Q4/16 Quarterly Market Review

Transcription

1 January 4, 2017 Report prepared by: Darim Abdullah, CFA Scott Booth, CFA Q4/16 Quarterly Market Review Highlights Canadian & U.S. Fixed Income The Canadian government bond index declined during Q4/16 and underperformed the U.S. government bond index as the Canadian index fell -4.04% Q/Q, compared to the -3.84% Q/Q return of the Bloomberg U.S. Treasury Bond Index. Canadian and U.S. investment grade corporate bond indices registered returns of -1.82% Q/Q and -2.88% Q/Q, respectively. Credit markets held up very well, with investment grade (IG) credit spreads trending tighter during the quarter, touching levels last seen in Q4/14. High yield credit spreads have also trended steadily narrower during the quarter. Canadian Equities The Canadian equity market rose in Q4/16 as the S&P/TSX Composite Index (S&P/TSX) returned 4.54% (21.08% for 2016). Five of the eleven sectors posted a positive return. The financials and energy sectors were among the strongest performers. Large-cap Canadian stocks outperformed small- and mid-caps, and growth stocks underperformed their value counterparts. Unless otherwise indicated, performance figures are stated on a total return basis. This document is for distribution to Canadian clients only. Please refer to Appendix A of this report for important disclosure information. U.S. Equities U.S. equities delivered positive results in Q4/16. The S&P 500 Index (S&P500) gained 3.82% Q/Q (11.96% for 2016), the Dow Jones Industrial Average Index (Dow) rose 8.66% Q/Q (16.5% for 2016) and the NASDAQ Composite Index (NASDAQ) returned 1.66% Q/Q (8.87% for 2016). Eight of the eleven sectors in the S&P 500 delivered a positive return during the fourth quarter. Large-cap U.S. equities underperformed small-cap and mid-cap stocks, and U.S. growth stocks underperformed their value counterparts. International Equities Most major developed international markets rose in Q4/16. The MSCI Emerging Markets Index fell -1.36%% Q/Q hurt by a selloff in emerging markets as investors looked to reduce risky bets following Donald Trump's victory in the U.S. elections.

2 Canadian & U.S. Fixed Income Money Market/Bond Issues and Indices Q4/16 Return 2016 Return Canadian Yields U.S. Yields 91-Day Treasury Bill % +0.50% 2-Year Government Bonds % +1.19% 5-Year Government Bonds % +1.93% 10-Year Government Bonds % +2.44% 30-Year Government Bonds % +3.07% FTSE TMX Canada Universe Bond Index -3.44% +1.66% +2.14% -- FTSE TMX Canada All Government Bond Index -4.04% +0.89% +1.94% -- FTSE TMX Canada All Corporate Bond Index -1.82% +3.72% +2.68% -- FTSE TMX Canada Real Return Bond Index -4.58% +2.86% +0.44% -- Merrill Lynch U.S. Corporate Master Index US$ -2.88% +5.96% % Merrill Lynch High Yield Master II Index - US$ +1.88% % % Source: Bloomberg Finance L.P. as at December 30, Index returns are reported on a total return basis. Source: Bloomberg Finance L.P. as at December 30,

