July 2015 Market Update
Traditionally we expect the summer to be more volatile for capital markets because of lower trading volumes and activity. However, this is not a typical July. The markets are being driven by global and domestic events.
At the end of June, it looked as if Greece was exiting the Euro. In a national referendum, the people of Greece rejected reform measures being demanded by the IMF and ECB. Greece’s Prime Minister Alexis Tsipras was in a tough position where he had to respect the wishes of Greek citizens while acting in their best interest. His country was on the brink of financial collapse and the prospect of having to print a parallel currency and exit the euro. After much negotiation Greece and its European creditors reached “aGreekment”. To receive €86bn of bailout funds Greece will cut pensions, increase sales tax, put in place spending constraints and sell off €50bn of public sector assets.
The other source of market turmoil was China. On July 27 the Shanghai stock exchange suffered its largest 1-day loss since 2007 dropping 8%.
From peaking in June the Shanghai exchange has undergone a major correction falling 29%.
This correction has been fuelled by declining economic growth and fickle retail investors. The government intervened to dampen the correction through restricting market activity. However, this may only prolong the inevitable. China has been portrayed as the force of global growth relying on the rise of its middle class. This view is coming under increased scrutiny with some renowned investors changing their previously bullish views on China.
The slow down in global growth has become more evident at home in Canada. Based on the expectation of economic decline as a result of depressed oil prices, the Bank of Canada cut key lending rates to 0.50%. Although BoC governor Poloz has not called this a “Recession” he did cite that “we have worked our way through a mild contraction.” and slashed the 2015 economic growth forecast to 1.1% (down from 1.9% back in April). Many economists expect that when the numbers for Q2 are in, Canada will have experienced two consecutive quarters of negative GDP growth. (The technical definition of a recession). However, we are also seeing job growth, a hot housing market, and increased consumer spending. The BoC is hoping that a lower interest rate environment and the resulting weaker Canadian dollar will lead a return to economic growth supported by strong fundamentals.
Historically, the Canadian and U.S. economies have tended to move in lock-step. However, we are state of divergence where U.S. economy is expanding and Canadian is contracting. On Wednesday, the Fed said that in the U.S. “economic activity has been expanding moderately in recent months” and “The labor market continued to improve, with solid job gains and declining unemployment”. The Fed held the target rate at 0.25% but said it will be appropriate to raise the rate when is see some further improvements to the labor market and inflation moving toward the 2% target. Analyst interpreted this to mean that a gradual rate increase is likely to occur this year and as early as September. The stock market also took this as good news.
The resolution of the Greek debt crisis, China’s stock market woes, BoC rate cut, slashing of Canadian growth forecasts and an expected interest rate increase by the U.S. Fed later this year generated a lot of volatility in our portfolios throughout July. Overall our balanced portfolio ended the month +1.7%. The BoC rate cut and decline in Canadian Dollar led to increase in the value of the Canadian bond portion of the portfolio and unhedged U.S. dollar exposure. Despite global influences and high volatility the U.S and developed international markets moved upwards (S&P500 & MSCI EAFE +2.1%) and Canadian markets remained flat (S&P/TSX Composite -0.4%).
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