Q3: Strong Growth, Flat Markets

While GDP growth soared, thanks to a rising loonie, market returns barely budged.

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Canada’s economy posted its best year-over-year growth rates in over a decade during the third quarter of 2017, the best economic showing among G7 countries. Nonetheless, the S&P/TSX Composite Index treaded water most of the period as the Bank of Canada hiked interest rates twice, further fuelling a jump in the value of the Canadian dollar that weighed on Canada’s export-oriented companies. Only in September, when the heavily weighted energy and financial sectors surged, did the index move solidly into positive territory, delivering a total return of 3.7%. Canada remains one of the worst performing equity markets in the developed world year-to-date.

Energy’s advance came as West Texas Intermediate crude (WTI) moved above $50 US/barrel, driven mostly by U.S. stockpiles declining as refineries disrupted by Hurricane Harvey resumed operations. Financials moved higher in response to rising global bond yields after the U.S. Federal reserve announced plans for unwinding its $4.5 trillion balance sheet and reaffirmed its case for interest rate policy tightening. Materials performed well as both industrial and precious metals were strong, the former on signs of continued growth in China, and the latter on geopolitical tensions. Consumer discretionary names were also strong. Sector losses were led by health care, and by utilities, staples and real estate – sectors considered bond proxies and that tend to underperform as interest rates rise.

The surge in the loonie held the S&P 500 Composite Index total return to 0.6% in $CAD terms, despite the index advancing throughout the period and touching new highs each month.

The surge in the loonie held the S&P 500 Composite Index total return to 0.6% in $CAD terms, despite the index advancing throughout the period and touching new highs each month. The Dow Jones Industrial Average fared slightly better at 1.0% $CAD. The enduring climb in stocks was driven by solid corporate earnings growth and economic data that continued to show the U.S. economy on a solid footing with little sign of inflation. Sector performance was led by technology, in particular the so-called “FANG” stocks (Facebook, Amazon.com/Apple, Netflix, Google).

The MSCI World Index climbed 0.9% $CAD, held back by the stronger loonie (in U.S. dollar terms the index advanced to record highs each month.) Almost all major equity markets rose during the period as economic data and corporate earnings remained firm. The OECD reported that, for the first time in a decade, all 45 countries it tracks were expected to grow this year. Asia Pacific and Europe posted strong regional performances, despite yen and euro strength pressuring Japanese and European equities. The MSCI Europe Index jumped 2.5% $CAD and MSCI Asia Pacific Index gained 1.2% $CAD.

This commentary is published by Investors Group. It represents the views of our Portfolio Managers, and is provided as a general source of information. It is not intended to provide investment advice or as an endorsement of any investment. Some of the securities mentioned may be owned by Investors Group or its mutual funds, or by portfolios managed by our external advisors. Every effort has been made to ensure that the material contained in the commentary is accurate at the time of publication, however, Investors Group cannot guarantee the accuracy or the completeness of such material and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. Investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm) and Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.

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