Month: June 2015

Q1 2015

MARKET COMMENTARY

Global growth in the first quarter 2015 was essentially the same as it was at the end of last year.  With a cursory glance at the headlines from around the world one could conclude that the global marketplace is on the precipice of calamity; however nothing is further from the truth.  The list of potential headwinds seeming to gang up on future prosperity is long: deflation; falling oil prices; freakish weather conditions; the strong U.S. dollar; Europe’s problems; Greece’s issues; China’s slowdown; the Middle East; the Ukraine conflict; increasing U.S. interest rates and lastly terrorism.  In reality these issues are already priced into the market. In fact growth is expected to rebound later this year as lowered oil prices should lead to higher corporate spending in Canada.

Canadian economic activity slowed across most industries last quarter, with oil & gas activity slumping to record lows. This broad based decline was felt across most manufacturing industries. The severe weather patterns experienced further reduced economic activity and sapped the positive momentum provided by the service sector. Even so the country should be able to eke out a marginal level of expansion. While the worldwide drop in oil prices will be a boom to other nations, it will have a decidedly negative impact across Canada. On a positive note, corporate profit margins hit a 27 year high as a result of soft labour costs and a 25% depreciation in the dollar.

The U.S. economy continues to chug along nicely despite disruptions from the heavy snowfall in the northeast. The bigger picture remains positive as declining unemployment and low inflation boost incomes, which will lead to increased consumer spending. Manufacturing growth is slowing but the service sectors are faring well as consumers appear to be spending their oil windfall. The Federal Reserve is expected to tighten monetary policy later this year which could lead to a stronger dollar. This is not necessarily a reason to worry about stock market prices because stocks typically continue to rise for a considerable time after interest rates start to increase.

Europe is not going to be the driving force of the world’s economy anytime soon, but it is moving the right direction. Unemployment has fallen to a three year low, deflation looks to be less of a worry and a weak currency is an added bonus. Throw in the European Central Bank’s heightened stimulus package and a growth spurt should occur. Japan’s limited recovery at the end of last year has already fizzled and the economy is stagnated. China, the world’s second largest economy, has slowed sharply which could lead to new stimulus measures to prevent growth from slowing even more. Austerity is a thing of the past and the oil price decline is the equivalent of a big tax cut for consumers.

On some metrics, stock valuations appear relatively stretched which is triggering a shift from North American into European and Japanese equities. However a rebound in profits will likely temper this perception and allow North American stock markets to continue to appreciate. Global equities dominated performance results for one simple reason, depreciation of the Canadian dollar, which lost 9.1% in the quarter.  U.S. equities were up 10.1% (all figures in Canadian dollar terms); European equities climbed 12.0%; Asian equities soared 16.1%; and Emerging Market stocks rose 11.1%. Compared to the enhanced foreign market returns, Canadian equity stock gains of 2.6% and bond returns of 4.2% look anaemic.

Overall, while global activity remained weak it is expected to pick up towards the latter part of the year. The economic boost from the collapse in oil prices has yet to be fully integrated into the economy and the recovery in Europe is going to be unambiguously positive for the rest of the world. While there are still many risks remaining which cannot be brushed off as mere inconveniences or distractions, the long overdue recovery story is firmly in place.

Christopher Ambridge, CFA

 

CANADIAN EQUITIES

The Canadian equity market did not find any clear direction in the first quarter of 2015. In January the S&P TSX index performed modestly, followed by a strong February and then fell in March. This lack of direction was largely due to the significant oil price decline of more than 50%, as well as a decline in commodity prices. As a result economic forecasts for Canada have been significantly revised to the downside. A notable event was the unexpected decision by the Bank of Canada to cut its key rate by one quarter of a percentage point to 0.75% in January, the first rate cut in almost six years. While that decision was explained by the Bank as insurance against the negative effects of oil’s price plunge, it appeared aggressive to investors who preferred to take a wait and see approach.

The S&P TSX index managed to post a gain of more than 2.5% on a total return basis for the quarter as Materials enjoyed a comfortable rally and Energy recouped some losses.  This performance appeared unimpressive vis-à-vis other developed markets such as Europe which enjoyed double digit returns. A review of index sector performance confirms that none of the larger sectors led the pack. Health Care was by far the best performing sector with a 28% gain which was largely attributed to the consolidation activities of Catamaran and Concordia. Information Technology managed to return almost 8% despite weakness in Blackberry. The Consumer Discretionary sector came in third with a 5.5% gain. On the downside, Telecoms underperformed by more than 4.0%, Financials fell 3.0% and Energy dropped 1.6%.

Canada’s economy began the year with a disappointing 0.1% decline in GDP for the month of January after posting surprisingly strong GDP growth of 2.4% in the fourth quarter of 2014. Though the decline might appear to be solely due to the energy sector, it was pervasive across numerous economic sectors including wholesale, retail, manufacturing and construction. Fears of an “atrocious quarter”, as qualified by the Bank of Canada due to the decline in GDP, did not materialize in the job numbers as January posted a comfortable 35,000 jobs gain. February did see a loss of about 1,000 jobs but these numbers were far below the predictions of 5,000 to 20,000 in losses. More recently March saw an unexpected gain of about 29,000 jobs which left the unemployment rate at 6.8%. In the months ahead, the likelihood of a protracted bear market in energy should keep inflation on the downside which would support a low interest rate policy. This ongoing low interest rate environment is a positive factor for the economy.

Ari Abokou, MBA, CIM, FCSI

FIXED INCOME

The Canadian FTSE TMX Universe Bond Index rang up another healthy 4.1% gain in the first quarter of 2015 and for the 12 month period ending March 31st the index rose a remarkable 10.3%. The Bank of Canada surprised the market in January when it announced that it was lowering its target for the overnight rate by 1/4 of one percentage point to 3/4%. The Bank cited the sharp drop in oil prices as the reason for the surprise rate cut.

Bank of Canada Governor Stephen Poloz suggested that the Bank is not in any hurry to cut rates further. The Bank’s forecast for first quarter GDP growth had stood at 1.5% annualized, however that now seems unlikely. At the end of March Statistics Canada confirmed that the economy contracted 0.1% in January which was attributed to the dampening effects of bad weather and the oil shock. The central bank now seems prepared to wait and monitor how well the economy is managing the oil price shock before announcing any further policy change.

In a widely expected move, the U.S. Federal Reserve (Fed) removed its commitment to be “patient” in its March monetary policy report. The language change signals that the central bank is preparing to raise short term interest rates, perhaps as soon as the middle of the year, but at the same time the Fed also seemed to suggest that it might wait until inflation is running at a 2% annual rate before making changes. 2015 may finally be the year that interest rates begin to rise but keep in mind that a bet on higher interest rates was likely the call most investors got wrong in 2014.

