MD Financial Management: Chief Investment Officer Message—Boost in Sentiment For Emerging Markets

June 16, 2014

MD’S MARKET UPDATE: MSCI EM Index outperforms developed peers in May, bond yields decline

Emerging Market equities were the top performing asset class in May with the MSCI EM Index advancing 2.4% on the month. Sentiment continues to improve within the sector following the signing in early May of a $400-billion long-term agreement for Russia to supply natural gas to China, where manufacturing growth continues to slow.

In comparative terms, however, the Emerging Markets sector continues to underperform developed market peers on a year-over-year basis.

For the third consecutive month, the Canadian dollar strengthened slightly, but remains down year over year relative to both the USD and euro.

The FTSE TMX Universe Bond Index increased 1.2% on the month, with the 10-year Government of Canada bond yield dropping 18 basis points (0.18%).

RESULTS ACROSS GLOBAL ECONOMIES: Inflation hits 2% in North America, global growth continues

After rising in April, both retail sales and employment rates declined in Canada while housing prices continue to rise, outpacing wage growth. For the first time in two years, headline inflation hit the Bank of Canada’s 2% target.

Meanwhile, on June 4, the Bank of Canada announced its decision to maintain the overnight lending rate at a target of 1%.

In the U.S., consumer sentiment has slowed but remains strong as retail sales rose slightly and home sales jumped in May with inflation hitting 2%. U.S. manufacturing continues to strengthen with new durable goods orders up 7% over the last year.

In the European Union, gross domestic product (GDP) has risen slightly over the last four quarters but remains below the 1% mark year over year as manufacturing growth continues to be sluggish.

Sentiment continues to improve in emerging markets as a long-term $400 billion agreement signed in early May will see Russian gas flow to China, where manufacturing growth continues to slow.

CAPITAL MARKET INDICATORS AT END MAY 2014

(in Canadian dollar terms, unless otherwise indicated)

Market Indicator Level 1-Month Return (%) 1-Year Return (%)
Canada (S&P TSX Composite Index) 14,604.16 -0.2 +19
U.S. (S&P 500 Index) 1,923.57 +1.3 +26.5
Europe, Australasia and Far East (MSCI EAFE Index) 1,956.61 +0.7 +24.5
Emerging Markets (MSCI EM Index) 1,027.69 +2.4 +9.9
Canadian Bonds (FTSE TMX Universe Bond Index*) 923.58 +1.2 +2.9
Exchange Rate: Canadian Dollar to U.S. Dollar 0.9221 +1.1 -4.3
Gold Price (oz) 1,249.73 -3.2 -10
Oil Price (WTI) 102.71 +3 +11.7
*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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