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1st quarter 2019

Richard Morin

Update :
24
April
2019
Update :
April 24, 2019

After a significant decline in the last quarter of 2018, the stock markets experienced strong growth in the first quarter of 2019. Indeed, the change in tone of the central banks as well as the truce between the United States and China were able to revive the markets.

Asset classes Returns in $C
1st quarter YTD
Bonds 2,53% 2,53%
Equities
- Canadian 13,30% 13,30%
- American women 11,27% 11,27%
- International (EAFE) 7,68% 7,68%
- Emerging markets 7,26% 7,26%
Real estate investments (REITs) 15,76% 15,76%

The last quarter was exceptional for all asset classes, which all finished in positive territory. During periods of strong growth such as this, it is easy to forget that markets are subject to cycles and that a downturn could occur.

Unfortunately, it is not possible to predict such declines. Attempting to position ourselves based on our "predictions" leads to poor returns. The best strategy is to adopt a good asset allocation and maintain our long-term strategy.

The federal budget of last March attacks certain exchange-traded funds (ETFs) that use derivatives to turn their returns into capital gains. Archer clients will not be affected by these measures as these "structured" ETFs are excluded from our investment universe. We only use ETFs that invest all of our clients' assets in the securities underlying the index they are replicating.

Canadian equities: 13.3% rebound

Buoyed by returns from the technology, health care and energy sectors, Canadian markets ended the first quarter of 2019 with a return of 13.30%. January of the same quarter was also the best start to the year for our markets in over 30 years.

This result would not have been possible if it were not for the recovery in the price of a barrel of Canadian oil (WCS), which had fallen sharply during the last two quarters of 2018.

U.S. Equities: The Fed is backing off

As we reach the end of a cycle and investors are nervous, the Fed's policies are impacting U.S. market yields more than ever. Just a few months ago, the U.S. central bank announced that we should expect to see a tightening of monetary policy in 2019, but the Fed changed its tone on future rate hikes earlier this quarter. In March, it announced that it did not expect any rate hikes for the year. This reversal of fortune helped to restore investor confidence. The return on US markets was 13.6% (11.27% in CAD) during the last quarter.

International stocks: new rates?

International developed market equities returned 9.98% (7.68% in CAD) in the first quarter. Italy, Hong Kong, the Netherlands and Switzerland were the best performing countries in this category. Conversely, heavyweights such as Japan and Germany underperformed this asset class.

Now that the Trump administration has renegotiated its trade agreements with Canada and Mexico, and is hinting that a deal with China may soon be in the works, it is fair to ask which country it will target next. Germany and Japan would be obvious targets given their strong impact on the U.S. trade deficit.

Due to a poor start to the year and the threat of tariffs, the European Central Bank has announced that it will implement various stimulus measures to support the economy. These measures should help support consumption and help stabilize their economy.

As for the United Kingdom, it is mired in Brexit. Already twice this year, the British Parliament has rejected the agreement presented to it. The possibility of a "hard" Brexit is starting to become an increasingly plausible scenario for investors. It will be interesting to follow the development of this issue.

Emerging markets: on the road to an agreement?

Over the past three months, emerging markets have returned 9.68% (7.26% in CAD). This performance was made possible by China, which represents a little less than a third of this index, but which generated more than half of its total return (5.4%).

Among the emerging economies, the service sector fared best, while the manufacturing sector, which usually dominates in these economies, got off to a slow start.

The U.S.-China agreement negotiation appears to be going well. The U.S. has decided not to apply additional tariffs to Chinese imports following the first 90 days of talks

Bonds: a good quarter

In order to stimulate the Canadian economy, the Bank of Canada left its key interest rate (1.75%) unchanged. This expansionary approach is aimed at stimulating a slowing Canadian economy. The status quo adopted by the Bank of Canada was well received by the bond market, which had a good quarter with a yield of 2.53%. Like the Bank of Canada, the Fed also left its key rate unchanged.

Real Estate Investment Trusts (REITs)

REITs were once again our best performing asset class in the last quarter. Although all types of REITs had a good start to the year, it was the REITs with a strong presence in industrial and hotel properties that really stood out. Indeed, industrial and hotel properties have respectively generated returns of 21% and 19% in the first months of 2019. The asset class as a whole closed the quarter with a return of 15.76%. Canadian REITs are currently trading above their historical average, but well below their U.S. counterparts.