Many fixed income investors are concerned that the eventual rise of U.S. interest rates could portend a crash in the bond market. This is a possibility if rates rise quickly or inflation soars but the onset of previous tightening cycles has not usually been associated with a slowdown in global growth. Bond market crashes have actually been rare and mild. Going back to 1857 in the U.S., the biggest one year drop in 30 year corporate bonds was 12.5% for the 12 month period ending in February 1980 after Paul Volcker took the helm of the Federal Reserve and killed off inflation by hiking interest rates so high that he created a major recession. Compare that bond market loss to the U.S. stock market where one year losses have exceeded 12.5% on 23 occasions since 1900.

The global recovery should be able to withstand the next Fed tightening cycle for several reasons. U.S. monetary policy is likely to remain very loose, the global employment picture is rapidly improving, and both corporate and household debt has undergone a significant reduction. Against this backdrop the U.S. economy should expand rapidly despite lower than previously expected GDP growth in the first quarter due to temporary factors. The U.S. is now well placed for growth which would be a welcome driver of the Canadian and global economies.

Peter Webster, CFA

U.S. EQUITIES

The Standard & Poor’s 500 index rose a mere 1.0% in U.S. dollar terms over the first quarter of 2015 but in Canadian dollar terms the index was up 10.3% for the period as the Canadian dollar continued to weaken. While weak in U.S. terms the index continued to be positive as investors rode one of the longest bull markets since the 1940s. The S&P 500 index has more than tripled since bottoming out in March 2009.

The latest reports on the U.S. economy have not all been good. Growth seems to have stalled in the first quarter of the year as evidenced by the disappointing jobs report released on Good Friday. Payrolls rose by just 126,000 in March, far undershooting a consensus estimate of 243,000. The weak report builds a case for the U.S. central bank to further delay an interest rate hike. Such hesitation would normally be interpreted as a positive for stocks but there are also concerns that companies are facing a slowdown in profits. During the first three months of 2015 as the most populous part of the country was hit by very cold and very snowy weather, the U.S. dollar strengthened significantly which hurt those big companies that compete globally, and oil prices collapsed leading to a huge decline in investment in the oil patch as oil companies are turning off the drills and shutting down production in fields where it is too expensive to extract oil.

Consumers have received a windfall as fuel prices have plunged but so far they have chosen to save rather than spend it. Price adjusted incomes have risen at a 7.7% annual rate over the past three months but spending has only grown half as fast. In January the household savings rate rose to 5.5%, a two year high. Consumers, who fuel about two thirds of the economy, now have more money to spend thanks to the ongoing decline in fuel prices which began in June of 2014 and accelerated in the fall. Consumer confidence is now higher than it has been in years. Households are in good shape to spend more money because more people are working and incomes are rising. Consumers have also paid down their debts and are now spending just 9.9% of their income on debt servicing which is the lowest on record.

Since the end of the Second World War there have been twelve bull markets which lasted an average of 58 months.  The current streak of 72 months is now the fourth longest on record. While this run has been a long one, it is nowhere near that of the longest streak which began in 1990 and lasted 113 months before culminating with the tech “bubble” of 2000. The current U.S. bull market has continued despite political gridlock, economic woes in Europe and increasing tensions in the Middle East. Market observers remain confident as we haven’t yet seen the telling signs of investor speculation that often accompany a market peak.

Peter Webster, CFA

INTERNATIONAL EQUITIES

The global economy which many feared was floundering from Asia to Europe now appears poised for a rebound on the back of cheap oil and falling interest rates. A sustained expansion of the global economy will depend on whether consumer spending can regain momentum. This optimistic outlook marks a shift from last fall when the war in Ukraine, a hesitation by the European Central Bank (ECB) to implement stimulus efforts and the rise of the Islamic State terror group led investors to take a dispiriting view of the markets outside of North America.

A sustained economic recovery is occurring in Europe. Numerous indicators point to growing confidence of both businesses and consumers due to inexpensive oil and central bank stimulus policies. The ECB cut its benchmark interest rate to near zero and launched large scale purchases of bonds with newly printed money to lower longer term borrowing costs. As a result household spending has picked up to almost a ten year high and unemployment is at its lowest level in nearly three years. The Euro has seen one devaluation after another as it dropped 25% against major currencies and hit a 12 year low against the U.S. dollar. Smaller economies like Portugal and Ireland are just emerging from bailout programs, while Italy, Spain and France are still focused on reducing debt. Last year Britain’s economy grew faster than previously thought and is one of the fastest growing amongst developed nations.

After crawling out of recession, Japan’s economy looks unlikely to accelerate at a brisk pace despite the government’s herculean effort to end two decades of malaise and rebuild Japan’s competitiveness. Its frailty since the financial crisis has done little to help the global recovery. While the ultra loose monetary policy is designed to spark household and businesses spending, most seem hesitant to step into the fold. The central bank has been pumping trillions of yen into the economy which has resulted in rising corporate profits with a 51% surge in stock prices since 2013. Unfortunately the government’s massive debt, now standing at 250% of GDP, leads the world in indebtedness.

China’s growth is decelerating and is at its slowest pace in a quarter century. This is prompting concerns that the government’s desire to transform the country from export based to self sustaining domestic consumption is starting to veer off target. To forestall this and avoid a politically dangerous spike in unemployment the government cut interest rates on two occasions and may need further stimulus measures. With inflation falling, the country should be alert to the possibility of deflation. Export and import growth has also nose-dived. The outlook for growth in other Emerging Markets is less optimistic but could still attract bargain hunters as Emerging Markets have favourable valuations compared to their developed counterparts. Even resource rich Australia sees the need to jolt its stagnant economy from the falling commodity price quagmire.

International equity markets followed up the Q4 2014 positive performance with even better results in the first three months of 2015. It seems investors are starting to see beaten down stock markets around the world as good buying opportunities. As a whole, international markets gained 5.0% (all figures in U.S. dollar terms) propelled by Asian stocks which appreciated 6.9% and European stocks which expanded by 2.9%.  Emerging Market stocks got into positive territory for the first time in two years with a 1.9% gain.

Using the last five or six years as a roadmap, we can certainly confirm that the path of the unfolding recovery will not go smoothly. Europe and Japan have been in intensive care for a while now, Emerging Markets are a shadow of their former selves and even the powerhouse giants are suffering.  With structural reforms and business friendly practices starting to take hold, the healing will continue and give breathing room for a sustained recovery in the coming year.

Christopher Ambridge, CFA

Q2 2015

MARKET COMMENTARY

Investors who slept through the first half of 2015 did not miss much with regard to the global financial markets. The world continues to be swept up in the Greek crisis with every twist and turn played out in the press and the financial markets. The global economy barely achieved a passing grade as first quarter growth crawled along at its slowest pace since the financial crisis in 2008. Throw in some unlucky bounces and the first six months of 2015 were basically a write off, although the next six months are starting to look better, as the hit from the oil shock and a soft U.S. economy will likely be nothing more than fading memories.

