum in the first quarter and posted its first back-to-back
growth acceleration in seven years, which has bolstered the global
growth outlook in general.
TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
Our current scenarios are for a synchronized global expansion (65%), which is a continuation of the current environment that benefits
equities, political instability (15%), which would be negative for equities and positive for bonds, emerging market instability (10%) led by
emerging market disequilibrium that would introduce significant volatility, and finally, global economic stagnation (10%) which would be
negative for equities and positive for bonds.
MAIN SCENARIO
SYNCHRONIZED GLOBAL
EXPANSION
PROBABILITY 65%
The synchronized global expansion remains
largely entrenched over the next 12 months,
with all major regions contributing to the
advance. The US economy surges ahead,
thanks to an improving consumer backdrop
and a manufacturing sector that’s finding a
floor – while the economic benefits stemming
from President Trump’s pro-growth agenda
should counter any drag from restrictive trade
policies. Meanwhile, the adjustment to low oil
prices in Canada remains well underway, as
the economy thrives on the combination of
resurgent US demand, a competitive Canadian
dollar, and fiscal support. While policymakers in
Europe and Japan ultimately prove successful in
reflating growth, emerging market economies
prosper in the environment of improving global
demand, ample liquidity, and rising commodity
prices. Taken together, the immediate focus
on growth-enhancing policy initiatives in
the US should have positive implications for
the global economy in general and bolster
inflation expectations across the world, aided
further by a revival in commodity prices. This
reflationary backdrop bodes well for equities
and commodities (ex-gold) at the expense of
fixed income and the US dollar.
3
MAY 2017
SCENARIO 2
PROBABILITY 15%
POLITICAL INSTABILITY
The recent trend towards populism and protectionist policies in the US and the UK could spread to
the Eurozone and bring about tremendous political upheaval and a corresponding crisis in confidence,
disrupting the global economy and financial markets alike. Notably, we are embarking upon a volatile
election cycle in Europe, where the threat of a rise in euro-skepticism and anti-establishment
movements risks throwing the region into political disarray, bringing into question the future of the
euro bloc. Meanwhile, the unknown consequences of impending Brexit negotiations linger on after
UK PM May formally triggers the UK’s departure from the EU. Finally, in the US lies the potential for
President Trump’s “America First” campaign platform to become a reality, where his aversion to trade
agreements and his protectionist bias could cause massive headwinds for global trade.
SCENARIO 3
PROBABILITY 10%
EMERGING MARKET INSTABILITY
Emerging market economies are most vulnerable to a faster pace of interest rate increases in the
US and a corresponding resurgence in the US dollar. The sharp decline in foreign direct investment,
repayment of US-denominated debt, and potential capital outflows could result in major contagion
and a corresponding flight to quality trade, further exacerbating USD strength and a broad based
tightening of financial market conditions. Furthermore, excessive and rising debt burdens in China
leave the economy vulnerable at a time when growth is already slowing, rekindling fears of a hard
landing in the world’s second largest economy. Finally, anti-trade rhetoric in the US becomes a reality,
resulting in tariffs being imposed on emerging market economies such as China and Mexico, with
retaliatory measures igniting a global trade war.
SCENARIO 4
PROBABILITY 10%
GLOBAL ECONOMIC STAGNATION
After eight years in recovery-mode, the global economy fails to regain momentum and runs out of
steam, as secular forces such as an aging population, weaker labor force growth, and lower productivity
temper growth prospects worldwide. Furthermore, the massive amounts of monetary stimulus already
in place prove unsuccessful in bolstering growth as a broad-based deterioration in confidence offsets
the environment of accommodative policy, leaving policymakers with little ammunition to shelter
the economy from the storm.
TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
FORECASTS FOR THE NEXT 12 MONTHS
SCENARIOS
APRIL 28,
2017
PROBABILITY
SYNCHRONIZED
GLOBAL
EXPANSION
POLITICAL
INSTABILITY
EMERGING MARKET
INSTABILITY
GLOBAL ECONOMIC
STAGNATION
65%
15%
10%
10%
GDP GROWTH (Y/Y)
Global
3.10%
3.25%
2.25%
2.00%
2.00%
Canada
2.50%
2.75%
1.00%
0.50%
0.50%
U.S.
1.90%
3.00%
1.00%
1.50%
1.00%
Canada
1.60%
2.40%
1.75%
1.00%
1.00%
U.S.
2.40%
2.40%
2.00%
1.50%
1.00%
Bank of Canada
0.50%
0.75%
0.25%
0.25%
0.25%
Federal Reserve
1.00%
1.50%
0.75%
0.50%
0.50%
Canada Government
1.55%
2.30%
1.20%
1.20%
1.20%
US Government
2.28%
3.00%
1.40%
1.20%
1.25%
Canada
21.4%
27.9%
-1.6%
-4.9%
-1.6%
U.S.
10.6%
17.6%
-5.4%
-5.4%
2.8%
EAFE
15.2%
8.4%
-15.2%
-15.2%
-5.7%
EM
24.2%
30.9%
-21.1%
-21.1%
-13.3%
Canada
16.8X
17.0X
16.0X
16.0X
17.0X
U.S.
