Market review July 2018

Cathy Duval |

STOCK MARKETS (as of June 29th 2018)


Canadian Equities

  • Despite rising trade tensions, the S&P/TSX managed to post modest gains last month, even setting a record high on June 22.
  • That brings Canadian equities up 1.9% halfway in 2018, with technology, industrials, real estate, and energy names leading the pack, while defensive sectors such as utilities and telecom got left behind.


U.S. Equities

  • The S&P500 also closed June marginally positive, passing along a bumpy road riddled with tit-for-tat tariff disputes between the U.S. and virtually all of its trade partners. 
  • Year-to-date, U.S. equities have returned a meager 2.6%, a performance that certainly looks better when converted to Canadian dollars (7.8%).
  • Sector divergence is quite spectacular, with Technology (10.9%YTD) and Consumer Discretionary (11.5%) at the positive end of the spectrum, compared to significant losses for Staples (-8.5%) and Telecom names (-8.4%).


World (ex-US)

  • The world stocks have ended the first half of 2018 on a defensive note, the MSCI EAFE (US$) being down -4.5% this year (2% in Cnd $).
  • The outlook for the world stock markets have been brutally obscured by the looming trade war between the United States and its commercial partners.



  • Oil kept marching higher last month, with WTI prices jumping to a four-year high following the OPEC+Russia agreement to modestly increase output and the significant inventory draw south of the border.


Foreign Exchange

  • It was a tough month for the Loonie, falling to a one-year low as it got caught in a perfect storm of rising trade-related uncertainty and weaker than expected economic data. Still, the currency recouped some of the ground lost in the last few days of June, bolstered by oil prices and rising prospects of a July rate hike by the Bank of Canada.
  • Six months into 2018, the Loonie is down 4.4% against the Greenback.





Trade tensions between the U.S. and virtually all of its trade partners have escalated quite significantly over the last few weeks. President Trump game plan on trade is no easy feat, and there are few signs that the White House has any intention of backing off in the near term.


Over the last six months, monetary conditions have undeniably tightened, while global growth appears to be shifting down a gear, but a recession signal is still pending. In other words, it’s getting late in the business cycle – a period where risk assets should continue to outperform, but a more prudent approach to risk-taking must be reinforced.


Unless crude oil continues on its stellar performance and inflation reaches a point where the Bank of Canada is compelled to act more forcefully, we expect Mr. Poloz will use a very cautious approach which will limit the appreciation potential of the Loonie, especially when waters remain murky regarding a trade deal.



The last few weeks have not been easy for Canada-U.S. relations. NAFTA talks that recently seemed on the verge of success have collapsed. Yet renewed uncertainty did not prevent the S&P/TSX from closing at a new high on June 22.


President Trump has issued a stark warning of a possible 25% tariff on auto imports from Canada. In a special report published earlier this year, we highlighted that auto and parts manufacturing is the Canadian industry most exposed to U.S. protectionism. In Ontario, where it is concentrated, 2.6% of all jobs and 3.1% of provincial GDP is exposed to its exports to the U.S.


If such a blow to the automotive sector occur, it means that the relationship between the two neighbours has turned sour and this would affect the Industrial and Consumer Discretionary sectors of the S&P/TSX. Both sectors have ridden Canadian-dollar weakness to record highs in recent weeks.

Also, we have to keep in mind that an escalation of trade tensions between the U.S. and China could strengthen the USD globally, undermining demand (and prices) for commodities produced in Canada.


On another note, the Bank of Canada has maintained its overnight rate at 1.25% on May 30th but Mr. Poloz has decided to hike the rate to 1.5% this past July 11th. This is the second hike in 6 months.



A fifth consecutive quarter of above-2% real GDP growth is in the cards for the U.S. economy. Consumption spending seems to be responding in the second quarter to the boost to disposable incomes provided by a healthy labour market and personal income tax cuts. Investment remains strong, coinciding with elevated business confidence. All in all, the data so far does nothing to change our view that U.S. real GDP growth will be near 3% this year, i.e. well above potential. Rising inflation pressures over the near term do not mean U.S. monetary policy will become overly aggressive. The impact of higher oil prices is transitory while the persistence of low wage growth continues to cast doubts about whether inflation can be sustained near the Fed’s 2% target.


During the quarter, the Federal Reserve hiked its benchmark rate for the second time this year and the 7th in this cycle, citing strong labour market conditions and inflation nearing their symmetric 2% objective.


World (ex-US)

European politics once again threaten to derail global economic momentum. Italy’s new coalition government, with its Euroscepticism and anti-establishment rhetoric, will cause headaches in Brussels. The uncertainty that creates does not help a Eurozone already reeling from a difficult start to the year. For now, we continue to call for world gross domestic product (GDP) to grow 3.8% this year and next. That, however, assumes world governments and central banks successfully manage risks posed by trade protectionism, overleveraging and, of course, political disruptions


The world economy continued to expand in Q1, albeit at a slower pace. The moderation was most felt in the eurozone and Japan.


Volatile oil prices also add to uncertainties about global growth — Brent and WTI prices are both more than 30% higher than last year. True, part of the increase can be attributed to stronger global demand courtesy of improved economic activity which has allowed for an earlier supply glut to be absorbed.



In a context where markets are fully evaluated and where uncertainties are multiplying, our defensive positioning remains the cornerstone of our portfolio strategy.


For many quarters now, we have gradually taken some profits on certain positions. Our geographical and sectorial diversification have also been adjusted to reflect our expectation that there will be more market volatility as well as changes in the source of returns in the next 24 to 36 months. Our portfolios are positioned very well to seize upcoming opportunities. We know that episodes of market decline generally allow us to make our best purchases so we remain ready to adjust the portfolios over time.


It is extremely difficult to reduce risk when markets are rising but we know full well that nobody can predict when a market correction will happen or even its degree of severity. That is why we put forward a disciplined portfolio management process aiming to put aside short-term trends and noises. A global vision and a rigorous process allow us to offer better long-term results.



At the end of last quarter, we reduced our overweighting in financial services by selling Intact and some Bank of Nova Scotia to add to the energy sector. Vermillion, the company we bought, is up more than 19% as of July 13th while Intact and BNS are showing a performance of -1.8% and -4.9% respectively since then (also as of July 13th).


At that time, we had also placed a transaction with the goal of slightly reducing our exposure to the US dollar (reduction of the S&P500 index in $US to add to the S&P500 index in Canadian dollars). We thought at the time, that the Canadian dollar was undervalued. However, the fact that NAFTA was not signed in May as planned has cooled down the Canadian dollar which has lowered significantly since. The signing of this accord remains uncertain to this day, which should keep the Canadian dollar under pressure for the next weeks or months. Even considering that this adjustment has yet to yield the anticipated effect, we still hold the S&P500 index in Canadian dollars and in US dollars. These indexes are the best performers since the beginning of the year showing an increase of 2.6% in US dollars and 7.8% in Canadian dollars (as of June 29th).


It will be my pleasure to give you additional information and answer your questions regarding the discussed topics in this financial letter. Please feel free to contact me.


Sources :Asset allocation strategy July 2018 , Monthly Vision June 2018