June 2015 Market Update
Greece has shaken the world. Although the final curtains have not dropped on this tragedy, it looks like they will be unable to reach a compromise with their creditors. In an attempt to preserve the country’s stability the Syriza government held an emergency referendum for the country to vote on the creditor’s proposals and declared holidays for the banks, keeping their doors closed to prevent the public starting a run on the banks. On Sunday more than 60% of Greeks have voted to reject euro zone reform and austerity measures which would provide the necessary funds for the country to meets it’s obligations. The Greek government now has the challenging position of trying to reach a new deal with is creditors while representing the will of its people.
The European Union feels there are sufficient safeguards in place to prevent the collapse of the Union and contagion of the global economy should Greece default and be forced out. The long-run effects on global capital markets are hard to estimate but we are seeing increased volatility across the world. On Monday last week, global markets were down significantly with some rebounding the following day. Following the results of Sunday’s referendum in Greece, global markets exhibited some volatility but mostly maintained their stability. The next step will be Wednesday’s meeting of euro-area finance chiefs, where they will discuss Greece’s proposal for a new deal.
Although the Greek saga has captivated markets and headlines around the world, at only 1.3% of the total EU GDP, it alone cannot account for all the global volatility observed in June. There are several other events that are affecting markets.
Earlier this month the Federal Reserve signaled it’s on track to raise interest rates as early as September, but that rates are likely to climb more gradually than previously anticipated. The FOMC cited it will be looking for “improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective”
ADP reported that almost 237,000 jobs were created in June, mainly in services with some additional growth in goods-producing firms. Moody’s chief economist Mark Zandi said: “The current robust pace of job growth is double that needed to absorb the growth in the working age population.”
As investors in REITs, the potential negative impact of rising interest rates is a key concern. However, REIT managers are less concerned. They have strengthened their balance sheets since the last downturn and are now more conservatively leveraged. Loans maturing over the next few years still carry interest rates that far exceed current rates, so even a 1% rise in rates would have a negligible impact on cash flow.
Here at home, Canada’s economic results from April were weaker than expected. The economy shrunk by 0.1%, following the contraction in Q1. It’s now clear that the collapse of oil prices continues to reduce output from the energy sector and the anticipated turnaround in the manufacturing sector has failed to materialize in any meaningful way. The Bank of Canada will address this data as well as the effects of the Greek crisis when they meet mid-July. Many economists feel that another rate cut could be considered as a measure to avoid a recession, though some believe we’re already in one.
We usually expect equity markets to exhibit higher levels of volatility over the summer but with the effects of Greece, this may be tightened. The potential of the Bank of Canada lowering interest rates may create a headwind for the Canadian fixed income aspect of our portfolios. The valuation of our REITs has also recently been volatile because they trade on capital markets and are responding to changing interest rate expectations.
In the backdrop of the Greek crisis, an expected rate increase by the US Fed in the fall, and domestic economic challenges stemming from the price of oil, our balanced portfolios ended the month down.
Periods of volatility and broad-based market decline like we are experiencing tend to occur from time to time. We believe in maintaining a disciplined and diversified investment philosophy as we invest for the long term.
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