Keep connected
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.
After a strong month in October, the stock market in Canada was up only slightly in November, gaining 0.3%. The resource sector continued to be the biggest drag on our market, with the gold stocks taking the Basic Materials sector down by 5.7% and the Energy sector falling 1.1%. Other losing sectors included the Utilities, which lost 2.9%, and the Consumer Staples, which fell 1.7% on weakness in the grocery stocks. On the plus side, the industrials sector lead the advance, gaining 5.1% in November as the rail stocks continued to move higher. Financials also gained on optimism over bank earnings and higher valuations for life insurance and investment management stocks. The Financial Services sector gained 2.5%. The Information Technology sector was helped to a 3.5% monthly advance on gains by Open Text and CGI Group. The attribution of the gains/losses in the Canadian market in November were right in line with where they’ve been for most of this year. The Financial Services sector has accounted for 75% of the gains in the overall market this year, an impressive number given that the sector only represents about 35% of the overall index. The Basic Materials sector, on the other hand, has been responsible for over 700 points of downside for the TSX index this year. In other words, without the Basic Materials sector, the TSX would be up over 16% in 2013, versus its actual year-to-date gain of 10.8%!
Outside of Canada markets were much better as U.S. stocks gained 3% last month and are up a stellar 26.6% so far in 2013 with investors beginning to shift assets from bonds to stocks. Japan was the strongest major market in November, gaining 9.3% in Yen terms. Germany lead all European markets with a 4.1% gain as German economic data continues to hold up better than its neighbours in the euro-zone. Chinese stocks were also stronger, gaining 3.7% on optimism about reforms announced during the governments Plenum to lay out their 5-year growth plan. Emerging Markets continued to be a source of weakness for global stocks, with the composite index down another 1.6% in November, lead in large part by a 4.4% fall in the Brazilian stock market.
Bonds continued their 2013 struggle as investors fret over the actions of the U.S. Federal Reserve, which appointed Janet Yellen to take over from Ben Bernanke in 2014. The DEX Bond Composite Index fell by 0.24% in November, driven largely by the 1.14% decline in the long-term government bond index. Corporate and short term bonds rose slightly on the month. Although central bankers all over claim that they will not be raising interest rates anytime soon, investors are less convinced of this and have been selling bonds and pushing interest rates higher in the process. The ultimate risk is that all this money creation will eventually set off a round of higher inflation, and then interest rates would have to head higher. The only scenario where we see a benefit from owning bonds over the next few years would be if we expected a slowdown in global growth and/or the risk of deflation. That is not our outlook. The better opportunities in fixed income investments, in our view, continue to be in the preferred share and mid-term corporate bond market. We continue to add selectively to those holdings, which generate substantially higher income levels than cash and which have somewhat limited downside.
Stocks have had a strong move off the lows seen last June as investors continue to assess new economic data as it comes out and use it to guess as to when the U.S. central bank will begin to slow down their monthly purchases of $85 billion of government debt. While investors in stocks don’t want poor economic numbers for obvious reasons, they are also apprehensive about numbers which are too strong since that could accelerate the so-called ‘tapering’ of monetary stimulus programs in the U.S. Stock market gains, however, are somewhat self-perpetuating in that money is often ‘dragged into the market’ as stocks rise since investors feel left out by the rally and under-performing institutional accounts are forced to ‘chase high stocks even higher.’ The big question now becomes whether this could potentially lead to a stock market ‘melt-up’ into year-end as investors force money into stocks. We would not want to see this as it would increase the chances of a more significant pullback once the momentum fades. If we see further strong buying into year-end then we will reduce stock market exposure accordingly.
In terms of our current view on stocks, we have updated our proprietary Asset Mix Indicator, shown below. Our composite indicator is currently at +2 (in a range of -10 to +10 with 0 being a neutral equity weight). This model therefore still has us in a position of being slightly overweight stocks within the asset mix of our balanced portfolios. The indicator is down from +5 last year around this time and from +7 at the market lows of March 2009 and September 2010.
