Financial digest

Overview

Risk of recession indicator

Low

Stock markets

Foreign equities generated a higher-than-expected return, with European and emerging market stocks posting their strongest performance in the past six months. In the U.S., the S&P 500 index set new records, although stock market valuations remain high. In Canada, equity markets are lagging. Earnings growth is supporting the markets, but the price of oil has dropped sharply. Valuations are slightly above the historical averages.

Global growth

The IMF forecasts global growth of 3.5% in 2017 and 3.6% in 2018, based on a recovery in commodity prices and an increase in investment spending. The U.S. economy should rebound, while China’s economy picked up in the first quarter. In Canada, first quarter economic growth was among the best of the G7 countries.

Policy rate

The Fed raised its benchmark rate—now between 1.00% and 1.25%—for the second time this year and the third time within nine months. Its quantitative easing program is winding down, given the low unemployment rate and the risk of a rise in inflation caused by wage hikes in a full-employment environment. In Canada, the policy rate remains unchanged at 0.50%, but the Bank of Canada has indicated that a tightening of its monetary policy should begin in 2017 rather than 2018.

Geopolitical situation

Global geopolitical tensions

With regard to Europe and Asia, the election of Emmanuel Macron in France seems to indicate a decline in populism, while the election of a minority government led by Teresa May in Great Britain suggests that Brexit negotiations will be difficult. Tensions with North Korea are adding to the climate of uncertainty, and China’s debt is undermining its financial strength. The eyes of the world will be on Germany during the fall elections.

In North America, the U.S. government has not been able to implement its economic program. In Canada, the economy slowed in the second quarter and the loonie fell in May before rebounding in June in response to the Bank of Canada’s change of posture. NAFTA renegotiations are a source of uncertainty.

Risks

1. Central banks are experiencing difficulties in convincing the stock markets that inflation rates will soon be on the rise.
2. Global economic growth could disappoint investors, a possibility that has not been factored into the markets.
3. The economy is still unable to withstand very high borrowing rates.

How will we manage the portfolios?

Because of their higher return potential, stocks are slightly overweighted relative to bonds. Opportunities lie in the choice of sectors and securities. To diversify sources of added value and reduce return volatility, two new external managers have been added to the FDP Canadian Dividend Equity Portfolio.