Tensions remained high in June, with the world on the brink of an all-out trade war. Understandably, with uncertainty overhanging the markets, investors were unsettled, resulting in another month of choppy market performance.
The S&P 500 started June very strong, gaining more than 3% in the first week or so, only to see negative sentiment take hold, resulting in the index giving most of those gains back, ending the month only modestly higher. In U.S. dollar terms, the index rose a very modest 0.6%. It was a similar story with international markets. The MSCI EAFE Index had modest gains in the first half of the month, only to sell off in the latter half of the month, ending lower by 1.2% (U.S. dollar terms). The main reason for the sell off, was U.S. President Donald Trump following through on his threat to implement more tariffs. In the aftermath, it was Asian markets that were hardest hit, with the MSCI Far East Ex-Japan Index falling more than 5%.
Closer to home, Canadian markets fared much better on the back of strong energy and healthcare stocks. The S&P/TSX Composite Index gained 1.7% as the oil rally continued to push energy stocks higher, and news that the Senate approved the Liberal’s marijuana legalization bill pushed the healthcare sector up more than 7%.
In this environment, the portfolios performed well, led by our equity focused Growth Portfolio which gained 1.96% on the month. This result outpaced its benchmark thanks to a strong showing from the quality focused Fidelity Small Cap America Fund and the defensively positioned Mackenzie Ivy Foreign Equity Fund. The defensively positioned Conservative Portfolio rose by 0.6% but trailed its index. The largest headwind was the Sentry Small Mid Cap Income Fund which trailed its benchmark, followed by the RBC Global Corporate Bond, which ended the month 0.3% lower in a very tough global credit environment. Our Balanced Portfolio earned 1.1%, which matched its benchmark.
For a detailed review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. Additional detail can be found in these reports generated by Morningstar. A summary report can be downloaded here, while the more detailed report can be downloaded here.
Looking ahead, the Bank of Canada raised its benchmark overnight rate at its July meeting, however, the direction of rates remains up in the air given the uncertainty caused by the ongoing trade battles, and the potential for a slowing economy. We are now in the “dog days” of summer and are not expecting much in the way of market activity. Many traders are on vacation, and volumes tend to be much lighter than normal. Barring anything unexpected, markets are likely to be rangebound for the next month or two, setting the table for what could prove to be a very interesting fall.
I am currently watching a couple of areas. First is the high yield market. With spreads on high yield credit now approaching historic lows, I don’t believe investors are being adequately compensated for the higher default risk. If we see an economic slowdown, defaults are expected to rise and returns to suffer. This may have a spillover effect to the broader bond markets. I believe our fixed income holdings are well positioned, but the RBC Global Corporate Bond Fund may be a bit more exposed and could see higher volatility heading into the fall.
Next, I’m watching the trade wars unfold. There are many implications for this including a slowing global economy, the potential for higher inflation, and lower corporate margins. Another area of fallout is expected to be the Emerging Markets, which are very reliant on trade. So far, we have seen EM equities sell off, and more is expected while this is sorted out. Within the portfolios, I believe we are very well positioned for this. Our equity managers have a quality focus and are invested in companies that have enduring business franchises and generate solid levels of free cash flow. While a full blown trade war is likely to hurt, the funds in our portfolios are likely to withstand it better, thanks to this focus on quality. Second, our exposure to emerging markets is minimal at roughly 1% for our Conservative Portfolio, and just over 4% for our all equity Growth Portfolio.