In April we continued our Growth Outlook for the next six months followed by Inflation for the following six months.
Global momentum remains strong as the IMF forecasts 3.9% growth this year and next, the fastest since 2011 thanks to increasing investment and trade. The strength of global demand is leading to a significant increase in most commodity prices relative to last year. This is benefitting commodity exporting nations, such as those in the Pacific Alliance, where growth is expected to be much stronger than in 2017. While monitoring this we are also watching the intensifying standoff between the United States and China that threatens to flare up into the biggest trade confrontation since WWII. In addition, record levels of global debt could become a destabilizer and at the very least will lead to higher levels of interest rates around the globe.
China’s economic outlook is favourable. While we expect growth to decelerate gradually in 2018–19, China is aiming for 6.5% expansion this year. The Euro area has been running a primary fiscal surplus since 2014, which moved close to 1% of GDP in 2017. Over the past five quarters, nominal GDP growth averaged 4% annualized, compared with an average of 2.7% in the prior three years. Germany continues to lead with growth of almost 3% y/y by the end of 2017. A question on the monetary policy front is whether the ECB will make further asset purchases once the current round of QE comes to an end in September, or whether the program will be phased out more gradually.
The U.S. was already on a path toward rising fiscal deficits before the introduction of limited tax reforms. Unfunded social security obligations and health care expenditures were the main driver. Adding an extra U.S.$1.5 trillion to cumulative deficits over the next decade further erodes the deficit outlook. The current earnings season is expected to show significant support for equities as companies deliver on shareholder return from the tax windfall. Based on the recent FOMC minutes a rate hike at the June policy meeting is expected.
The Bank of Canada faces similar conditions to the Fed. Economic growth is solid, unemployment is low, and core inflation averaged 2% on an annual basis for a second straight month in March.
For Q1 2018, the S&P 500 ended down 1.2%, the first negative quarter in 9 quarters. The S&P TSX Composite fell 5% over the quarter and rates rose across the board. Gold held steady, rising 1.7%.
The month of March was challenging for U.S. large-cap equities, with the S&P 500 down 3%. Smaller caps performed better, as the S&P MidCap 400 and the S&P SmallCap 600 registered gains of 1% and 2%, respectively. International markets declined, as the S&P Developed Ex-U.S. BMI and the S&P Emerging BMI posted March losses of 2% and 3%, respectively. Canadian equities were slightly negative in March, with the S&P/TSX Composite down 0.16%. The S&P 500 Bond Index gained 0.15% in March, as high-quality and long-duration bonds outperformed for the month. The S&P U.S. High Yield Corporate Bond Index was down 0.45% for March as investor sentiment favored safer, higher-quality bonds.
Our outlook did not change from March and as a result we maintained our asset allocations across all models. U.S. Equity exposure ranges from 12% in Conservative, to 25% in Moderate Growth, Growth and Aggressive Growth while International equity allocations are 41%, 38%, 50% and 53% respectively. This highlights our view that Europe and the Asia Pacific regions are expected to perform well because of issues highlighted in the update.
We will continue to monitor the data for growth signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Fixed Income. March 31, 2018. Index performance is based on total returns and expressed in the local currency of the index. European regional index returns are expressed in Euros.