In the second quarter of 2015, we saw global markets remaining volatile and weak. The weakness began early in the quarter with the U.S. recording a slightly negative economic growth in Q1. But stronger employment, consumer spending and housing data in the U.S. supported markets mid-way through the quarter. However, with Greece defaulting on their €1.5 billion payment to the International Monetary Fund and the last minute referendum that would impact their membership in the Eurozone, the last days of June ended a bumpy quarter in a dramatic fashion.
By the Numbers:
|S&P/TSX Composite Index||14,902||14,553||349||-2.3%|
|S&P 500 Index||2,068||2,063||5||-0.2%|
|EURO STOXX 50 Index||3,697||3,424||273||-7.4%|
|FTSE 100 Index||6,773||6,521||252||-3.7%|
|Nikkei 225 Index||19,207||20,236||1029||5.4%|
|Shanghai 300 Index||4,051||4,473||422||10.4%|
|CAN 10yr Bond Yield||1.36||1.68||0.32|
|US 10yr Treasury Yield||1.92||2.35||0.43|
|GER 10yr Bond Yield||0.18||0.76||0.58|
|GRK 10yr Bond Yield||11.63||15.42||3.79|
|WTI Crude Oil||48||59||11||22.9%|
In the U.S., global uncertainty and weak Q1 economic data (which was mainly attributed to the cold winter and low oil prices) led the Federal Reserve to delay the rate increase which many expected to come in June, indicating instead that it will likely come later this year. But on a positive note, the U.S. housing starts in April were at the highest levels in 25 years and unemployment was at 15 year lows. Consumer spending has also remained strong thus far. If these trends continue, it should bode well for stronger economic growth in the longer term.
In Canada, we are still seeing deflationary pressures led by a low dollar, depressed oil prices and lower commodity food prices. However, the weaker Canadian dollar along with increased consumer spending from our neighbours in the South led by higher wages and housing expansion will be a major catalyst for Canada’s non-energy exports.
Across the pond, while the “Grexit” grabbed most of the headlines, immigration concerns in South East Europe and uncertainty regarding Britain’s attempts to renegotiate the terms of its EU membership added further downside pressure to the European markets. In Europe, the absence of a fiscal union has left countries in the Eurozone, which would normally rely on currency adjustment policies to rebalance growth differentials, unable to do so. The way it stands now with a relative static currency but dynamic interest rates across the various Euro members, the impact on countries like Greece is amplified. While Greece represents only 2 per cent of GDP in the Euro Zone, the uncertainty of an exit from the Euro currency and a potential contagion effect on the rest of the Euro countries, has caused increased volatility in the markets and will likely continue to do so until the dust settles.
We saw weak economic data out of Asia as the manufacturing sector in South Korea and Taiwan showed declining activity. However, Japan’s massive quantitative easing program boosted the Japanese equity markets although it drew deflationary concerns as the Yen continued to depreciate. China launched a new stimulus program in April to counter the country’s slowest economic growth in six years. As a result the volatile markets in China carried the Shanghai index up 32 per cent on hopes of increased liquidity before dropping sharply to finish the quarter 10 per cent higher than where it started.
For most portfolios, Q2 was a double-whammy as, while equity markets declined in general, bond yields continued to increase on the expectation of rate hikes from the U.S. Fed, lowering the value of bond holdings. While this might sound negative, the positive take-away is that there is no panic selling in the equity markets looking for a safe haven in the bond markets, and that investors are expecting growth to return.
We expect to see modest returns and higher than normal volatility in the market in the near term until at least the dust settles in Europe. However, the long term fundamentals continue to remain positive with consumer sentiment remaining strong as a result of employment and the housing data continuing to improve putting more money into the consumer pockets. With oil recovering from the lows and remaining relatively stable, the energy sector should also contribute positively to corporate earnings in the next few quarters, which should help boost equity markets.
There is no better time to reiterate that long-term investors should hold well diversified portfolios across various geographies and asset classes, and aim to lower the total costs of owning their portfolios. One of the best ways to take advantage of volatility is through pre-authorized contributions so you buy more units when prices are low and less when they are high. A well-defined Investment Plan would also take the emotion out of the game and keep you on track towards your financial goals!
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