Over the past few months, it may have seemed as though news headlines were dominated by natural disasters, geopolitical turmoil and other challenges. But I believe there was some good news as well. There were stories of unity and heroism coming out of Texas following Hurricane Harvey. There were key political wins in Germany and France that provided some much-needed stability for the eurozone. There was, in a word, resilience.
That would also be a good word to describe this past quarter’s capital market performance, which was largely unaffected by political risks and negative headlines. This quarter, we’ve focused on a few key factors that underlie this resilience and point to the likelihood of continued financial strength.
First, economic growth across the regions we cover became more synchronous this quarter. As opposed to being led by the United States, which was the case for several years, we’re now seeing growth in several regions, which is helping to support equities in both developed and emerging markets. Our outlook for the United States is still positive, but we’re seeing more opportunities in other areas and have adjusted some of our positions accordingly.
Fixed income markets, meanwhile, continue to be influenced quite heavily by central bank actions and rhetoric around the world. At home, for instance, the Bank of Canada hiked interest rates for the first time since 2010. Stephen Poloz, Governor of the Bank of Canada, stopped short of saying more policy rate increases were on the way, but he also said there is no predetermined path for future increases.
These actions caused the Canadian dollar to increase relative to most major currencies, providing a sign of economic strength, but somewhat dampening the value of global equity market returns for Canadian investors.
Elsewhere around the world, the U.S. Federal Reserve is also beginning to take actions to reduce its balance sheet and normalize its policy rates. The Fed is expected to again raise rates in December and at least twice in 2018. The European Central Bank (ECB), meanwhile, is expected to announce its intentions to reduce asset purchases–a quantitative easing measure initially launched to prop up sagging inflation rates.
These trends bring us back to currency volatility. As I touched on above, global equity markets posted strong gains in local currency terms, but the strong Canadian dollar reduced these returns for many Canadian investors. On the other hand, the weakening U.S. dollar was a boon for emerging market equities, although we expect the U.S. dollar to strengthen in the coming quarters.
This interplay of policy rates, currency volatility, equity market performance and fixed income returns, plus what they mean for you, are discussed in much greater detail in our Q3 2017 Macroeconomic Overview and Outlook.
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.
President and CEO