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4th Quarter 2018: Correction

Quarterly review

Richard Morin

Update :
Update :
January 31, 2019

2018 marked the end of the party. The U.S. president finally moved forward with his protectionist policies that raise fears of a slowdown in global trade. The U.S. also began tightening monetary policy which had repercussions around the world.

Asset classes Returns in $C
4th quarter YTD
Bonds 1,77% 1,39%
- Canadian -10,10% -8,88%
- American women -8,70% 4,25%
- International (EAFE) -7,66% -5,99%
- Emerging markets -2,22% -7,39%
Real estate investments (REITs) -3,18% 6,30%

The year 2018 can certainly be characterized as a ''bad year'' in the financial markets. The equity indices presented above all closed the year in negative territory in their respective currencies. However, the appreciation of the other major currencies against the loonie will have allowed Canadian investors to mitigate the impact of these declines in their portfolios.

For Canadian investors, bonds, U.S. equities and REITs ended the year in positive territory, while Canadian, international (EAFE) and emerging market equities declined. In this type of context, it is important for investors to be well diversified in order to stabilize their portfolio.

Canadian Equities

The two largest sectors in the index, Financials and Energy, both declined during the year, returning -12.6% and -21.5% respectively. During the last quarter, investors became more critical of the banks' ability to maintain their earnings in the future. As a result, their share prices fell and their price/earnings ratios fell to their lowest levels in 10 years. The Canadian index had its worst year since 2008 with a decline of 8.88%.

U.S. Equities

The surge in the U.S. markets combined with the appreciation of their currency allowed Canadian investors to have an exceptional start to the year with a 14.18% (10.57% in USD) return on this asset class as of September 30. The beginning of the fourth quarter was marked by a statement from the U.S. Federal Reserve that was interpreted by the markets as suggesting a significant number of rate hikes for 2019. This announcement was one of the triggers for the correction in the final quarter that erased the 2018 advance in U.S. markets. Fortunately, the strength of their dollar worked in our favor, allowing us to close the year with a return of 4.25% (-4.38% in USD).

The inversion of the yield curve is another element that has negatively impacted the markets in recent months. Historically, curve inversions have been followed by economic downturns. In contrast, SP500 companies performed well in the third quarter of 2018. More than three-quarters of them even beat analysts' forecasts. Unfortunately, this performance was not enough to convince the market, which lowered its growth forecasts for 2019, thereby impacting the price.

International Equities

Trade protectionism, geopolitical uncertainty and tightening U.S. monetary policy affected international equities in 2018. During the first three quarters of the year, international equities had still managed to limit the damage and posted a return close to 0%. This asset class finally weakened in the last quarter to end the year with a return of -13.78%. The depreciation of the Canadian dollar against the Yen, the Euro, the British pound and the Swiss franc allowed Canadians to obtain a much more reasonable return of -5.99% in CAD.

Emerging markets

2018 was undoubtedly a difficult year for emerging countries. These countries were hit by the new trade policies of the US. The rise of the U.S. dollar also affected these countries with a significant portion of their debt denominated in USD. The slowdown in growth in China, which accounts for nearly 30% of the emerging countries index, weighed on the balance. This asset class had a slightly negative quarter with a return of -2.20% in CAD, which brought its return to -7.39% (in CAD) for the year.

On December 1, the United States and China agreed to a 90-day "ceasefire. This truce is intended to allow the two countries to negotiate a free trade agreement. While this is a step in the right direction, the markets did not find this initiative sufficiently reassuring, believing that 90 days would not be a reasonable amount of time to work out such an agreement.


Fixed income once again played its diversification role. While most major asset classes had a poor fourth quarter, Canadian fixed income returned 1.77%. While the return expectation of this asset class is lower than that of equities, it is also much less volatile and particularly important during corrections.

In the last year, the Bank of Canada has raised its key interest rate three times and it now stands at 1.75%. These measures had to be taken by the Bank of Canada to allow it to control the Canadian economy which was starting to get out of control. As these hikes have begun to yield the results the bank had hoped for and global growth is slowing, the Bank of Canada has begun to adopt a more cautious tone regarding future hikes.

Real Estate Investment Trusts (REITs)

2018 was a good year for Canadian REITs. A growing economy, low vacancy rates, and stable long-term interest rates helped this class stand out. Canadian REITs returned 6.30% in 2018.