Message from the President and CEO

January 31, 2018

Much like the third quarter of 2017, this past quarter brought more than its share of headline-worthy events. The nuclear tension between the U.S. and North Korea seems to have become weekly news. Political volatility reared its head in Europe with the referendum in Catalonia, while Brexit negotiations are ongoing. Yet these events had very little impact on capital markets – again much like the third quarter of 2017. In fact, global equity markets posted strong gains, particularly in the U.S and emerging markets, to close out a very fruitful year.

The strength and stability witnessed in capital markets over the past quarter was largely the result of synchronized global economic growth, positive corporate earnings momentum and the continuation of low inflation and interest rates.

Global growth, which had been U.S.-led for several years, became much broader-based in the third quarter, with most major economies in expansion mode. This growth trend continued throughout the fourth quarter, providing a favourable backdrop for global equities. Compared to the last 10 years, Chinese growth has slowed, but this was an expected and targeted outcome to reach sustainable growth levels.

The strength of the global economy also had a positive impact on corporate earnings in almost all major markets. After two years of relative stagnation, earnings growth was positive across regions and sectors. In the U.S., corporate earnings are expected to further benefit from tax reform, particularly for companies in the information technology and financials sector. In anticipation of the U.S. tax bill, which passed in December, equity prices in those two sectors saw sizeable gains.

Commodity prices recovered in the fourth quarter supported by the synchronized upturn in the global economy.  The rebound in energy and materials prices helped commodity supported gains in equity markets with high exposure to commodities like Canada and Australia.

Inflation increased somewhat during the quarter but was below central bank targets. As a result, central banks’ policies remained largely accommodative. The Fed raised its federal funds rate in December, but this did not come as a surprise and had little impact on markets. The Bank of Canada held rates steady after a surprise rate hike in September, while the Bank of Japan anchored its 10-year yield at 0%. Globally speaking, interest rates remain very low, and the pace of interest rate increases has been measured.

Finally, fixed income investments provided decent returns in the fourth quarter, something that will become more difficult looking forward. However, bonds remain a good way to protect portfolios against extreme market events, given the low risk of inflation shock.

Our Q4 Macroeconomic Overview and Outlook takes a closer look at the factors that had the greatest impact on market performance in the fourth quarter, and how this has affected the way we’re positioning our portfolios.

If you want to know more about the trends highlighted in this report, and how they might affect your investments, I encourage you to talk to your MD Advisor.

Brian Peters

President and CEO

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