Message from the President and CEO
The year 2016 was a memorable one. It was plagued by weak financial market and economic performance at the outset only to finish with good economic gains and stellar market returns. Politics and their impact on financial markets were never far from investors’ minds; from Brexit to the Italian constitutional referendum and a victory for Donald Trump, larger-than-life events were the order of the day.
Despite the potential uncertainty surrounding these political events, the markets proved to be resilient. In our view, this was primarily due to a cyclical upswing in the global economy. This strength was reflected in purchasing manager indexes—monthly surveys of private sector companies—around the world, which showed growing levels of business activity across wide sectors of the economy.
Other positive economic signs were seen on the employment front. Employment data from Statistics Canada showed more job‑seekers entering the labour market in December. This was a positive sign of growing confidence in the economy. In the U.S., data from the U.S. Bureau of Labor Statistics showed wages delivered their biggest gains since June 2009, as average hourly earnings jumped by 2.9% in 2016. With U.S. unemployment at 4.7%, a case can also be made that a strong labour market could push wages higher, sparking inflation and fuelling economic growth.
Growing demand for key commodities, like oil, was another sign of economic growth in 2016. Oil recorded its biggest yearly gain since 2009 as OPEC and some non-OPEC members agreed to cut production. Rising oil prices were good news for Canada, as the Canadian energy sector finished 2016 almost 40% higher. However, we do not see room for oil to move dramatically higher and expect prices to be range-bound in 2017.
The wider Canadian equity market enjoyed strong gains as well last year. The S&P/TSX Composite Index finished the fourth quarter 4.54% higher and was up 21.08% on the year. Among developed markets, Canadian equities posted the best annual performance of 2016. U.S. equities, as measured by the S&P 500 Index were up 11.96% in U.S. dollars. Given these increases, our decision to overweight equities for much of the year proved beneficial for MD clients.
After the cyclical upswing we anticipated in the fourth quarter was realized, we used the opportunity to take profits and trim positions. We reduced our overweight to stocks to a neutral position overall, primarily by reducing our Canadian equity allocation to neutral to end the year.
We maintain an overweight position in U.S. equities, however. The U.S. economy continues to be strong relative to other countries’ economies, while equity fundamentals also remain generally supportive. The promised stimulus spending from the Trump administration may prove to be a boost for U.S. stocks.
We remain underweight in European and Asian equities. Political and economic risk remains high in many regions. Japan’s negative interest rate policy, in which bank deposits are levied with a fee to encourage savers to spend, has yet to kick-start the economy.
Turning to fixed income, we saw good performance from our fixed-income funds and pools relative to their benchmarks. Near the end of the third quarter, we decreased our overweight position to long-term bonds in anticipation of higher bond yields but remained overweight, which detracted somewhat from performance because of the severity of the rise in bond yields through the end of the year. However, we are comfortable with this position, as we remain in a low-growth and inflation environment globally. A small allocation to long-term bonds can provide diversification benefits in the event of short-term volatility.
The U.S. Federal Reserve’s decision at its December meeting to raise the target federal funds rate was widely anticipated. However, the Fed surprised many when it took a more hawkish stance on inflation by increasing expectations for three interest rate increases by the end of 2017, up from a previously estimated two increases. The speed and size of Fed rate hikes will be one of the most closely watched factors affecting our investment outlook in 2017.
As 2017 unfolds, we remain cautiously optimistic, given the strong finish to 2016 and the prospects for growth in the United States. We continue to recommend investors maintain an investment strategy that features diversification and active management aligned with their investment time horizon. To learn more about how we construct MD Portfolios and the impact of global economic trends on your investments, I encourage you to reach out directly to your MD Advisor.
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