MD Financial Management: Chief Investment Officer Message—Global stocks rise despite falling commodities prices

December 12, 2014

MD’S MARKET UPDATE: Lower oil price hits Canadian dollar; TSX financial, material sectors gain

Commodities prices continued to fall in November as supply outpaced demand. However, global stock markets rose overall, boosted by sectors other than energy.

The Organization of Petroleum Exporting Countries (OPEC) decision on November 27 to maintain oil production at current levels put further downward pressure on oil prices. West Texas Intermediate (WTI), which is a grade of crude oil used as a benchmark for oil prices, dropped by 17.9% over the month.

Lower oil prices also weakened the Canadian dollar, which declined relative to the U.S. dollar and euro.

Declining oil prices weighed on Emerging Market and Canadian stock returns, however the strong performance of the TSX’s financial and material sectors more than offset the weaker energy sector with the index rising 1.1% in November.

The S&P 500 and MSCI EAFE index were also up, rising (in Canadian dollar terms) by 3.9% and 2.5%, respectively.

The FTSE TMX Bond Universe advanced by 1.5% as Canadian bond yields continue to decline.

Year over year, global stock and fixed income returns remain positive while commodities prices have declined materially.

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

Economic activity in developed international markets remained slow in November, and in some cases contracted. Japan announced it will postpone a sales tax increase after it unexpectedly fell into recession. And in Europe, growth within the manufacturing and services sectors was sluggish.

The Peoples Bank of China introduced its first interest rate cut since 2012 in an effort to combat slowing inflation and industrial production growth.

The labour market in North America strengthened as the U.S. unemployment rate declined to 5.8% while continuing jobless claims dropped to a 14-year low; the unemployment rate in Canada fell to 6.5% due to the creation of private sector jobs.

Canada swung back to a trade surplus in September as exports rose, while the U.S. trade deficit widened to $43 billion. Inflation reports released in November show the Consumer Price Index (CPI) is relatively flat in both Canada and the U.S. as lower fuel costs were offset by rising prices for durable goods.

CAPITAL MARKET INDICATORS AT NOVEMBER 30, 2014
(in Canadian dollar terms, unless otherwise indicated)

Market Indicator Level 1-Month Return (%) 1-Year Return (%)
Canada (S&P TSX Composite Index) 14,745 1.1 13.3
U.S (S&P 500 Index) 2,068 3.9 25.9
Europe, Australasia and Far East (MSCI EAFE Index) 1,840 2.5 8.1
Emerging Markets (MSCI EM Index) 1,005 0.1 9.2
Canadian Bonds (FTSE TMX Universe Bond Index*) - 1.5 7.7
Exchange Rate: Canadian Dollar to U.S. Dollar 0.876 -1.3 -7.0
Gold Price (USD /oz) 1167 -0.5 -6.9
Oil Price (WTI, USD/pb) 66.2 -17.9 -28.7

*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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