July 16, 2014

The Perspective – Investors Rewarded with Strong Gains

Filed under: Uncategorized — MikeT @ 11:30 am

The first half of 2014 is now behind us! What started off as a banner year for Canadian athletes in the Sochi winter Olympics (where Canada won 25 medals including ten gold medals) has continued on the venerated grass courts of Wimbledon where young Canadian tennis players Milos Raonic and Eugenie Bouchard broke through to the semi-finals and finals respectively.  While Canadian athletes reaped the rewards of their efforts during the first half of 2014, so too have Canadian investors who in the middle of June finally saw the S&P/TSX index close above its pre 2008 credit crises high. 

In fact, thus far Canadian equities have led the way in 2014. Tthe S&P/TSX Composite Index gaining 12.86% (Guardian Capital LP), handily outpacing most other developed markets such as the S&P 500 and MSCI world’s indices which were both up 7.54% and 6.58%, respectively (Guardian Capital LP). 

While the Canadian economy has continued to gain traction there is some concern about the US economy which, due to an unusually harsh winter suffered a drop in economic output in the first quarter of the year. This drop in economic activity in the first quarter was largely caused by weakness in the housing sector, net exports and healthcare spending and has changed course in the second quarter which has seen improved economic data led by higher employment. Financial markets are nonetheless still wrestling with the US economies ability to sustain growth especially with the continued tapering of quantitative easing as the US Federal Reserve once again reduced monthly bond purchases from $45 billion to $35 billion (in June). This is now less than half the $85 billion a month it was pumping into the economy in 2013.

While the Sochi Olympics captured our attention in the first quarter, geo political risks led by Russia’s efforts to reclaim the Crimean Peninsula from the Ukraine captured our attention in the second quarter as did the renewed fighting seen in Iraq.  

In Europe, the second quarter was dominated by elections and saw the rise of anti-Europe parties throughout the European Union especially in France where the “Anti-EU National Front”  gained 26% of the vote.  June also saw the European Central Bank (ECB) cut interest rates to record lows and announce that for the first time it will begin charging banks on overnight deposits, in an attempt to force them to increase lending to smaller businesses. While the ECB stopped short of promising a US style Quantitative Easing program it did announce its intention to do more in order to stimulate economic growth.

Meanwhile, China has also struggled as the economy continues to be weighed down by the housing market. In a recent survey by Bloomberg, economists expect that GDP growth in China will be the lowest level in 24 years.

Although, the sustained efforts of the world’s central banks in providing monetary stimulus to financial markets appears to have positioned global economies to continue upon a path of slow recovery, there are still risks. Perhaps the biggest of which is the lack of volatility across asset classes which can sometimes be interpreted as over optimism amongst investors. As always optimism needs to be paired with balance.

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