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Market update. Oil price pumps up investors

May 17, 2018

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Market update. Oil price pumps up investors

Market Insights

Canadian stocks driven by the oil price combined with international stock growth are the major contributors to this month’s positive performance. Investors enjoyed a relatively relaxing month of lower volatility in many sectors. It seems to be a case of investors taking a breather to see what plays out in tech, Tehran, Trump news and more.

However, emotions are still near the surface, partly due to international political tensions. We expect continued uncertainty to make volatility a factor through 2018.

What does all this mean for your investments?

ETF Portfolios

Clients enjoyed positive performance for their portfolios in April. As well, 1-year results are trending to long term expectations.

One outcome we should note, given the outcome last month compared with our 1-year results: It’s no paradox. Yes, performance this April was good (despite continuing market volatility). However, it was not as exceptional as last April, when we saw quite exceptional returns during a bull market. This explains the drop in the 1-year results.

As such, to help you see the big picture, this month we are presenting monthly performance along with the 1 year performance.

ETF Safety Portfolio was up 0.1% in April. It’s up 2.4% for the past year.

With this portfolio’s significant weighting in the two Canadian bond ETFs (VSC & VSB), the flat performance of these ETFs resulted in a relatively subdued April performance. The main goal of these holdings is to provide stability and minimize losses. As a result, any gains or losses in the equity markets will be captured less. Having said that, the portfolio still received some gains from being exposed to Canadian equities. These had a great bounce in April.

ETF Conservative Portfolio was up 0.3% in April. It’s up 3.9% for the past year.

With increased exposures to equities and high yield bonds, this portfolio was able to capture more of the positive performance in these asset classes. At the same time, there is still a significant portion of the portfolio dedicated to diversification and risk reduction.

ETF Balanced Portfolio was up 0.3% in April. It’s up 5.1% for the past year.

The majority of this portfolio’s positive performance can be attributed to the greater exposure to Canadian & international equities. Both of these asset classes saw exceptional returns in April. The performance in Canadian bonds and real estate ETFs dragged down the portfolio’s performance, as they remained relatively flat. However, these holdings continue to be a good source of diversification.

ETF Growth Portfolio was up 0.4% in April. It’s up 5.6% for the past year.

This portfolio mainly increased its exposure to US equities, specifically the S&P 500 index. That index was relatively flat in April. As a result, the gain in this portfolio was not significantly higher than the ETF Balanced Portfolio. However, the Canadian dollar was slightly stronger. This helped reduce the volatility of the portfolio.

ETF Aggressive Portfolio was up 0.5% in April. It’s up 6.3% for the past year.

We saw exceptional returns in international equities, as this asset class pared its losses from back in March. This portfolio has the highest weighting in equities, specifically international equities. This resulted in the highest monthly return across all of our portfolios. Canadian real estate and bond ETFs remained flat while still providing a good source of diversification.

Private Investment Portfolios

Safety Private Portfolio was up 0.2% in April. It’s up 2.9% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity not only mitigated risk but generated positive returns. Canadian Bonds and mortgages continued to reduce the volatility of the portfolio.

Balanced Private Portfolio was up 0.3% in April. It’s up 4.2% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity not only mitigated risk but generated positive returns in this relatively flat month.

Aggressive Private Portfolio was up 0.7% in April. It’s up 2.7% for the past year.

The additional diversification to asset classes such as mortgages, commodities, real estate and private equity mitigated risk and generated positive returns. The additional exposure to real estate through the NWM Real Estate Fund greatly improved the overall return of this portfolio. The extra equity exposure in the NWM US Tactical High Income Fund also pared its losses from March.

Market movers, at a glance

Taking a closer look at some of the market movers in April, we can see what’s helping investors to keep their chins up.

Markets calmed down as the world took a break from war

Nobel peace prize for US President Donald Trump? If North Korea gives up its nuclear weapons… maybe? Investors and political watchers all perked up as the possibility of peace on the Korean peninsula seemed closer than in recent history. It’s a far cry from the market-wobbling sabre rattling not that long ago from barbed tweets about Little Rocket Man:

“Everyone thinks so, but I would never say it,” Mr. Trump said with a laugh on Wednesday when asked if he deserved the prize. “The prize I want is victory for the world.”

While violence in the Middle East may have flared up again in the wake of Trump’s decision this month to cancel the Iran nuclear deal, back in April markets were still hedging their bets on what might happen. Overall, there was a brief window of extra calm, which has helped to buoy market confidence.

Oil is up, but pipeline problem poses obstacle to profit

Oil rises, pumping up the priceAs North Americans filling up their tanks know with irritating clarity, gas prices are up, big-time. This is a natural follow-on effect of higher oil prices, which have been on a bit of a tear lately, heading into the summer driving season. Brent crude oil spot prices averaged $72/bbl in April, a level that hasn’t been seen since 2014.

