MD Financial Management: Chief Investment Officer Message—Asset classes post strong returns year over year amid recent volatility

November 10, 2014

MD’S MARKET UPDATE: Commodity prices decline; U.S. and Emerging markets stocks advance

Global stock markets rebounded by the end of October following declines at the start of the month, but many major indices still ended in negative territory. On a year-over-year basis, however, most asset classes have delivered strong returns with the exception of commodities.

The S&P/TSX Composite Index, dragged down by falling energy prices, declined by 2.1%. The MSCI EAFE Index also moved lower on the month by 0.6%. Stocks in the U.S. and Emerging Markets advanced, ending the month up 3.4% and 2.1%, respectively (all in Canadian dollar terms).

The Canadian dollar depreciated relative to the U.S. dollar and the euro while gaining strength against the pound.

The FTSE TMX Bond Universe rose by 0.6%, as Canadian bond yields declined.

Energy prices moved lower in October as increased supply and lower demand caused a further drop in oil prices with West Texas Intermediate1 crude declining 12% on the month.

RESULTS ACROSS GLOBAL ECONOMIES: Global monetary policy diverging, but remains accommodative

U.S. economic recovery is gaining ground with jobless claims dropping to their lowest level in 14 years—and consumer confidence hitting a seven-year high. Acknowledging the improving economic situation, the U.S. Federal Open Markets Committee ended its asset purchase program in October but pledged to maintain accommodative monetary policy by keeping the Fed Funds rate at its current level for a “considerable period of time”.

In Canada, the unemployment rate dropped to 6.8%, its lowest level since 2008.

The Bank of Japan, meanwhile, announced it will accelerate the pace of quantitative easing to ¥80 trillion annually on an indefinite basis in order to fight deflation.

Economic growth in the European Union appears stagnant leading to speculation that additional stimulus may be required from the European Central Bank.

In China, industrial production continues to expand, up 8% year over year. Gross domestic product (GDP) growth for the third quarter was 7.3%, slightly ahead of expectations; inflation remains moderate at less than 2%.

CAPITAL MARKET INDICATORS AT OCTOBER 31, 2014
(in Canadian dollar terms, unless otherwise indicated)

Market Indicator Level 1-Month Return (%) 1-Year Return (%)
Canada (S&P TSX Composite Index) 14,613 -2.1 +16.4
U.S. (S&P 500 Index) 2,018 +3.4 +31.4
Europe, Australasia and Far East (MSCI EAFE Index) 1,818 -0.6 +12.1
Emerging Markets (MSCI EM Index) 1,016 -2.1 +14.8
Canadian Bonds (FTSE TMX Universe Bond Index*) - -0.6 +6.4
Exchange Rate: Canadian Dollar to U.S. Dollar 0.888 -0.6 -7.4
Gold Price (USD /oz) 1173 -2.9 -11.3
Oil Price (WTI, USD/pb) 80.5 -11.6 -16.4

*Formerly the DEX Universe Bond Index
Sources: StateStreet via StyleADVISOR, FTSE TMX Global Debt Capital Markets, and Bloomberg

MD’S INVESTMENT METHODOLOGY: LEARN MORE

At MD, we monitor global economic trends, integrating viewpoints from carefully selected managers who actively invest for the benefit of our clients.

If you would like to learn more about MD’s investment methodology and the impact of global economic trends on your investment portfolio, I encourage you to reach out directly to your MD Advisor.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Financial Management Inc.

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