17.7X
18.5X
16.0X
16.0X
16.0X
EAFE
15.0X
16.0X
14.0X
14.0X
14.0X
EM
12.4X
13.5X
13.0X
12.0X
13.0X
CAD/USD
0.73
0.80
0.70
0.65
0.70
EUR/USD
1.09
1.05
0.95
1.10
1.15
111.49
125.00
110.00
100.00
90.00
49.33
65.00
45.00
40.00
45.00
INFLATION (HEADLINE Y/Y)
SHORT-TERM RATES
10-YEAR RATES
PROFIT GROWTH (12 MONTHS FORWARD)
P/E (FORWARD 12 MONTHS)
CURRENCIES
USD/JPY
COMMODITIES
Oil (WTI, USD/barrel)
4
MAY 2017
TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
MATRIX OF EXPECTED RETURNS
SYNCHRONIZED
GLOBAL EXPANSION
POLITICAL INSTABILITY
EMERGING MARKET
INSTABILITY
GLOBAL ECONOMIC
STAGNATION
PROBABILITY
65%
15%
10%
10%
Money Market
0.6%
0.4%
0.4%
0.4%
Canadian Bonds
-1.9%
4.3%
4.7%
4.7%
Canadian Equity
6.3%
-23.0%
-25.6%
-18.2%
U.S. Equity
1.6%
-19.3%
-13.0%
-12.2%
-8.1%
-28.1%
-22.6%
-20.1%
4.9%
-30.5%
-30.9%
-23.5%
SCENARIOS
International Equity
Emerging Market Equity
CURRENT STRATEGY 1
APRIL 5
CHANGES
MINIMUM
BENCHMARK
MAXIMUM
STRATEGY
ALLOCATION
RELATIVE
0.0%
5.0%
25.0%
Overweight
10.0%
+5.0%
Increased by 5.0 %
Canadian Bonds
20.0%
40.0%
60.0%
Underweight
25.0%
-15.0%
Increased by 5.0 %
Canadian Equity
20.0%
25.0%
45.0%
Overweight
32.5%
+7.5%
Decreased by 5.0%
U.S. Equity
3.0%
13.0%
23.0%
Neutral
13.0%
0.0%
No change
International Equity
2.0%
12.0%
22.0%
Underweight
7.0%
-5.0%
Decreased by 5.0%
Emerging Markets Equity
0.0%
5.0%
15.0%
Overweight
12.5%
+7.5%
No change
Money Market
1 Based on a 100 basis point value added objective. The benchmark employed here is based on a model portfolio and for illustrative purposes only. Individual client benchmarks are employed in the
management of their respective portfolios.
5
MAY 2017
TACTICAL ASSET ALLOCATION COMMITTEE
MONTHLY COMMENTARY
EVOLUTION OF STRATEGY 1
MONEY
MARKET
CANADIAN
BONDS
CANADIAN
EQUITY
U.S. EQUITY
INTERNATIONAL
EQUITY
EMERGING
MARKETS
EQUITY
August 10, 2011
+5.0%
-15.0%
+5.0%
+5.0%
0.0%
0.0%
October 5, 2011
+7.0%
-15.0%
+8.0%
0.0%
0.0%
0.0%
October 12, 2011
+6.0%
-10.0%
+4.0%
0.0%
0.0%
0.0%
November 11, 2011
+5.0%
0.0%
0.0%
0.0%
-5.0%
0.0%
0.0%
0.0%
+5.0%
0.0%
-5.0%
0.0%
April 20, 2012
+15.0%
-20.0%
+10.0%
0.0%
-5.0%
0.0%
July 31, 2012
+20.0%
-15.0%
0.0%
0.0%
-5.0%
0.0%
November 9, 2012
+10.0%
-15.0%
+10.0%
0.0%
-5.0%
0.0%
February 19, 2013
+5.0%
-15.0%
+10.0%
0.0%
0.0%
0.0%
0.0%
-15.0%
+10.0%
+5.0%
0.0%
0.0%
+10.0%
-15.0%
+5.0%
0.0%
0.0%
0.0%
February 5, 2014
0.0%
-15.0%
+10.0%
+10.0%
-5.0%
0.0%
October 14, 2014
0.0%
-20.0%
+5.0%
+10.0%
+5.0%
0.0%
+10.0%
-20.0%
+2.5%
+2.5%
+5.0%
0.0%
July 13, 2015
0.0%
-20.0%
+7.0%
+4.0%
+9.0%
0.0%
October 19, 2015
0.0%
-20.0%
+11.0%
+0.0%
+9.0%
0.0%
June 24, 2016
+9.0%
-20.0%
+11.0%
+0.0%
+0.0%
0.0%
July 12, 2016
0.0%
-20.0%
+15.0%
+0.0%
+0.0%
+5.0%
July 27, 2016
+5.0%
-20.0%
+12.5%
+0.0%
+0.0%
+2.5%
0.0%
-20.0%
+12.5%
0.0%
0.0%
+7.5%
+5.0%
-15.0%
+7.5%
0.0%
-5.0%
+7.5%
December 7, 2011
August 6, 2013
December 3, 2013
November 14, 2014
October 31, 2016
April 5, 2017
1 Based on a 100 basis point value added objective.
6
MAY 2017
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