2015 is shaping up to be an exceptionally disappointing year for Canada’s economy, the slowest growth in a non-recession year since the early 1980s. The economy slumped into negative territory in the first quarter as it was hampered by the plunge in oil prices and an unusually harsh winter, which kept unemployment levels at bay. In fact, the first four months of 2015 saw a contraction which has not happened since the end of the 08/09 recession. The hope for a turnaround in the manufacturing sector failed to materialize. Business spending remains weak as firms are unwilling to dig into their pockets. The hangover from plummeting oil prices lingers in the labour market to such an extent that another cut in interest rates by the Bank of Canada could be in the cards.

The U.S. economy declined in first the quarter, paving the way for its worst first half performance in four years. Even before this dismal quarter, economic growth was well off the levels of past recoveries. Employment gains have been healthy with signs emerging that wages are being pushed up after being stagnant for six years. This should eventually accelerate consumer spending and economic growth. Auto sales jumped to an almost ten year high and home sales are running at an eight year high. Many leading indicators have turned up sharply, supporting the view that the economy will improve in the remaining half of the year.

Sluggish capital investment, meager productivity gains, fiscal uncertainties and hesitant consumers are combining to dampen global growth. The global economy eked out 1.1% growth in the first quarter of 2015, its weakest expansion since 1998. Uncertainty over Greece is weighing on the Eurozone as the clock is ticking on the country’s efforts to avoid bankruptcy and a possible exit from the Euro. A sustained decline in unemployment has helped buoy consumers, as has the fall in oil prices. Monetary easing and currency depreciation in China and Japan are the weapons of choice to lift growth and increase trade but it is taking time.

Globally, developed markets had a strong first half, gaining 13.3%, while emerging markets gained 9.1% (all figures in Canadian dollar terms). Asian markets enjoyed a stellar first half of 2015 gaining 17.1%. European markets climbed 10.5% over the six month span. Canadian equities finished the first half of 2015 in positive territory, up 0.9%. It was helped by Health Care stocks which gained 58% but hampered by the Energy sector which declined 5%. The U.S. equity market gained 8.8% over the same period. In the second quarter Canadian stocks declined 1.6%, while U.S. stocks lost 1.2%. U.S. equities have tripled since the March 2009 low, propelled by a doubling of earnings over the period. Canadian bonds had a weak second quarter, declining 1.7%, but were up 2.4% for the first six months of 2015.

While growth has been hard to achieve, investors are beginning to realize that the magnitude of the risks facing the financial world are overblown. The biggest guessing game for investors is when will the U.S. Federal Reserve start increasing interest rates for the first time since 2006 and to what degree? It is a tricky decision if the consensus view is not correct and both the global economy and corporate profits do not strengthen in the second half of the year.  Financial markets could be vulnerable. While optimism amongst investors is wavering, conditions for further sustained upward movement in global markets are emerging.

Christopher Ambridge, CFA

 

CANADIAN EQUITIES

The second quarter of 2015 ended with recessionary concerns as Canadian GDP fell for four consecutive months as of April amid the protracted collapse of the energy sector. Although the fallout in the first quarter was not a surprise to many analysts, there was some level of optimism about a turnaround in the economy for the remainder of the year. Even a statement from the Bank of Canada qualified the Q1 fallout as “front-loaded” and predicted a rebound. The disappointing GDP reading of -0.1% in April opened the possibility of another weak quarter and even a technical recession. As expected, the weak economy translated into mixed jobs numbers, with 20,000 job losses in April, 59,000 new jobs in May and 6,000 job losses in June. Paradoxically, the unemployment rate remained at 6.8%, as fewer people looked for work. Notwithstanding the weak domestic economy, the TSX has also been affected by the Greek debt crisis. On June 29 amid intense negotiations on the so called Grexit issue, the TSX dropped more than 300 points, enough to erase previous year to date gains. The index posted a 1.6% loss for the quarter and closed the first half of the year with a 0.9% gain (both including dividends) – the worst six month start in two years.

For the upcoming quarters, unless a dramatic rebound in energy prices occurs, the economy will likely show mixed signals with a greater prevalence of downside risks. Global institutions such as the IMF (International Monetary Fund) have already trimmed their Canadian GDP forecast from 2.2% to 1.5% for 2015. Many analysts believe that the Bank of Canada will revise its second quarter GDP forecast down a few percentage points from its original 1.8% forecast. On the positive side, inflation is still muted and any change to the key interest rate by the Bank of Canada will likely be “dovish”, which should support the economy. Noteworthy is a call by some investors to short Canada and especially the banks due to the elevated household debt and the fallout of the Energy sector – a trend known as “the Great White Short.”  Digging deeper into the data, that view appears inconsistent with the broader market expectations about Canada as recent numbers clearly show that foreign investors are in fact bullish on Canada. In the first four months of the year they have injected more than $50 billion into the Canadian market.  This is nearly triple the amount compared to the same period in 2014. Therefore it seems that the Canadian market and overall economy have pockets of resilience. Once commodity prices stabilize the Canadian market should be better equipped to keep pace with other major economies.

Ari Abokou, MBA, CIM, FCSI

FIXED INCOME

The Canadian FTSE TMX Universe Bond Index lost 1.7% in the second quarter of 2015 but year to date the index is up 2.4%. The Bank of Canada surprised the market in January when it lowered its target for the overnight rate by 1/4 of one percentage point to 3/4%. The Bank cited the sharp drop in oil prices as the reason for the surprise rate cut.

Canada’s economic growth, as measured by real gross domestic product (GDP), decreased by 0.6% in the first quarter of 2015. The Canadian economy was sideswiped by the global collapse in oil prices which threatened to pull energy-dependent Alberta into recession and perhaps Saskatchewan along with it. It did not help that the U.S. economy got off to a slow start in 2015. Another concern is the high level of consumer debt as Canadian households just don’t need any more incentive to leverage their finances. Low rates are already providing stimulus and may lead to a debt problem that will need to be addressed in the future.

The January rate cut did provide some stimulus to the Canadian economy, however the impact was marginal. With interest rates already low, much of the drop in yields in the early months of 2015 reflected a rally in global fixed income markets. The biggest stimulus to the economy was a further weakening of the Canadian dollar but it may have only lowered the exchange rate marginally. A weaker trading range for the Canadian dollar will help the export sector rebuild. Ongoing weakness may cause the central bank to cut rates further but the economy is largely being dragged down by events in the global economy which the central bank cannot control.

Federal Reserve Chair Janet Yellen said she expects to raise interest rates this year if the economy meets her forecasts and that any further rate increases will be very gradual. The Fed has two criteria that need to be met before they will raise rates from the near zero level they have been at since December 2008. They are ongoing improvements in labour market conditions and an outlook for inflation to move closer to 2% over the medium term. While the labour market is nearing full strength, she recently confirmed that “we are not there yet”. Consumer prices were flat in May compared to a year earlier and have been below the Fed’s goal since April 2012. Another measure of price pressure showed that the cost of living excluding food and energy rose 1.7% in May from a year earlier.

