Market Commentary – August 2012

Those who adhered to the old adage of selling in May and going away for the summer may have been sorry that they did. Global equity markets were again higher in August, their third month in a row of gains. This time around, it was Canadian equities leading the way higher, as our three main sectors, financials, energy, and materials, all enjoyed decent gains. The S&P/TSX Composite rose more than 2.4% in the month. The energy and financial sectors matched the gains of the broader index.

The biggest winner by far was the precious metals, which saw the S&P/TSCX Global Gold Index rise by 9.1%. This jump was spurred by the price of gold which hit the $1,700 per ounce level again on speculation that the U.S. Federal Reserve would be announcing another round of quantitative easing. Traders believe that if such a plan is announced, it would result in a drop in the U.S. greenback.

In the U.S., the S&P 500 gained 2.3% in U.S. dollar terms, ending the month at 1,406.58, its highest close in nearly four years. The MSCI EAFE Index rose by 2.4%, while the MSCI World Index rose by 2.3%. Market sentiment was much improved on optimism that the European Central Bank would resume its buying of sovereign bonds and that the Euro-zone leaders would work out a solution to the debt crisis. This pushed European shares sharply higher, with the MSCI Europe Index gaining 4.1% in the month. For Canadian investors however, these gains were muted by the increase in the Canadian dollar which finished the month at $1.0139 from July’s close of $0.9986.

Signs of an economic slowdown continued to emerge out of China, with manufacturing output dropping more than expected. Japan also struggled as a rise in the Yen hurt the outlook for manufacturers.

Despite the positive summer, we believe that there are many reasons to remain cautious as we enter into the fall. September and October have historically been nasty months for investors, and with the macro risks that are currently overhanging the markets, we expect that this year will be no different. While the ECB buying up bonds will help in the short term, it does very little to solve the actual crisis. Until a firm plan is in place, the region is ripe with uncertainty. Compounding the situation is a slowing Asian economy and concerns about the U.S. “Fiscal Cliff”, a series of tax increases and spending cuts that are set to take effect in the New Year. Without a deal in place to postpone these, it is likely their implementation will halt the already fragile recovery. All of these factors are expected to continue to weigh on the market sentiment, causing increased levels of uncertainty well into the fall.

Considering this, our investment stance remains defensive. It is our expectation that interest rates will remain unchanged for the next several months. This will help to provide some support for fixed income investments. Within the fixed income space, we are focusing on actively managed, high quality bond funds that allow the managers the tools to help navigate the tricky waters. For equities, we continue to focus on actively managed, large cap focused funds that invest in well managed, high quality companies that generate strong cash flows. We are still avoiding Europe and China specific funds as we believe that there is too much risk in the short term. Instead, we continue to favour Canada and the U.S.

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