Market Commentary July 2012

Global markets got a boost following the July 26 comments made by the European Central Bank’s president Mario Draghi. In his remarks, Mr. Draghi stated that the ECB would “do whatever it takes” to ensure that the Euro remained intact. Investors took this as a sign that the ECB would take immediate simulative action in an effort to shore up the European economies, bidding stock prices higher.

These comments boosted investor confidence, resulting in a modest 1.1% gain in the MSCI EAFE Index in U.S. dollar terms while the S&P 500 gained 1.4%. Unfortunately for Canadian investors these gains were muted, as the Canadian dollar rose against other currencies. The dollar gained 1.76% against the greenback, rising from $0.9813 to end the month at $0.9986. Once the currency affect was taken into account, gains were much reduced, with the S&P 500 rising a more modest 0.03% and the MSCI EAFE losing 0.61% in the month.

One sector that did see a boost was resources, which saw a 3% rise in gold and a 7% jump in the price of oil. These gains were partly attributable to Mr. Draghi’s comments, but also to news that both European and Chinese central banks cut interest rates and were committed to further stimulus action. This boosted hopes that China would be able to rebound out of their slowdown more quickly which would boost demand for oil.

In Canada, the S&P/TSX Composite Index gained 0.80%. Not surprisingly, it was energy leading the charge higher, gaining 4.4%, followed by telecom and industrials, who posted gains of 2.8% and 2.4% respectively. Laggards included technology, which was dragged lower by the continued fall of Blackberry maker Research in Motion. Small Caps outpaced their large cap brethren, with the S&P/TSX Small Cap Index gaining 2.5%.

Canadian bonds were positive, with the DEX Bond Universe gaining 0.66% on the month. Corporate bonds outpaced governments and yields remain near historic lows. While there is no doubt that rates will be moving higher, the question remains when will that rise begin. Considering comments from Bank of Canada governor Mark Carney, and the yield curve, it is our view that rates are now likely on hold until at least early 2013.

While Mr. Draghi’s statement was encouraging, there is still much more that needs to be done before the European debt crisis is solved and the future of the Euro more certain. Despite central bank easing, China continues to show signs of a slowdown that will no doubt have an impact on the Canadian economy, particularly those sectors that are tied to energy and commodities. The U.S. is showing some signs of economic life, but growth is not yet at a pace that will provide significant support for the equity markets.

Based on this view, our investment outlook remains unchanged. We continue to focus on quality, both in equities and fixed income. With an overhang of issues weighing on the markets in Europe, and slowing growth in the emerging markets, we continue to favour North America. For equities, we favour well managed, conservatively positioned funds that invest in large cap, dividend paying companies.

Within fixed income, our focus is on actively managed funds that can invest in a mix of government and high quality bonds. We also like funds that offer higher yields and shorter durations than the benchmarks. This will serve two purposes – provide the potential for better returns while rates are flat, and better downside protection when rates move higher.

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