Looking forward, consumers, businesses and investors are facing an era of higher borrowing costs as some of the lowest global interest rates in modern history begin to rise.  The message from many economists is a reassuring one as they do not expect rates to rise fast or high enough to inflict much damage on the global economic recovery. Borrowers and investors may feel some short term pain but should be able to manage the change over the long run.

Peter Webster, CFA

U.S. EQUITIES

The Standard & Poor’s 500 index rose a nominal 0.3% in U.S. dollar terms over the second quarter of 2015 and in Canadian dollar terms the index lost 1.4% for the period. Year to date the U.S. equity benchmark is up 1.2% but gained 8.8% in Canadian dollars as the Canadian loonie weakened significantly in the first quarter of 2015.

The U.S. Bureau of Economic Analysis confirmed in late June that the U.S. real gross domestic product (GDP) decreased at an annual rate of 0.2% in the first quarter of 2015. The weakness has been attributed to a stronger dollar that has hurt U.S. exporters and cheaper gasoline prices, which are great for consumers, but have hit the previously rapidly growing energy industry hard. Drillers have shed thousands of jobs and shelved expansion plans. Both consumers and companies aren’t spending as much as had been hoped at this stage of the economic recovery. As a result, the economy is on track to grow less than 1% in the second quarter according to a new tracking tool created by the Atlanta Federal Reserve and the New York Federal Reserve has cut its growth forecast for 2015 to 1.9% from a year earlier estimate of 3.5%.

The June jobs report reflected the uneven nature of the recovery. The unemployment rate fell to 5.3% from 5.5% and is now at its lowest level since the April 2008 level of 5%. The downside is that the drop was attributed to 432,000 people having left the labour force, most of whom are young and just graduated from school. The percentage of Americans in the labour force has now fallen to its lowest level in 38 years. The report confirmed that wages of U.S. workers has been disappointingly flat, rising just 2% over the past 12 months. The May and April employment numbers were also revised downward and the evidence is that the U.S. is not expanding as fast as it was in the middle of 2014.

Many investors are concerned that the U.S. equity market has run too far, too fast. The S&P 500 index is trading at 17 times estimated 12 month forward annual earnings which is about 1 standard deviation above the ten year moving average. That is lower than the October 2007 peak and much lower than the average 19.6 price/earnings ratio of U.S. market tops since 1929. A big driver of the market has been the low interest rate monetary policy and there are concerns that the eventual rise in rates will cause the market to fall. High valuations and a rise in rates however may not be enough on their own to trigger a market drop as two hallmarks of past bubbles have yet to fully appear.  These are the return of individual retail investors to the market and a significant uptick in merger and acquisition activity. U.S. retail investors have largely been watching the rally from the sidelines as more than $80 billion has flowed out of equity mutual funds since 2009. Mergers and acquisitions have begun to pick up and is only now at its highest pace since before the Great Recession.

Peter Webster, CFA

INTERNATIONAL EQUITIES

The world’s economies have been helped by the drop in oil prices and the decline in the value of the Euro relative to the U.S. dollar. At the start of 2015 investors were almost paralyzed with fear that Europe would tumble into a deflationary spiral that would cripple business and consumer spending. The tides have changed and we now seem to have a degree of normalcy in the financial markets. If this new-found level of comfort could be spread around the world a little more, then we might experience a global calming in the financial markets.

Europe is still in a precarious situation with its biggest headache being Greece. The uncertainty surrounding a disorderly default and exit from the European Union has been ongoing. A so called Grexit would cause a massive depression in Greece as the country reverts back to an old, weaker currency, the Drachma. Despite the Greek drama and a disappointing slowdown in Germany, the European economy is picking up speed and growing at its fastest pace since the second quarter of 2013. Italy is enjoying its first expansion in two years and perhaps the most notable increase was in Spain, which saw robust growth for a change. The U.K. unexpectedly slowed, posting its weakest performance in more than two years as demand from Europe sizzled, but it is still one of the fastest growing countries among developed nations.

Japan’s economy grew at a faster pace than expected in the first quarter of 2015 on stronger corporate spending. Consumer spending, which accounts for nearly two thirds of Japan’s economy, rose only marginally and signals a continued reluctance among consumers to splurge. Exports and public spending continue to be a drag on growth. The government has pointed to the stronger growth as a sign the recovery is gaining strength and the considerable efforts to re-inflate the economy after 20 years of stagnation are finally yielding benefits.

China’s growth engine is not running on all cylinders, but might be headed to the garage for a minor tune up, as opposed to a major refit. It is not keeping pace with the expansion that the world had been counting on to support the global economies. China is having a negative impact on other Asian countries due to its size and deep trade and financial linkages. China’s vaunted consumers are showing signs of spending fatigue and the service sector is also cooling. The government has rolled out a flurry of initiatives, including interest rate cuts and more infrastructure spending to energize an economy which looks set for its worst performance in 25 years.

For the most part the second quarter was rather indifferent to international stocks as few markets eked out better than 1.0% performance. However, combined with the first quarter’s strong results the year-to-date returns were much more impressive. Overall the developed markets increased 5.9% (all figures are in U.S. dollar terms) in the first six months of the year, led by Asian gains of 9.6%. European stocks lagged with only a 3.1% gain, while emerging markets appreciated a weak 1.7%. The remarkable market was China where stocks have rallied more than 110% since November, easily making it the best performing stock market in the world.  More recently, Chinese stocks have collapsed rapidly since June 12, losing more than 30% in jaw dropping volatility.

The global financial markets continue the tug of war led by the competing forces of improving activity in Europe on one side versus the unfolding Greek tragedy and slowing China on the other. Hopefully, improving global demand for manufacturing goods will be the tonic needed to create a virtuous cycle of growth where increased demand will ultimately put more money in people’s pockets so they can spend more. While there have been worries over the last several months that the level of the markets may be as good as they will get for a while, the prospect of better days ahead are improving.

Christopher Ambridge, CFA

Q3 2015

MARKET COMMENTARY

In the span of three months the global equity markets have gone from contentment to dread. Even the formerly invincible U.S. stock market started to show cracks. There has been no specific reason for the selling but a collection of interconnected concerns: the slowing Chinese economy, the continuing commodities collapse, the prospect of the first U.S. interest rate hike since the financial crisis and the evaporation of growth and inflation around the world. The correction and spike in volatility were long overdue and will pave the way for financial markets to find a new equilibrium.

The Canadian economic slump in the first half of the year was one of the shortest, mildest and strangest recessions ever as consumer spending and employment are both surprisingly up. Despite the weak start to the year, there is good reason to believe that the worst is over with the stage now set for a recovery in the second half of the year. There is optimism that Canada will benefit from the acceleration of the U.S. economy and the low interest rate environment. Despite the deep and ongoing collapse of oil prices, much of the panic over the energy sector has subsided; helping the Canadian economy beat recent expectations.

