The Market
What a surprise for investors in the first quarter with markets up more than 8%. With the market in a complete funk at the end of 2018, we received a strong reminder this quarter why it is advisable to not make significant asset allocation changes based on human sentiment. Investor behaviour diverged quarter to quarter, yet the fundamental issues remained: central bank actions, China-U.S. trade relations, decelerating economic growth, and Brexit chatter, were all in the mix during the past six months. The primary reason for this change of heart was the U.S. Federal Reserve hitting the pause button on raising interest rates and shrinking its balance sheet. Its latest policy statement shows a removal of any planned interest rate increases for 2019 and only one more in 2020. Subsequently, the Bank of Canada and other major central banks around the world followed suit, shifting to more accommodative policies which could ultimately lead to an environment of lower rates for longer.
The table below shows the market performance as of March 31st, 2019 in Canadian dollar terms.
Market Indices ($Cdn)as of 31-Mar-2010 |
Year 2017 |
Year 2018 |
Q1 2019 |
| TSX (Canadian market) | 9 % | -9 % | 13 % |
| S&P500 (US mkt) | 14 % | 3 % | 11 % |
| Nasdaq (mainly tech.) | 20 % | 8 % | 14 % |
| MSCI World | 15 % | -0.5 % | 8 % |
| MSCI EAFE (Int’l) | 18 % | -7 % | 8 % |
| iShares Cdn Short Bond | -0.1% | 1.8 % | 1.7 % |
| US$ relative to Cdn$ | -7 % | 8 % | -2 % |
Performance
As a result of us taking a more conservative equity position in YouFirst portfolios, the YouFirst Growth composite at 7.4% for the quarter trailed the FPX Growth benchmark by 0.6%. The YouFirst Conservative Growth composite at 6.5% matched the FPX Balanced benchmark.
Portfolio Activity
For new, under-invested portfolios, we introduced two rate-reset preferred shares, Brookfield Infrastructure preferred (BIK.PR.A – TSX) and Brookfield Renewable preferred (BEP.PR.O – TSX). Both of these issues offer a minimum reset rate at 5 year reset intervals, providing share price protection if the 5 year government bond rate declines. BIK.PR.A has a minimum reset rate of 5.85% on 31-Mar-2024 and yields 5.85% until then. BEP.PR.O has a minimum reset rate of 5.75% on 30-Apr-2024 and yields 5.75%.
With markets trading near all time highs and to reduce individual security risk in TSFA accounts, we sold China Mobile (CHL – NYSE) and Novo Nordisk (NVO –NYSE). Where this left TFSA portfolios underweight in equity, we added Manulife (Mawer) Global Equity or Manulife (Mawer) Global Equity Private Pool.
Manulife now allows us to hold the Manulife (Mawer) Global Equity Private Pool, with its lower MER (management expense ratio), in denominations of less than $100,000 as long as client’s Manulife holdings across all accounts hit the $100,000 threshold. This works well for TFSAs.
Outlook
Looking ahead, it appears we have a double-edged sword in terms of investing conditions. With Central Bank accommodation, lower-for-longer interest rates should help equities climb higher as discount rates remain stable and modest. On the other hand, the policy shift of holding off on interest rate increases could be reflective of a slowing global economy, putting future growth and profitability at risk.
We are still anticipating that economic growth will slow within an eighteen month timeframe. Any additional evidence of this occurring will cause the markets to correct so we are maintaining portfolios at the lower end of the equity allocation range for now.
If you have any questions or comments regarding items discussed in this newsletter please let us know.
Doug Garner, P.Eng., CFA
President, Portfolio Manager
Jane Garner, BA, EPC
VP Operations and Client Experience
Simon Chun, P.Eng., CFA Level III Candidate
Investment Analyst