The Market
The usually weakest quarter of the year showed positive market results in Q3 2018. U.S. equities, as measured by the S&P 500 Index, set new highs over the third quarter, appreciating 5.8% (CAD) while the resource-oriented sectors in Canada suffered with the S&P/TSX Composite dropping 0.6% as a result. The Canadian dollar gained 2.4% versus the US dollar, mitigating some of the strong market returns on US dollar denominated securities.
One of the most prominent risks during the third quarter was the rise in U.S. interest rates (with rising rates globally being the key valuation risk for portfolios) which, along with central banks reducing stimulus, has increased corporate and personal borrowing costs.
The table below shows the market performance as of September 30th, 2018 in Canadian dollar terms.
Market Indices ($Cdn)as of 30-Sept-2018 |
Year 2017 |
YTD 2018 |
Q3 2018 |
| TSX (Canadian market) | 9 % | 1 % | -0.6 % |
| S&P500 (US mkt) | 14 % | 13 % | 6 % |
| Nasdaq (mainly tech.) | 20 % | 20 % | 5 % |
| MSCI World | 15 % | 8 % | 3 % |
| MSCI EAFE (Int’l) | 18 % | 2 % | -1 % |
| iShares Cdn Short Bond | -0.1% | 0.5 % | 0 % |
| US$ relative to Cdn$ | -7 % | 2.4 % | -2.4 % |
Performance
Boosted by the strength in the Canadian dollar the YouFirst Growth composite improved to match the FPX Growth benchmark with a year-to-date return of 3.2%.
The YouFirst Conservative Growth composite had a year to date return of 2.6%, landing between the FPX Growth benchmark and the FPX Balanced benchmark at 2.1%
Portfolio Activity
During the quarter, Crombie REIT (TSX – CRR.DB.E) redeemed their 5.25% 12-Mar-2021 convertible debenture. This relatively safe REIT anchored by Sobey’s grocery stores presumably determined that they could borrow money at lower interest rates elsewhere.
With the resulting cash from the redemption and where appropriate for portfolios, we continued adding Innergex (INE.DB.B – TSX) 4.75% 30-Jun-2025 convertible debentures and Kinder Morgan (KML.PR.A – TSX) 5.25% 15-Nov-22 rate-reset preferred shares. These securities were discussed in earlier portfolio reviews.
Visa (V – NYSE), who everyone is familiar with, has been our most successful investment over the years. Recently its price climbed aggressively and it became over-weight in some portfolios so we reduced the size of this holding.
Outlook
The downward swing in market sentiment between the end of the 3rd quarter and writing this section 11 days later is significant.
Pending threats such as a U.S./China trade war, rising interest rates, pressure on emerging market economies, and Brexit plans have pushed the markets to a boil. Only time will tell how deep the present setback will be. Our portfolios have been positioned at the lower end of the equity allocation range and have held defensive securities such as real estate and utilities. The recent decline in global markets should provide an opportunity to rebalance portfolios, we will just have to wait until the decline subsides.
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