U.S. economic fundamentals look resilient with consumers in robust shape and growing healthier, while the housing market continues to push ahead. The job market is strengthening with only minor signs of wage pressure which is keeping inflation tame. Falling oil prices were expected to save drivers lots of money at the gas pump which could then be spent elsewhere to propel the expansion forward. Instead, they have chosen to pay off debt. Unfortunately this frugality has been the biggest driver of weaker corporate earnings and ultimately falling stock prices.

The European recovery appears to be gaining momentum as worries of a Greek exit have eased and led to an improved business environment. It still faces debt problems and is going to need more growth if unemployment is to come down significantly from the current rate of 11%. The European Central Bank has kept its interest rates at record lows and is ready to provide more stimulus if needed.

China has been at the epicenter of many of the recent global market moving events as it attempts to rebalance its economy toward services and consumption while maintaining high growth. It is walking a tightrope in introducing reforms as evidenced by the currency devaluation and stock market swoon confirming that the slowdown may be worse than expected. These concerns have posed a challenge to emerging market countries as the dual pressure of plunging commodity prices and the risk of a rise in U.S. interest rates have taken their toll.

The third quarter can lay claim to being the worst quarter in four years as a wave of selling hammered equities. A pause is natural and in this case long overdue so there is no need for panic. Sell offs do not end bull markets. They quite often restore value to securities which allow markets to revert back to their upward trend. The Canadian stock market now has valuations that are below their long term average after falling 7.9% in the quarter. The U.S. market, which is set to trump the Canadian market for the fifth straight year, gained 1.0% (all figures in C$ terms) after a decline in the Canadian dollar of 7.4% is taken into consideration. International stocks lost 2.8%, paced lower by an 8.8% drop in Asian stocks. Emerging markets were the hardest hit, plunging 11.1%.

The reappearance of volatility has stirred memories of the financial crisis and pushed sentiment to extreme pessimism. China is now big enough to pose a threat to financial markets but the possibility that it will stop growing is remote, though future growth may be at a diminished rate. Both the U.S. and Europe will contribute to growth and corporate profits, helping global growth to continue to be very much viable.

CANADIAN EQUITIES

The S&P/TSX index, which struggled to recoup some lost ground in the first half of the quarter, skidded lower in September. The total return version of the Canadian index, which includes dividends, closed the quarter at 14,461, a drop of about 3,500 points or 7.9% lower than where it traded at the end of June.

About 80% of the stocks in the TSX index are trading below their 200 day moving average. The losses were somewhat foreseeable due to the collapse of the Energy and Materials sectors that started last year. The decline was further aggravated by volatility which suddenly resurfaced in mid quarter. Materials lead the pack downward with a 26% loss, followed by Energy which turned in a 19% loss even with dividends. A noticeable change in the market’s dynamics was the abrupt reversal in what had been the leading sector as the Heath Care sector posted a 16% loss, largely due to Valeant and Concordia HealthCare. Valeant and Concordia HealthCare have been under severe pressure from proposed U.S. legislation that would curb some of these drug companies’ aggressive pricing models.

The Canadian economy apparently fell into a technical recession in the first half of the year as GDP growth dropped in the first two quarters. Initial estimates of GDP are subject to a number of revisions as the initial numbers are often well off the mark. Many analysts recognize that there is weakness in the economy but the flurry of recession talk appears misplaced as data from across the country does not provide sufficient evidence of a serious economic downturn which would be typical of a recession. Positive job creation, with about 14,000 new jobs year to date as of September, provides a compelling argument to hold off on confirming that Canada is indeed in a recession pending the issuance of revised GDP numbers. A full economic rebound might not occur for a number of quarters as weak commodity and energy prices will likely remain a headwind for the economy for many months to come. On the plus side the economy has a strong competitive advantage with the loonie at its lowest point in many years. The ongoing drop in interest rates was further aided by the Bank of Canada as it dropped its benchmark rate to 0.5% in July. The low interest rate policy is a positive stimulant which should eventually help propel the economy forward, momentum that is expected to continue into the future.

Ari Abokou, MBA, CIM, FCSI

FIXED INCOME

The Canadian FTSE TMX Universe Bond Index gained a nominal 0.1% in the third quarter of 2015 and year to date the index is well into positive territory with a 2.8% gain. The Bank of Canada surprised the market in January when it lowered its target for the overnight rate by 1/4 of one percentage point. More recently the central bank cut its trend setting rate by the same amount in July. The overnight rate now stands at 1/2 of one per cent. No change was made to the rate at the most recent meeting on September 9th.

The central bank cited the sharp drop in oil prices as the reason for the first surprise rate cut. The rate had been unchanged since September 2010, the longest period of rate stability since the early 1950s. The reasoning for the second rate cut appears to be to weaken the loonie in order to boost trade. An improved trade outlook is vital to the country as there are indications that the Canadian economy went into recession in the first half of the year. Following the most recent rate cut the Canadian dollar dropped to a post Great Recession low which has the adverse impact of raising the cost of living as Canadians are heavily reliant on imports. A consequence of the dependence on imports is that Canada is currently enduring its second worst trade deficit on record.

The U.S. Federal Reserve is keeping U.S. interest rates at record lows in the face of threats from a weak global economy, persistently low inflation and unstable financial markets. Following the Federal Open Market Committee’s highly anticipated meeting on September 16 and 17, Fed officials confirmed that while the U.S. job market is doing well, global pressures may “restrain economic activity” and further drag down already low inflation.

The market turmoil that swept across the globe in September also hurt Canadian bond issuers as corporate borrowing costs spiked to their highest level in three years. Following the slowest August in a decade for debt issuance, corporations are facing higher borrowing costs despite the central bank’s two interest rate cuts this year. The extra yield that bondholders demand to own Canadian corporate borrowings relative to government bonds expanded dramatically in August as corporate bond yields saw their biggest monthly jump since May 2012 and the fattest spread between government and corporate issues since September of 2012. In the first half of the year Canadian companies issued bonds at the fastest rate in at least a decade. That pace is now slowing though and seems unlikely to break the 2013 record of $106 billion. Corporate yields are still near record lows but the widening yield gap over federal debt shows it is getting more costly to entice investors to take on the added risk of lending to companies. Changes in regulatory requirements are also compounding the difficulty of buying and selling corporate bonds in Canada. Capital requirements in the U.S. and globally have led some financial institutions to reduce their traditional role as bond market middlemen which is making it harder and costlier for investors to trade bonds.

Peter Webster, CFA

U.S. EQUITIES

The Standard & Poor’s 500 index fell 6.4% in U.S. dollar terms over the third quarter of 2015 but in Canadian dollar terms the index gained 1.9% for the period. The U.S. dollar was one of the few upward trending financial instruments as equities worldwide fell dramatically in September.

