June 2019
Our outlook is focused on tension between politics, policy and the positioning of the corporate sector. The world economy remains vulnerable to the U.S – China power play. If tariffs persist or are ramped up further, already weak world trade volumes will struggle to gain traction. In addition, rising political conflict (Brexit and Italy) and uncertainty have weighed on business sentiment over the past year and global capex is stalling. The dovish stance by central banks supports our Stagnation outlook for the U.S. economy as growth is capped over our forecast time horizon of twelve months.
China is committed to maintaining 6% growth and will respond to any slowing with further easing.1 The U.S. and China have each raised tariffs and appear to be broadening the conflict to their respective tech sectors. The results of the European Parliament elections showed a significant step up in support for populist parties, who now control 28% of total seats in Parliament, up from 22% before. Turnout in the elections was low at 37%, some 30%-35% lower than may be expected in a general election or second referendum.2 The Brexit Party’s win (mostly at the expense of the Conservatives) sent the message that many voters are willing to support a no-deal.
In the U.S., the FOMC is ready to respond to slowing GDP and job growth. Consensus expects two rate cuts later this year. Job growth has slowed through May, with the latest jobs report showing only 150,000 jobs added on average over the three months through May, down from a three-month moving average for job growth of 245,000 as recently as January.3 Trade policy could dampen growth further as most of the data reports that have been released to date cover a period before the recent escalations regarding tariffs toward China. The U.S. administration is using trade barriers as a tool of broader foreign policy and is signaling it will no longer defend the rules based global trading order it helped create over the past quarter century. The US dollar, still one of the world’s strongest currencies, has been trading at close to the highest levels in two years.
In Canada, there are signs that the recent economic slowing is giving way to a recovery as oil production curtailments are less frequent and housing markets have come off their bottom. The current 1.75% Bank of Canada policy rate is consistent with an economy operating at or near capacity. Economic growth is expected to settle around its trend pace of 1.7%. Population aging, private indebtedness, and modest productivity gains mean a slower pace relative to history.
In May, the trade war levied its toll, sending equity markets into reverse. In contrast to the strong performance during the first four months of 2019, U.S. equities suffered. The S&P 500 lost 6.4%, while the S&P MidCap 400 lost 8.0% and the S&P SmallCap 600 lost 8.7%. Canadian equities posted losses in May, with the S&P/TSX Composite down 3.1%. The S&P Europe 350 dropped 4.7%, giving up all of April’s gains and moving into the negative territory for the second quarter. The S&P United Kingdom was down 2.9%. Asian equities dropped sharply in May. The S&P Pan Asia BMI declined 5.4%, with all 11 sectors finishing in the red. Fixed income performance was mostly positive, with Treasuries outperforming corporates. The 10-year U.S. Treasury Bond yield closed the month at 2.1%, down from the previous month’s yield of 2.5% (2.69% for year-end 2018, 2.40% for 2017, and 2.45% for 2016).
In June, we maintained the existing allocation between equities and bonds across all models. Allocation to equities remains at 30% in Tactical Conservative, 40% in Tactical Moderate Growth, 50% in Tactical Growth, and 60% in Tactical Aggressive Growth. Within equities, we eliminated exposure to the S&P SmallCap asset class and distributed the exposure equally between the S&P 500 and the S&P MidCap. We are of the view that smaller companies will feel the impact of the uncertainty that exists in the current climate while longer treasuries will continue to benefit from the downward pressure on interest rates and the relative attractiveness of interest rates in the U.S. versus the rest of the world.
Our outlook for 2019-20 has focused on tension between politics, policy, and the positioning of the corporate sector. Rising political conflict and uncertainty have weighed on business sentiment for a year and global capex is stalling. We will continue to monitor the data for growth, inflation, and recession 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
1 South China Morning Post. China lowers 2019 GDP growth target to 6-6.5 per cent range. March 5, 2019.
2 J.P.Morgan Economic Research. Global Data Watch. May 31, 2019.
3 Trading Economics, U.S. Non-Farm Payrolls. June 7th, 2019.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2019. Index performance is based on total returns and expressed in the local currency of the index.