3 The Canadian government bond index declined during Q4/16 and underperformed the U.S. government bond index as the Canadian index fell -4.04% Q/Q, compared to the -3.84% Q/Q return for U.S. Treasuries as measured by the Bloomberg U.S. Treasury Bond Index. North American Government bond yields rose sharply in the latter half of Q4/16. With the U.S. presidential election in early November acting as a catalyst, equity investors were emboldened by expectations that President-elect Donald Trump will advocate policies including financial and environmental deregulation and massive corporate tax cuts which are expected to spur faster economic growth. The same forces that have raised economic growth expectations have pulled forward inflation expectations, which in turn, have pushed interest rates higher to compensate. Canadian and global bond yields have followed U.S. yields higher. On December 14, 2016, The Federal Open Market Committee raised the target federal funds rate by 25 bps to a range of 0.50% to 0.75%, with a target effective rate of 0.625%. This is the Fed's second rate hike since 2006 and follows this cycle's initial hike in December The Fed's move came on a unanimous 10-0 vote. The median "dot" projection of the Fed s so-called dot plot, used to signal its outlook for the path of interest rates, rose 25 bps for the end of 2017, indicating that the majority of Fed officials expect three quarter-point rate increases in 2017 (up from two previously). The median projection for 2018 also increased by 25 basis points, implying three additional hikes that year (the same number as previously). Yield curves in North America moved higher and steepened in Q4/16. The U.S. Treasury (UST) yield curve bear steepened, with yields on longer dated securities rising more than those at the front end of the curve. The 2-year UST bond yielded 1.19% at the end of December, as 2-year yields rose 39bps during the quarter. The 10-year UST yielded 2.44% at the end of Q4/16, as yields rose 84 bps during the quarter. The Canadian yield curve also rose and steepened in Q4/16. The 2-year Government of Canada bond yielded 0.75% at the end of December, up 25 bps from the end of Q3/16. The 10-year Government of Canada bond yielded 1.72% at the end of Q4/16, as its yield increased 72 bps during the quarter. On December 7, 2016, the Bank of Canada (BoC) maintained its target for the overnight rate at 0.5%. The BoC noted strengthening global economic conditions, but counter-balanced this against 'undiminished' uncertainty. Recent growth dynamics are seen as being largely as the BoC anticipated. The BoC highlighted several areas of weakness: business investment and non-energy goods exports which 'continue to disappoint', and the significant amount of economic slack that remains in Canada relative to the U.S. The recent back-up in global bond yields was acknowledged, resulting from anticipation of a U.S. fiscal expansion. However, the Bank did not provide a further viewpoint on implications for Canada, other than to note that Canadian yields 'have risen significantly in this context'. Total CPI inflation has picked up in recent months but is slightly below expectations, largely because of lower food prices. Core inflation is close to 2% because the effect of persistent economic slack is still being offset by that of past exchange rate depreciation, although the latter effect is dissipating. Canadian and U.S. investment grade corporate bond indices registered returns of -1.82% Q/Q and -2.88% Q/Q, respectively. Credit markets held up very well, with investment grade (IG) credit spreads trending tighter during the quarter, touching levels last seen in Q4/14. High yield credit spreads have also trended steadily narrower during the quarter. 3

4 Canadian Equities Indices Dec. 30/16 Q4/16 Return 2016 Return S&P/TSX Composite Index 49, % % S&P/TSX 60 Index 2, % % S&P/TSX Cdn MidCap Index 1, % +20.5% S&P/TSX Cdn SmallCap Index 1, % % S&P/TSX Preferred Share Index % +1.25% Source: Bloomberg Finance L.P. as at December 30, Total index values and returns, except the S&P/TSX Preferred Share Index which is reported on a price return basis. Q4/16 S&P/TSX Sector Returns Q4/16 S&P/TSX Composite Sector 2016 S&P/TSX Composite Sector The Canadian economy bounced back from a second-quarter contraction and slightly exceeded expectations in the third quarter of 2016 with the real GDP growing at 3.5% (annualized). Driving this growth was an 8.9% (annualized) increase in exports, mostly coming from the energy sector. Despite the strong third quarter, the Canadian economy pulled back in October as real GDP contracted by 0.3%, ending a four month string of gains. Some pull-back in the Canadian economy was anticipated for October in light of strong gains in prior months and the weak October trade data. The Canadian equity market rose in Q4/16 as the S&P/TSX returned 4.54% (21.08% for 2016) and five of the eleven sectors posted a positive return. The financials, energy, industrials, real estate and consumer discretionary sectors were the only sectors to advance during the quarter. The financials sector, the largest sector in the S&P/TSX, rose 11.54% during Q4 and outperformed the broad market. It was also the top performing sector during the quarter. The performance of the commodity-based energy and materials sectors diverged during the quarter, as the materials sector fell 6.21% while the energy sector rose 4