After a harsh winter, the U.S. economy posted a solid rebound in the second quarter, led by a surge in consumer spending and a recovery in residential construction. In late September the U.S. Bureau of Economic Analysis revised upward its estimate for U.S. GDP. New data showed the U.S. economy expanded at an annual rate of 3.9% which was well up from the 0.6% first quarter increase. The revision to second quarter growth was led by a boost in consumer spending, which expanded at a 3.6% rate, up from the previous estimate of 3.1%. Business investment spending was revised higher, reflecting increased spending on structures and equipment.

Residential construction grew at a steady pace as single family housing starts are up 15% from a year ago and multifamily starts are up 20%. Economists are looking for growth to strengthen more in the second half of the year as consumer spending is bolstered by employment gains. The unemployment rate in August dropped to a seven year low of 5.1% and remained at that level for the month of September as full time employment surged by one million in recent months. U.S. employment has been strong resulting in a few signs of wage pressures. In this case inflation would be a strong positive as the alternative, deflation, can be a difficult situation for an economy to extract itself from. So far however, inflation is well below the U.S. central bank’s 2% target.

The Federal Reserve’s policies of targeting employment and inflation have kept them from raising interest rates from ultra-low levels and they may have missed the opportunity to end the zero interest rate policy this year due to the collapse in inflation expectations. Some economists say that the Fed is paying particular attention to three key gauges in deciding when to raise rates. They need to see a stable U.S. dollar, steady energy prices and a still stronger jobs market. The U.S. dollar has risen about 15% against a basket of currencies in the past year and has hurt U.S. manufacturers as their goods have been priced out of overseas markets. A strong dollar also reduces inflationary pressures because foreign made goods become cheaper. On the energy front, the price oil is less than half of what it was a year ago, leading to suppressed inflation. Fed officials may be reluctant to act until they believe that oil prices have bottomed. Finally, while employers have added almost 3 million jobs over the past year, the hiring has yet to spur faster wage growth. Trends in these three factors will have to improve for inflation to reach the Fed’s objective.

Peter Webster, CFA

INTERNATIONAL EQUITIES

The global economy is in the middle of a significant transition as developed nations try to normalize policy, while China and other emerging countries try to reconfigure their economies. This means rich countries are left as the sole engine of growth, although Europe’s recovery remains fragile. Unfortunately with interest rates at rock bottom levels there is little wiggle room to stimulate economies. As such, the relentless deceleration of global growth has meant a slow down this year with only a minor pick up in pace anticipated in 2016.

Fundamental concerns are being raised about China, the world’s 2nd largest economy, which accounts for 15% of global GDP and approximately 50% of global growth. Weakening growth and a devalued currency have combined to put pressure on the government’s efforts to smoothly evolve from a command economy to a market economy. Declining exports and a gyrating housing market means China faces a period of strong headwinds. And yet the doomsayers have generally gone too far. China is not in crisis. Its economy continues to grow at a steady 7% per year and while the growth rate is losing steam, China still has plenty of room to stimulate growth by cutting interest rates further or stepping up spending.

A genuine revival in the Eurozone earlier this year appeared to be taking hold, as equity markets were jubilant and consumers were confident. Unfortunately this optimism was short lived as a new round of unspectacular growth emerged. Worries have cropped up despite the stimulus of slumping oil prices, quantitative easing and record low interest rates. Tepid growth has left inflation as a spent force, for now. The shadow of the Greek demon has passed, so the Eurozone’s recovery now comes down to fundamental factors which are currently lagging.

The Japanese economy actually contracted in the second quarter, forcing the government to step up its monetary easing efforts. The world’s 3rd largest economy has been trying for two decades to pull itself out of the doldrums by enticing foreign investment to combat deflation. Japan’s largest trade partner, China, has caused extensive turmoil with its slowdown and market churning policies. Japan’s expected recovery in the second half of the year is now in danger of disappearing.

Emerging market stocks and currencies tumbled again as the formerly powerful cocktail of strong Chinese growth, low interest rates and buoyant commodity prices evaporated leaving them to face the ensuing hangover. Emerging market growth has slowed for the fifth consecutive year and this year’s declines have been the sharpest since the 2008 financial crisis. Once again heightened fears over China have fed worries that emerging markets could suffer a repeat of the Asian financial crisis of 1997-98. Fortunately these fears are not grounded in reality.

There was no shelter from the global storm in the third quarter as stock prices experienced one of its most volatile three months since 2011. International equities as a whole dropped 10.2% (all in returns in U.S. dollars), which was essentially matched by European stocks which fell 10.1%. Emerging market equities continued their five years of underperformance versus developed markets, declining by a whopping 18.5%, and Asian shares slid 16.2% due to the impact of plunging Chinese stocks and collapsing commodity prices.

Global economies and financial markets do not move in sync. Some countries zig and others zag; the only question is whether the majority are expanding in unison. Developed economies have regained some of their poise, but fears remain although in many ways these worries are misplaced. Uncertainty about China’s growth is now one of the main swing factors in markets. As a result global stock markets could continue to be volatile over the next while as these things sort themselves out.

Christopher Ambridge, CFA

Q4 2015

MARKET COMMENTARY

Global economic growth once again disappointed in 2015. This was largely due to the poor perfor- mance of emerging markets which appear to be entering a new and dangerous phase. Developed nations were not immune as they were also subject to wild swings in stock and bond prices, com- modity values and currencies. Looking forward however, the key factors that will dictate market returns are the U.S. Federal Reserve starting to raise interest rates, the acceleration of European growth, moderation in China’s expansion and the persistence of deflationary pressures.

Markets have been volatile as the global economy remains in a fragile state. The U.S. is distinctly different from most countries as it has seen decent growth over the past year. On the other hand, it is still a matter of taking a wait and see” approach to Europe as the uncertainty from the refu- gee crisis, the ongoing budget crises in Greece and Portugal, and the potential exit of the U.K. from the European Union will continue to befuddle the markets. Weak global trade and delayed reform implementations has caused erosion in emerging market fiscal dynamics, such that they are in their worst state in a decade. The collapse in commodity prices and the need for financial de-leveraging will dampen economic expansion in the short term. Longer term, the global equity bull market can continue to run, but the pace will be dependent upon the prospects for the global economy and corporate earnings.

Canada’s economy turned the corner from recession to growth in the third quarter after negative growth in the first half of 2015. The rebound was helped in part by a jump in exports and house- hold spending, which offset weak business investment. The worsening oil price slump continued to spell trouble for the energy sector and by extension the financial sector. To combat this situa- tion, the Bank of Canada cut their benchmark rate twice last year, with potentially more reduc- tions on the horizon.

Canada’s stock market has been among the worst performing in the world in 2015, down 8.3%, with investors selling everything from resource companies to the banks, which have had their first negative return since 2011. It underperformed U.S. stocks for the fifth consecutive year. Canada has been caught at the center of a commodity price storm and there are growing fears that eco- nomic growth from China to Europe is slowing at the same time as the prospect of rising U.S. in- terest rates all of which will further weaken the Canadian dollar. From a valuation perspective however, things are looking up as a bottoming process has started to occur.

