Market Commentary – March 2012

For the past year, market sentiment has been dominated largely by the debt crisis that continues to boil over in Europe, causing fear and panic among investors. In the first quarter of 2012, this situation was merely simmering, allowing investors to focus on the economic recovery that appears to be well underway in North America.

Sentiment was buoyed by encouraging data in the U.S. showing that the housing market is rebounding, job growth has been encouraging for six months, and consumer confidence remains positive. In Europe, while the economy is showing signs of slowdown, markets rallied strongly on news that the European Central Bank had injected funds into many banks in an effort to help spur economic growth.

While many economists believe more stimulus is needed to avoid a recession, markets viewed this as a very beneficial step, with all major equity markets posting big gains during the quarter. The U.S. led the way with the S&P 500 gaining 12% in U.S. dollar terms. The MSCI EAFE Index was also strong, gaining nearly 10% in U.S. dollar terms.

Canadian equities, while positive, had a tough quarter. The S&P/TSX Composite Index gained nearly 4%, well off the pace set by their global counterparts. Much of this underperformance was attributable to the resource sector which struggled on news that China, and other emerging market economies may be slowing down the pace of their economic growth. This led to a sell-off in commodities. The materials sector was also hit hard, as gold dropped from its February peak, ending the quarter at around $1630 an ounce.

Another positive during the month was that the high levels of volatility that we have become accustomed to were on the decline. Markets were much calmer during the quarter however, we do expect that any headline event will result in its return. With troubles in Iran, the still unresolved debt crisis in Europe, and lingering worries over the pace of economic growth, it is not a question of if volatility returns, but when.

Not surprisingly, in this environment, bonds were negative as the lower volatility enticed some investors back into the equity markets, pushing bond prices lower and yields higher. Adding to this is the speculation that many investors are now realizing that bonds have likely peaked and much of the risk going forward is now to the downside. Regardless, it should be emphasized that fixed income plays a very important role in a well diversified portfolio as it will help to provide some level of downside protection during periods of heighted volatility.

Looking forward, it is expected that the economies in Canada and the U.S. will continue to rebound, albeit at a more modest pace. As a result, it is expected that equities will provide modest returns, and it is expected that volatility will re-emerge in the coming months. The equity focus of any portfolio should be on funds which have significant exposure to high quality, dividend paying securities, which are expected to hold up better in a modest growth and volatile environment. For the fixed income portion of portfolios, it is expected that corporate and high yield bonds will perform better in a rising rate environment. Still, some exposure to government bonds is necessary for their safe haven appeal.

For the month of March, the best and worst performing funds were:

Best Performing Funds for the Month

Worst Performing Funds for the Month

Best Performing Funds for the Year

Worst Performing Funds for the Year