MD Financial Management: Chief Investment Officer Message—Emerging markets outperform amid geopolitical tension

August 27, 2014

MD’S MARKET UPDATE: MSCI EM Index climbs 4.3%; TSX rises 1.4%

Emerging market equities were the top performing asset class in July with the MSCI EM index rising 4.3% in Canadian dollar terms. The S&P TSX Composite index rose by 1.4% while the MSCI EAFE and S&P 500 were up slightly in Canadian dollar terms but declined when removing the effect of a depreciation in the Canadian dollar. Year-over-year returns remain strong.

Following four months of appreciation relative to the U.S. dollar, the Canadian dollar declined by $0.02USD as the U.S. Federal Reserve further reduced its stimulus by $10 billion to $25 billion.

The FTSE TMX Bond Universe rose by 0.6% with bond yields moving lower over the month.

RESULTS ACROSS GLOBAL ECONOMIES: European growth lags developed counterparts

Manufacturing and retail sales grew in Canada with the trade deficit narrowing as export growth outpaced a slight increase in imports.

After contracting in the first quarter of 2014, the U.S. economy expanded in the second quarter. Gross domestic product (GDP) growth hit 4.0%, as the improving job market has consumer confidence hitting multi-year highs.

In Europe, meanwhile, economic recovery remains muted and uneven. While Purchasing Managers’ Indices (PMIs) are moving higher, regional discrepancies continue to widen, particularly among the European Union’s two largest members: France, which is contracting, and Germany, where economic growth is expanding.

Among key developments by policy makers in July, the BRICS nations (comprised of Brazil, Russia, India, China and South Africa) signed an agreement to create a development bank—a move that signals their growing economic clout. The New Development Bank, with authorized capital of up to US$100 billion, is intended to rival the International Monetary Fund (IMF) and World Bank. While Russia struggles under additional sanctions imposed by Western nations, the Chinese economy strengthened in the second quarter, hitting its 7.5% growth target.

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

Market Indicator Level 1-Month Return (%) 1-Year Return (%)
Canada (S&P TSX Composite Index) 15,331 1.4 26.5
U.S (S&P 500 Index) 1,931 0.8 23.8
Europe, Australasia and Far East (MSCI EAFE Index) 1,933 0.2 22.4
Emerging Markets (MSCI EM Index) 1,066 4.3 22.4
Canadian Bonds (FTSE TMX Universe Bond Index*) - 0.6 5.8
Exchange Rate: Canadian Dollar to U.S. Dollar 0.917 -2.2 -5.8
Gold Price (USD /oz) 1,283 -3.4 -3.2
Oil Price (WTI, USD/pb) 98.2 -6.8 -6.5

*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.

Previous Article
Bank of Canada Maintains One Percent Target Rate – Global financial conditions “very stimulative”

In its latest decision on interest rates, the Bank of Canada is maintaining the overnight lending rate at a...

Next Article
Bank of Canada maintains One Percent Target Rate – Economic Growth Weaker than Estimated

In its latest decision on interest rates, the Bank of Canada is maintaining the overnight lending rate at a...