Stock returns from around the world in Canadian dollar terms were robust but this was essentially due to the fact that the Canadian dollar declined 19% over the year which inflated performance substantially for other markets on a relative basis. U.S. stocks gained 20.7% (all returns are in Canadian dollars) and was the only major market to have positive returns in domestic currency terms. International stocks were up 19.0%, while emerging market equities did terribly, gaining of only 2.4% (including a calamitous 12.6% drop in Latin American stocks). The past year also saw the unwinding of the commodities super cycle as commodities suffered their worst year since 2008, dropping 26%; its fifth straight losing year. Canadian bonds posted surprising gains, appre- ciating 3.5% despite the ever present threat of increasing interest rates. Prognostications during volatile markets can be misleading, with the latest data release, report or tea leaf reading causing markets to seemingly fluctuate randomly and sending investors scurry- ing. However, the coming year is likely to be characterized by steady inflation, subdued global growth and differing monetary policy patterns around the globe. Any positive news for emerging markets, Europe or commodities would likely create a strong tailwind which could overcome the current malaise.

Christopher Ambridge, CFA

 

CANADIAN EQUITIES

2015 has been one of the most tumultuous years for the Canadian market in recent history as it lagged its major global counterparts and returned a disappointing -8.3%, including dividends. After a mediocre start in the first quarter with no clear direction, the S&P TSX index ended the first half of the year flat. Performance has over that period could be explained by the weak econ- omy amid depressed energy and materials prices which ultimately culminated in a mild reces- sion during the first half of the year.

The third quarter appears to have marked an inflection point with a decent 2.3% growth in real gross domestic product (GDP), largely due to the very competitive Loonie which triggered a surge in exports. With that economic rebound the stock market roared back in October with a 2% gain. However it was short lived as GDP growth stalled in October and the economy lost 36,000 jobs in November. Weakness persisted in the last months of the year and the price of West Texas Intermediate (WTI), a benchmark for North American oil prices, fell to the $35 range with no bottom in sight.

There is no doubt that falling energy and commodity prices have created serious headwinds for the economy. According to many experts, it is difficult to foresee a short term rebound. Even the World Bank, in its recent forecast, has lowered 2016 global growth from the 3% range to 2.7%. That view holds for Canada as well with revised 2016 growth dropping from the 2% range to 1.8%. The persistence of slow growth across the globe and even recession in some major econ- omies (apart from the U.S.) is the pressing issue to tackle and is crucial to a turnaround for global markets. There have been calls from some analysts to short Canada. Contrary to that view, Canada looks to be “on sale”, as much of the negative news has already been discounted into valuations. This is a great opportunity for long term investors. Also the state of the economy is far from exhibiting a typical recessionary scenario as there are many pockets of resilience. For example, although the current unemployment rate is 7.1%, 2015 saw an increase of 158,000 new jobs; a 3 year high. Also, with almost no inflationary pressures to be seen the Bank of Cana- da is expected to accommodate ongoing low levels of short term interest rates, which is a very stimulative environment for the Canadian economy.

Ari Abokou, MBA, CIM, FCSI

 

FIXED INCOME

The Canadian FTSE TMX Universe Bond Index gained 1.0% in the fourth quarter of 2015 and was up 3.5% for the year. The gain was largely driven by a surprise cut in interest rates by the central bank. Over the course of 2015 the Bank of Canada lowered its target for the overnight rate by 1/4 of one percentage point on two occasions; first in January and again in July. The overnight rate now stands at 1/2 of one percent. In the U.S., the Federal Reserve increased its benchmark interest rate from record lows in December for the first time in seven years.

The Bank of Canada cited the sharp drop in oil prices as the reason for the 2015 rate cuts. In its December decision to leave the benchmark rate at 1/2 of one percent, the central bank cited the weaker Loonie and stronger U.S. growth as factors which will help the Canadian economy adjust to the huge shock from falling oil prices. However this will take time. A legacy of the falling Canadian dollar will be reflected in an eventual growth in exports in the non-resource sector. Looking back, at the end of 2001 oil prices were well under US$20 and steadily increased to over US$145 at the market peak in 2008. For much of the period between 2011 and 2014 the price of oil was able to stay above US$100. The Canadian dollar followed this trend, steadily rising to parity with the U.S. dollar and higher for a while. As a consequence a lot of Canadian manufacturers went out of business. The currency trend has reversed but it will take time for the Canadian economy to recover. In the past the Canadian economy usually followed the U.S. econ- omy fairly closely but this is one of the times where it has not, due to the significant changes that will be required to take advantage of the relatively robust outlook for the U.S.

In December the U.S. Federal Reserve raised its benchmark interest rate for the first time in close to a decade. The announcement of a 1/4 of one percentage point increase in the Fed funds target band came seven years to the day after the Fed lowered the rate from 1 percent to a range of zero to 0.25 percent. The increase was anticipated and it is expected that it will have little impact on the economy as forecasts of real gross domestic product (GDP) growth in 2016 are going up and another year of above potential growth is being penciled in for 2017.

Stephen Poloz, the Bank of Canada’s Governor, has noted that a dominant theme across the global economy has become “divergence”. The U.S. has begun to increase rates, which is a clear sign that its economy has recovered enough to begin the long process of returning to a higher interest rate structure. Much of the rest of the world however continues to struggle as central banks in Europe, England and Japan pursue economically stimulative policies. The Bank of Canada has no influence on oil prices but moved to cut interest rates to help stimulate the hard hit manufacturing sector. The falling currency also helps Canadian energy producers as they benefit from falling Canadian dollar denominated costs relative to selling U.S. dollar priced commodities. The central bank pointed out that a third, less desirable impact is that the price of imported goods rises for all Canadians, which spreads the impact across the country, rather than leaving the resource centered regions to take an even harder hit.

Peter Webster, CFA

 

U.S. EQUITIES

The Standard & Poor’s 500 index climbed 7.0% in U.S. dollar terms over the fourth quarter and in Canadian dollar terms the index gained 10.4%. For 2015 as a whole, the U.S. equity bench- mark gained a mere 1.4% in U.S. dollar terms but was ahead 20.7% in Canadian dollars as the Loonie weakened significantly over the course of 2015. While the U.S. market changed little over the year, the flat return belied a volatile period as stocks saw a 20% market correction at the end of the summer, which was recouped by late fall.

The U.S. economy grew at an annual rate of 2.0% between July and September as noted in the gross domestic product report released in December. Economic growth had slowed sharply from a 3.9% gain in the second quarter but at that time the economy was rebounding from a harsh winter that had slowed first quarter growth to an anemic 0.6% pace. Economists are forecasting that growth will accelerate to about 2.5% in the fourth quarter as a healthy labour market and falling fuel prices power stronger consumer spending. Business investment slowed to 3.4% in the third quarter, which was well down from the 5.2% rate in the second quarter as oil and gas exploration plunged at an annual rate of 47.1%. Residential investment grew 7.3% in the third quarter, down slightly from 9.2% in the second quarter.