5 6.99%. In Q4/16, West Texas Intermediate (WTI) crude oil returned 11.36% Q/Q (45.03% for 2016) in a volatile quarter that saw WTI crude oil price fall by as much as 9% during the first half of the quarter before bouncing back again in anticipation of the Organization of the Petroleum Exporting Countries (OPEC) members' meeting in Vienna. On November 30, 2016, OPEC members agreed to cut 1.2 million barrels of their daily oil output, reducing their target production to 32.5 million barrels a day starting in January The OPEC production cut agreement is the first one in eight years and caused oil prices to jump higher by more than 9% generating big gains for energy companies around the globe as well as currencies of large exporters. The price of gold bullion declined % Q/Q (8.56% for 2016) following a flat performance in the third quarter with most of the decline occurring after Donald Trump's win of the U.S. presidential elections as investors shunned assets perceived as havens for riskier stocks and oil. Large-cap stocks outperformed mid-cap and small-cap Canadian equities as the large-cap S&P/TSX 60 Index returned 5.59% Q/Q (21.36% for 2016) compared to 1.48% Q/Q (20.5% for 2016) for the S&P/TSX Canadian Mid Cap Index and 3.12% Q/Q (38.48% for 2016) for the S&P/TSX Canadian Small Cap Index. Canadian growth stocks, as measured by the Morningstar Canada Target Momentum Index, gained 0.24% Q/Q (9.42% for 2016) and underperformed the comparable value benchmark, the Morningstar Canada Target Value Index, which gained 8.95% Q/Q (17.52% for 2016). The S&P/TSX underperformed the S&P 500 in Canadian dollar terms in Q4 after outperforming it over the past three quarters. Canadian preferred shares traded higher in price during Q4/16. The S&P/TSX Preferred Share Index rose 3.88% during the quarter (1.25% for 2016). Looking at the performance of individual market segments, the prices of Rate-Reset preferred shares advanced 7.56% during Q4/16, while Perpetual preferred share prices posted a loss of 3.05%, as higher interest rates weighed on issues with fixed dividends and supported issues with variable dividends. Floating Rate-Resets posted the solid gains, advancing 5.97% and the Fixed-Floater segment increased 3.22% in price, while the prices of Floating Rate issues moved 6.11% higher. U.S. Equities Indices Dec.30/16 Q4/16 Return Q4/16 Return (C$) 2016 Return 2016 Return (C$) Dow Jones Industrial Average Index 41, % % % % S&P 500 Index 4, % +6.46% % +8.90% S&P 400 Index 2, % % % % NASDAQ Composite Index 6, % +4.24% +8.87% +5.89% Russell 2000 Index 4, % % % % Source: Bloomberg Finance L.P. as at December 30, Total index values and returns. Index returns calculated in local currency and C$. 5

6 Q4/16 S&P 500 Sector Returns 2016 S&P 500 Sector Returns U.S. equities delivered positive results in Q4/16. The S&P 500 gained 3.82% Q/Q (11.96% for 2016), the Dow rose 8.66% Q/Q (16.5% for 2016) and the NASDAQ returned 1.66% Q/Q (8.87% for 2016). Eight of the eleven sectors in the S&P 500 delivered a positive return during the quarter, with gains led by the financials sector which rose by 21.05% Q/Q (22.75% for 2016). The financials sector benefited from Trump's victory in the U.S. presidential election amid expectations for some scaling back of post-financial crisis regulation when he takes over the White House on January 20, During the fourth quarter, investors were focused on the U.S. presidential election which saw Republican nominee Donald Trump win the elections ahead of the Democratic nominee Hillary Clinton. Investors were also following the central bank's policy which, as universally anticipated, announced an increase in the federal funds target rate of 0.25% to a range between 0.50% to 0.75% in its meeting on December 14, The S&P 500, a benchmark for U.S. large-cap equities, rose 3.82% Q/Q (11.96% for 2016) and underperformed small-cap U.S. stocks, as measured by the Russell 2000 Index, which advanced 8.83% Q/Q (21.31% for 2016) and underperformed U.S. mid-cap stocks, as measured by the S&P 400 Index, which rose 7.42% Q/Q (20.74% for 2016). U.S. value stocks, as measured by the Morningstar U.S. Value Index, gained 8.12% Q/Q (20.79% for 2016), and outperformed the comparable growth benchmark, the Morningstar U.S. Growth Index, which registered a total return of -0.14% Q/Q (3.16% for 2016). The strengthening of the U.S. dollar versus the Canadian dollar enhanced returns for Canadian investors during Q4/16. In Canadian dollar terms, the S&P 500 returned 6.46% Q/Q, the Dow rose 11.42% Q/Q, and the NASDAQ rose 4.24% Q/Q. In 2016, the Canadian dollar rose by 2.96% against the U.S. dollar, detracting from relative returns for Canadian investors as the S&P 500 returned 8.90%, the Dow gained 13.31% and the NASDAQ returned 5.89%. 6

