3rd quarter 2018: appreciation of the loonie

Everyone was hoping for the American president to come to his senses, but he had something else in store for the world!

This summer was marked by a multitude of outbursts from Mr. Trump that had the effect of cooling the confidence of many investors.

However, the quarter ended on a positive note from an economic standpoint as the Canadian government finally found common ground with the United States which will result in the U.S.-Mexico-Canada Agreement (Mexico-USA).

At the time of writing, however, the fourth quarter is starting on a much less positive note, marked by severe market turbulence. The diversification of our portfolios and the discipline of Archer's approach will be put to work.

Canadian Equities

Although the Canadian economy and companies performed well in the last quarter, the markets had a negative performance of -0.57%. This decline was caused by a contraction in the price/earnings ratio. The deterioration of the multiples of Canadian companies reflects the escalation of tensions between Canadian and American leaders, which made investors fear the worst. Although it represents less than 2% of the index, the health care sector contributed significantly to limiting losses by closing the quarter up 31.2%.

At the time of writing this letter, Canada had agreed to the AEUMC a few days earlier. Unfortunately, Canada had to make some concessions during the negotiations, as it has limited negotiating power with the American giant. Nevertheless, this agreement is good news for the Canadian market which was affected by the climate of uncertainty. Reassured and knowing the rules of the game, Canadian companies will now be able to concentrate on their growth!

U.S. Equities

The strength of the U.S. labor market and the Trump administration's fiscal stimulus carried the S&P500 to an all-time high in September at 2940.9 points. The health care, technology and industrial sectors led the U.S. markets, which had their best quarter in over 4 years, returning 7.71% (5.93% in CAD). This performance reflects the fact that U.S. corporations reported earnings increases that exceeded analysts' expectations.

As we have seen in recent weeks, interest rate developments can have a significant impact on the markets at this stage of the economic cycle. It will be interesting to watch the U.S. Federal Reserve's statements, which are currently one of the key factors in market performance.

International Equities

The good indicators of the developed economies combined with the stimulus measures introduced by their governments allowed their markets to perform well in their respective currencies. Japan, Switzerland, Sweden and France, which together account for more than 46% of the index, performed well in the third quarter. Unfortunately, the appreciation of the Canadian dollar completely erased the gains of this asset class for Canadian investors. International equities had a performance of -0.32% in CAD during the last quarter.

Emerging markets

The emerging market index fell by -1.45% (-3.16% in CAD) in the last quarter. As mentioned in the previous quarter, trade tensions between the U.S. and these countries are particularly harmful for countries whose economies are mainly based on exports. In September, the U.S. introduced new tariffs that will affect $200 billion of Chinese imports. China in turn retaliated with new tariffs on $60 billion of American goods. This trade war has severely impacted the performance of Chinese financial markets, which declined by -7.51% (in USD terms) in the third quarter. The gradual withdrawal of foreign capital has also caused emerging market currencies to lose value, thereby increasing their credit risk. In addition to trade uncertainty, the risk of contagion from the Turkish crisis has contributed to this exodus of capital.

Bonds

For the second time this year, the Bank of Canada raised its key rate to 1.50%. South of the border, the U.S. Federal Reserve also raised its key rate to 2.25%.

The Canadian bond yield for this third quarter was -0.97%. During this same quarter, US bonds for the first time this 2018 finished in positive territory with a yield of 0.04% in US dollar terms. The year-to-date return for US bonds being -1.64%.

It is normal for bonds to produce a negative return when rates start to rise. However, they remain the best source of diversification in portfolios and an insurance policy against adverse economic scenarios.

Real Estate Investment Trusts (REITs)

Relatively low long-term interest rates and good economic conditions in Canada once again allowed the REIT to stand out with a return of 3.52% for the quarter. This asset class makes an excellent contribution to the portfolio in terms of returns and, to some extent, diversification.