Global markets outpace Canada as materials continue to drag
The first quarter of 2013 rewarded investors, as global equity markets surged higher. The U.S. led the way with the S&P 500 rising by nearly 13%, finishing at a record high. International equities were also strong, as the MSCI EAFE Index and MSCI World Index rose by 7.4% and 10.1% respectively. Were it not for the rise in the Canadian dollar, these gains would have been even higher.
At home, the S&P/TSX Composite lagged its global peers, gaining a modest 3.3%. Much of this underperformance can be attributed to the materials sector, which has continued to disappoint, negatively affecting the broader market. With concerns over a slow economy in China and the European recession continuing to weigh on commodity demand, the situation is not expected to change in the near term. Technology, healthcare, industrials and consumer focused sectors were the contributors to the performance.
More turmoil erupted in Europe after a proposed bailout plan for Cyprus would have resulted in a tax on all bank accounts in the tiny country. This resulted in the country’s banks closing for several days while the plan was considered. Uncertainty spread across the region as IMF and ECB officials commented that this deal could prove to be the template of future bailout programs. Fortunately, cooler heads prevailed, and the deal was not implemented, helping restore some level of confidence to the region.
Looking ahead, we remain cautiously optimistic.. With interest rates low, and inflation well contained, the environment is more conducive for equities than fixed income. We are not suggesting that one abandon fixed income completely in favour of equities. We still believe in using fixed income in a well diversified portfolio as a way to help manage overall volatility. Instead, we suggest that investors consider adding to their equities as a way to help generate higher returns going forward.
Within the equity space, we continue to favour North America, specifically the U.S. With a modest recovery firmly entrenched, economic fundamentals continue to improve, which will likely provide a favourable environment for equities.
We are still positive on Canadian equities, just less so than their U.S. brethren. The main reason for this is that with Europe mired in recession and China still struggling to recover, we expect pressures to remain on commodity prices. This will continue to drag the broader Canadian indices. Within Canada, we continue to like the yield plays, as we believe that investors’ seemingly insatiable demand for yield will continue to provide some level of support for equity prices. Still, one must be cautious on valuation and be careful not to overpay.
We also see continued opportunities within Europe and the emerging markets for those with a higher tolerance for risk. Those with modest risk tolerances are better to get this exposure through a high quality, well diversified global fund, while those with higher risk appetites may want to invest in funds that are specific to the regions.
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