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2nd quarter 2017: foreign investments save the day

Richard Morin

Update :
Update :
July 20, 2017

Once again, foreign investments saved the day inQ2 2017, despite the rising C$. International equities and emerging markets offered good returns while Canadian equities declined slightly. U.S. bonds also outperformed Canadian bonds as the yield spread between the 2 markets closed during the quarter.The second quarter again showed the importance of healthy diversification. The EAFE (Europe, Australasia and Far East) and emerging market indices continued to perform well and U.S. equities consolidated their first quarter gains while the Canadian stock market continued to lag. So far, this is the opposite of 2016 when the Canadian stock market was leading the pack.

Asset classesReturns in $C
 2 nd trimYTD
- Canadian-1,6%0,7%
- American women0,2%5,6%
- International3,6%10,6%
- Emerging markets3,0%14,4%
Real estate investments (REITs)0,0%3,6%

Equities: long live diversification!

For the year to date, the S&P 500 index of the U.S. stock market (in C$) is up 5.6%, propelled in large part by technology stocks, particularly heavyweights such as Facebook, Amazon, Google, Microsoft and Apple. The sorry spectacle offered by Donald Trump does not seem to worry investors too much.

International equities also had an excellent return of 10.6%. The wind of optimism blowing through Europe - symbolized by the election of Manuel Macron in France - is probably a factor. Stocks are up 20% or more in several countries. The United Kingdom did less well because of the anticipated impact of its withdrawal from the European Union, particularly on the important financial sector. In Japan, the increase is also more moderate than in Europe. The Japanese economy continues to be held back by structural rigidities and is facing demographic headwinds.

Emerging market equities have risen by 14.4% since the beginning of the year. Among the BRICs, the underperformance of Russia (-13.1%) was largely offset by India (16.1%) and China (13.7%). Several other smaller markets participated in the increase, including Turkey with a year-to-date performance of nearly 30%.

Bonds: rates are on the rise

We have been anticipating it for a long time, but it is now a fact: interest rates have begun to rise in Canada, as they have in the United States. It is expected that even the European Central Bank will start tightening its monetary policy in the coming months. Bond markets were quick to react: the yield on 10-year Government of Canada bonds rose from 1.4% in early June to 1.9% in mid-July. The spread between Canada and the U.S. has also closed, which has helped our position in U.S. bonds.

Real Estate Investment Trusts (REITs)

So far, REITs have been able to withstand the rise in bond rates. Their performance during the quarter was nil.


After several years of very accommodating monetary policy - short-term interest rates close to zero and massive injections of liquidity into the financial system - central banks are starting to raise interest rates. If confirmed in the coming months, this tightening of monetary policy will have an impact on all asset classes.

The impact will be immediate on the budgets of households that have taken out a variable rate mortgage. In turn, this increase could also lead to a correction in the price of residential real estate (condos, single-family homes and plexes) if it has the effect of reducing demand. Remember that Canada is one of the countries where residential real estate is the most expensive in the world in terms of average household income and rent levels. Although this is especially true in Toronto and Vancouver, other major Canadian cities will not be spared if there is a correction.

Rising long-term interest rates will also inevitably have an impact on the performance of financial assets - stocks and bonds. For this reason, our return assumptions are conservative for the next 3 to 5 years