This is of course tied to the bigger issue of how Canada’s petro-economy works. In theory, a premium price for oil is usually seen as good news. But in practice, major political disagreements between the federal government and provinces over pipelines and energy infrastructure have broken out. As one observer in a Houston Chronicle report noted, this problem has been bubbling up to the surface for some time:

Kinder Morgan spent six years navigating the Canadian bureaucracy to win approval to expand its Trans Mountain pipeline to move crude from the tar sands of Alberta to ports on the Pacific Coast of British Columbia. But now, six months after the Houston company began construction, the project is trapped between feuding federal and provincial governments, driving a frustrated Kinder Morgan to shut down work on the multibillion dollar pipeline in the hope of pressuring Canadian officials to resolve their differences.

The federal government and the provinces are deadlocked. It has highlighted Canada’s political and infrastructure woes. The country’s inability to export petroleum (or even transport it from Alberta to locations in the east) costs it billions. International investors in Canadian assets don’t like what they’re seeing, which appears to be a country that is not ‘open for business.’ As well, the US administration is still intent on renegotiating NAFTA. This could have major impacts for trade and the economy. Investors seeking certainty aren’t finding much.

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On the other hand, energy companies the world over are enjoying a heady flow of sweet profits of late, a welcome change from the days not that long ago when oil couldn’t seem to climb out of the $40/bbl gutter. Some of April’s good news from oil stocks came from anticipation of Trump’s ending of the Obama administration’s deal with Iran. With sanctions against Iran’s oil sector likely to choke off significant supply, the rest of the world’s energy companies can look forward to higher prices.

The rallying price of oil and energy stocks have had a positive impact on the Canadian market. Some of our portfolios have a greater weighting in Canadian S&P/TSX 60 ETF (HXT), the Horizons ETF that essentially seeks to replicate the performance of the S&P/TSX 60™ Index (Total Return). Those that did took advantage of the stronger Canadian marketplace and saw greater returns in April.

Silicon Valley tech firms regain their footing (after some ups and downs)

Apple stock price volatility

For portfolios that had significant equities exposure, tech stocks’ mid-month dip followed by a swift rebound towards the end of April contributed to a relatively flat return for the month.

Amazon, Alphabet (parent company of Google), Netflix and Facebook all saw big hits, with an $85 billion drop in share value on April 24, though markets were kinder in later days. Just prior to a significant Apple surge based on rumours of a stock buyback, investors were optimistic about a quarterly report that could restore confidence in the innovative firm.

Facebook’s share price was on a similar trajectory throughout April, as investor dismay over the Cambridge Analytica data scandal for most of the month gave way to optimism. As the company released earnings numbers that crushed forecasts, its stock rose 5 percent in a single day.

Like Apple, Amazon also kicked off April with a spurt, followed by a downward slide, before finally surging 7% later in the month. Once again, positive earnings numbers saved the day. The moral of this story? Headlines and politics can hurt these tech titans in the short term. However, once investors’ cooler heads prevail, the stocks tend to better reflect their revenue earnings and growth prospects. These market leaders will likely continue to set the pace for US equities on the whole.

International stock markets up. Japan cashes in before it ages out

The London Stock exchange has been on a tear, with the FTSE 100 up 6.8 percent in April. This is par for the course for international equity markets generally. It contrasted with the results of volatility in North America.

When US government 10-year bonds were below 3 percent and money was cheap, investors were more eager to buy into riskier ventures in developing nations. With higher interest rates and currency issues flaring up, markets as far afield as Argentina and Indonesia have been affected. US moves towards increasing tariffs certainly haven’t helped that sentiment. A recent buying frenzy on emerging markets was not a sign of strength, but of weakness, with investors looking for discounts amid the growing unease.

Meanwhile, Japan’s Nikkei was up and the economy seemed to be humming along… but not all was as it seemed. Much of the positive outlook has resulted from the Bank of Japan simply buying Japanese stocks. They effectively propped up the economy as foreign investors took a pass. The long-term prospects of such ploys are not positive, particularly with Japan’s endemic demography problem becoming more obvious with each passing year. One ominous sign, adult diapers are outselling baby diapers.  Japan seems to be running out of youthful workers to pay into a gargantuan burden of pensioners’ social safety net.

The returns in the international markets contributed to the positive performance for all of our portfolios. Our Balanced, Growth & Aggressive ETF portfolios saw the greatest return due to their larger weightings in the iShares Core MSCI EAFE IMI ETF (XEF), which consists of international equities. This holding did not just provide higher returns this month. It also provided diversification by reducing potential geographical risks.

Emerging market investments riding high

Market update. Conclusion

The higher volatility that sparked a mild correction in February has moderated as investors have focused on positive economic fundamentals. Investors saw some modestly positive returns in April. That upward momentum may well continue. However, we continue to take measures to minimize risk from volatility.

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