Market review October 2019

Cathy Duval |

Market Review and Portfolio Strategy

October 2019 Edition

The last few weeks have been eventful for global equities. After rising to almost a record in mid-September on optimism about a China-U.S. trade deal, the MSCI ACWI (all countries), retreated after Saudi oil output was impaired by attacks on a major facility. Though Saudi production has since been restored, the markets remain mired in uncertainty in the face of indications that trade tensions are hurting corporate profits.

 

Some highlights for the quarter ending September 30th

Fixed Income

·The European Central Bank and the Fed in the United States both cut their respective key interest rates in September amid slowing global growth and significant geopolitical uncertainty. The Bank of Canada left its key interest rate unchanged. 

·The Canadian Bond Universe (FTSE Index) had an excellent start to the year with a return of 7.76%.

Canadian Stock Markets

·The S&P/TSX hit a record 16,900 September 20th. It remains one of the best-performing asset classes so far in 2019. The index is up 19.3% this year.

·The Canadian economy is running close to its potential and core inflation is at the 2% target. Given that global growth is under pressure, our economists believe that the Bank of Canada's current overnight rate is appropriate at 1.75%.

U.S. Stock Markets

·The S&P500 index is up 18.2% since the beginning of the year.

·The U.S. is still posting growing profits, but the trend is not inspiring.

·Our economists expect the Fed to cut the federal funds rate once again in October and announce an expansion of its balance sheet (liquidity injection into the economy).

Commodities

·September saw the largest single-day spike in WTI oil prices since December 2008 following a drone attack on Saudi Arabian oil infrastructure. Its price quickly returned to its previous level as the supply disruption was relatively brief. Oil price finished the month at $54.07/barrel and that corresponds to a 23.1% price increase this year.

·Gold is benefiting from geopolitical uncertainties. It is posting a return of 16.4% since the beginning of the year.

Currency

·The Canadian dollar is one of the two major currencies to rise against the U.S. dollar in 2019 (up 2.4%).

·The performance of the Canadian dollar will depend not only on U.S.-China trade discussions, but also on the Bank of Canada's monetary policy decision and, to a lesser extent, the results of the federal elections later this month. If the truce between the United States and China that we are pressing takes place, oil prices should receive a boost, as investors will be less pessimistic about the global economy and this would encourage markets to lower their expectations of interest rate cuts by the Bank of Canada, supporting the loonie. The firm has an unchanged USD/CAD rate forecast of 1.30 by the end of the year.

 

Our Portfolio Management Strategy

October’s Washington meetings between senior trade representatives of the two superpowers will be crucial to the global outlook for next year. Investors will be hoping for at least a truce in the ongoing trade war. The upcoming talks could very well be make-or-break for the 2020 economic outlook.

 

In this context, our defensive positioning remains the cornerstone of our portfolio strategy. It should be noted that since the end of 2017, our strategy has gradually adjusted to cope with the end of the business cycle. In fact, our goal has been to reduce and risk and volatility to better protect portfolios during episodes of market declines. No one can predict when a market correction will occur or even its magnitude, but it is possible to position portfolios in such a way that they are more resilient when storms pass through.

 

Here are some successful elements of our strategy that we have put in place this year:

·Reduction in our international stock allocation to increase North American positions

·Decision not to initiate an emerging market position despite the very attractive valuation at the beginning of the year

·Increased diversification in international equities by adding an exchange-traded fund with a management style based on the quality of the underlying securities and to their capacity to increase dividend annually.

·Added stocks in sectors that are usually less affected during downturns: Brookfield Asset management (infrastructure), Capital Power (utilities), H-R REIT (real estate trust)

·Added an investment manager that specializes in Value investing (undervalued companies)

 

In closing, it is important to remember that the combination of an appropriate investor profile and an healthy portfolio diversification not only reduces risk, but also prevents an investor from exiting the market at the wrong time. We believe that these are key elements in an investor's life and therefore we put a lot of emphasis on them.

I hope you enjoyed our newsletter. I am available to answer any questions you may have so feel free to contact me.

 

Cathy Duval 

cathy.duval.ca

514 871-3474

 

Sources :

Asset Allocation Strategy October 2019

Forex October 2019

Economic Monitor October 2019

 

Disclaimer: The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). National Bank Financial is a Canadian Investor Protection Fund member (CIPF)