7 International Equities Indices Dec. 30/16 Q4/16 Return Q4/16 Return (C$) 2016 Return 2016 Return (C$) FTSE 100 Index 5, % +1.81% % -2.96% DAX Index 11, % +5.21% +6.87% +0.04% CAC 40 Index 12, % +5.68% +8.88% +2.80% MSCI Europe (LC) Index 7, % +7.90% Nikkei 225 Stock Average 29, % +3.78% +2.38% +2.52% MSCI Emerging Markets Free (LC) Index 101, % % Source: Bloomberg Finance L.P. as at December 30, Total index values and returns. Index returns calculated in local currency and C$. Most major developed international markets rose in Q4/16. In Europe, the U.K. s FTSE 100 Index gained 4.32% Q/Q (19.07% for 2016), hitting an all-time high on the last day of trading in The post-referendum plunge in sterling has boosted multinational companies listed on the FTSE 100, with many benefiting from earnings in currencies that are stronger than the pound. In its December meeting, the Bank of England (BoE) voted unanimously to leave monetary policy unchanged, keep the bank rate at 0.25% and maintain its current pace of asset purchases. The BoE reiterated its previous stance that it was ready to make monetary policy tighter or looser depending on how the economy evolves as the Brexit process gets under way. Germany's DAX Index rose 9.23% Q/Q (6.87% for 2016) and France's CAC 40 Index gained 9.72% Q/Q (8.88% for 2016). At a meeting in early December, the European Central Bank's (ECB) Governing Council left interest rates unchanged and extended its quantitative-easing program beyond its horizon of March 2017, until at least December The pace of asset purchases will remain at 80 billion per month through the end of March of However, asset purchases will fall to 60 billion per month starting in April 2017 through the end of December 2017 or beyond depending on the Governing Council's assessment at that time of whether inflation is on track to converge to its 2% target, given the outlook for the economy and financial conditions. Japan s Nikkei 225 Stock Average rose 16.38% Q/Q in Q4/16 (2.38% for 2016). In its December meeting, The Bank of Japan (BoJ) Policy Board left the interest rates unchanged. The central bank maintained the negative 0.1% interest rate imposed on banks for some excess reserves, left the 10-year Japanese government bond (JGB) yield target at around zero, and kept annual rises in JGB holdings at 80 trillion yen ($676.9 billion). The BOJ also upgraded its economic assessment, revising up its views on exports and output, while noting that the economy continued to recover moderately. The MSCI Emerging Markets Index fell -1.36% Q/Q (10.11% for 2016) underperforming most developed markets. It was mainly impacted by investors' fear that U.S. interest rates could rise at a faster pace which in turn could hurt the U.S. dollar-denominated debt across the developing markets. Donald Trump's victory in the U.S. elections sparked a sell-off in emerging markets as investors looked to reduce risky bets. The Chinese Shanghai Composite PR Index returned 3.29% Q/Q (-13.13% for 2016). Chinese third quarter real GDP grew by 6.7% (year-on-year) for the third quarter in a row signalling that the economy is close to meeting its growth target of 6.5% to 7% for China's activity data, including retail sales, industrial production, manufacturing Purchasing Managers' Index (PMI) and nonmanufacturing PMI all improved more than expected in November. 7

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