Many investors believe that the strong equity market of the last few years was driven by the low interest rate policy. The bull market can stay intact but the pace is dependent upon how robust the economy remains and what that means for earnings. The U.S. is likely years away from a recession so stocks can keep moving higher over the intermediate term and a lack of alternative investments will continue to drive investors into the stock market .

In the near term many investors see declining corporate profits as a problem. U.S company earnings are falling for the first time since 2009, when the economy was reeling from the Great Recession. The main culprit is the plunging price of oil which has decimated earnings at big en- ergy companies. Earnings at energy companies dropped a whopping 59% in the third quarter, enough to drag overall profits for companies in the index down 0.8% from Q3 2014. This marks the first quarterly decline in six years but without the drag of energy companies, overall earnings would have been up. Earnings are expected to start growing again in 2016 partly because they won’t have to soar to look better than they did in 2015. Also the improving economy will help companies increase revenue but it is expected to be a long, drawn out process.

Peter Webster, CFA

 

INTERNATIONAL EQUITIES

The mood among many investors has become so unsettled that even a minor improvement in the global economic outlook will be enough to shift sentiment and drive up security prices. Unfor- tunately, the underlying picture is still one of solid yet unspectacular expansion. It is going in the right direction, but it is hardly robust and appears completely disconnected across countries and regions.

The European economy as a whole grew in the third quarter, while unemployment has fallen to its lowest level in more than four years. These are good signs as Europe has been a perennial laggard since the 2008 financial crisis. With growth and inflation rates essentially stalled, the European Central Bank cut its key interest rates and promised to unveil even more stimulus measures in an attempt to boost lending and help growth. However there are many issues that will make any significant rebound in Europe quite onerous: the refugee and terrorist crises; the possibility that the U.K. leaves the union; Greece remains in solid crisis; the economic slowdown in China which soaks up a lot of European exports; and rising U.S. interest rates could trigger potential debt problems for numerous highly leveraged companies.

Japan’s economy sidestepped a recession last quarter and likely achieved positive growth overall for the year. The government is projecting the real domestic economic growth rate to accelerate and a pick-up of consumer inflation should occur in 2016. With exports and factory output re- maining weak and consumer spending sluggish, Japan’s central bank may have to deploy further monetary stimulus to maintain the turnaround. Meanwhile the downside risks (including a slow- down in China and other emerging Asian economies as well as spillover effects from the U.S. monetary policy’s normalization) could still spell trouble. China’s influence is growing. It accounts for more than 10% of global trade and remains the sin- gle biggest contributor to global growth. So when its economy sputters after years of double digit growth, investors scramble to assess the risk and frantically try to figure out what is going on. China’s economic growth dipped to 6.9% in the third quarter, sending ripples around the world. Chinese manufacturing has been stagnating for more than three years. Retail sales have been a rare bright spot. In a bid to avert a sharper economic slowdown, China’s central bank has already cut interest rates six times, but an even more aggressive policy could hold the key to stabilizing growth in the coming months.

After five years in retreat, emerging markets are showing signs of recovery as the U.S. and Euro- pean economies pick up. While last year was truly dreadful, there may be some relief in sight as assets appear to be bottoming out and are starting to find their footing. It is far too early to ex- pect a significant turnaround but the developing markets do look inexpensive by historical stand- ards although a rerun of the roaring 2000s is unlikely.

While stock prices in the fourth quarter were positive across the board, returns for the year unfor- tunately dipped slightly into negative territory. International equity gained 4.8% for the quarter (all in returns in U.S. dollars), led by rebounding Asian shares that climbed 6.3%, while emerging market equities just managed to eke out a 0.3% gain. European stocks recovered from their third quarter shellacking with a 2.2% increase.

Slowing economic growth and structural reforms in China are causing concern around the globe. On top of this the decade old commodity boom came crashing to an end in 2015. While many developed economies have regained a little of their swagger, the list of issues hampering the markets is still very long. Discounting the current malaise is ill advised, as volatility seems to come in waves and the best solution is to batten down the hatches and wait for blue skies.

Christopher Ambridge, CFA

Overcoming Inertia

The law of inertia naturally predisposes us to resist change. Many people are aware of the advantages of having a physical financial plan as a roadmap for their future yet inertia prevents them from doing something about it. So here are some tricks you can use to overcome it.

Shock yourself into action
When you want to make a change you have to change course. You can shock yourself into taking action by asking questions such as: “What are the consequences if I don’t get started on a financial plan?”, “How much money am I losing by not getting started on this?” or, “What would that money mean for my family or my retirement?”

Secure short term wins
Produce enough quick wins to energize the change and create momentum. Instead of training immediately for a marathon, start with a 5K run. If you’re new to investing and feeling stressed about it, instead of investing the whole amount, start small.

Dangle a carrot in front of yourself
One of our greatest motivators is the pursuit of pleasure. Choose an appropriate reward to give yourself once you’ve reached a certain goal. Let the carrot give you the kick start you need to get going on a goal which will later become self-motivating with its own momentum. Decide you will save a certain amount each month and whatever you have left over use it to spend on something you enjoy.

Create a clear vision of what you’re trying to achieve
Sit quietly with your eyes closed and imagine what you want your goal to look like. If your goal is to save for retirement, imagine how your retirement would feel. Continue in this way until you’ve created a vivid vision of what you want and how it feels. Then open your eyes and allow this vision to pull you out of your state of inertia and get started on your goal.

Don’t blow tasks out of proportion
Stop telling yourself that your success in life hinges on the outcome of this one action that you have to take. If you do this you’re going to put so much pressure on yourself that you’ll be looking for any excuse to avoid taking the necessary steps.

Break tasks down into smaller pieces and set deadlines for each subtask
One of the main reasons why people procrastinate is because the project is so big they don’t know where to start. This makes them feel overwhelmed. What you need to do is break the project down into small pieces so that they feel manageable. By setting deadlines for smaller tasks, you can make sure that you work steadily on the project instead of leaving everything to the last minute. You don’t have to map out your life goals in one sitting. Break it down into manageable parts. Spend time on your retirement goals one day, and do education planning or estate planning on a different day.

Stop telling yourself that you have to be “in the mood” before you act
You have to take action toward the attainment of your objectives whether you feel like it or not.

Repeatedly ask yourself, “What’s next?”
You don’t have to wait until you have a perfect, detailed plan of how you’re going to achieve your goal before you begin to act. Simply determine, “What can I do right now to move forward, even if it’s just by a bit?”

Have a guide, mentor or consult with an expert
Find someone who’s done what you’d like to attempt, or knows how, and follow their path. Obviously if you’re interested in investing, planning for retirement, estate planning, or other areas of finance then it makes sense to consult with a financial planner.

Have someone hold you accountable
You’re much more likely to avoid procrastination if there’s someone holding you accountable.

Use these steps to get moving and work on that financial plan!