After a turbulent start to the year in January where most major global markets saw a decline, we saw a reversal of sentiment in February. The S&P 500 Index, comprising of the 500 largest companies in the US, was up over 5% reaching its all-time highs, while the Canadian S&P/TSX Composite was up almost 4% during the month. Most other major global markets such as Japan and Germany closed the month in positive territory.
So what were the major themes during the month?
Greece & Ukraine situations abate
The Eurozone finance ministers approved a four-month extension to the Greece financial debt coming due, which provided a significant tail wind to the global markets. This was supplemented by the tentative ceasefire in Ukraine. By no means have these matters been resolved, but at the very least it took the investor focus away to other positive developments for the short term.
German & Japanese economies improve
The German economy expanded at an annualized rate of 2.8% in the fourth quarter of 2014, up from 0% in the second quarter of the year, which was quite encouraging. After a pause in the second half of 2014, the Eurozone economy appears to have fallen back in synchrony with the U.S. economy, as both continue to grow. Strong manufacturing data helped the Japanese equities to trade at 15-year highs. The weakening of the Yen clearly seems to have given a boost to the manufacturing and the export sectors. In fact, the Japanese equities are up over 30% in dollar terms in the past 2 years.
Some disappointments in the US
In the US, retail sales fell for the second month in a row. Despite oil prices falling significantly in the last 6 months, it appears that the consumers have chosen to save the extra money left in their pockets at the gas pumps, rather than spend. The Q4 2014 GDP reported at 2.6% in January was also revised down to 2.2%, which caused some concern to some, however the revision came in better than expected. The employment situation in the US also continued to improve.
Oil prices look for a new level, Canadian dollar fairly range-bound
After a significant decline in price since June 2014, Oil traded in a narrower range (between $48 and $55) for most of the month looking to find a new level. This took attention away from the debate over the impact of oil prices on the various sectors of the economy keeping the markets less volatile. As a result, the Canadian dollar was range-bound around USD 0.80 cents per CAD.
Tail wind for Canadian Equities
The Canadian markets saw a reversal of sentiment from January as Oil traded within a narrow range and the Canadian banks reported strong results. Three of the banks (TD, CIBC and Royal) also raised their dividends, taking the dividend yield in the sector to about 4%, while the Canadian government bond yields continue to stay near record lows.
10-Year bond yields back up in the US
As the global economies continued to improve, albeit at a moderate pace, the yield on the benchmark 10-Year US Treasury Note rose from 1.64% at the end of January 2015 to over 2% at the close of February 27th. In the meanwhile, the US Fed Chair, Janet Yellen, left the door open for policy tightening as early as June indicating they are in no rush to raise rates.
Did you know?
With positive economic developments in a number of major global markets, the market capitalization of global equities reached an all-time high to over $67 Trillion. This means from the low of $25.5 Trillion in March 2009, the gain of over $42 Trillion represents a 160% increase.
Source: Scott Grannis Blog
This means Canada’s current equity market capitalization of about US$ 2 Trillion (Source: World Federation of Exchanges) represents roughly 3% of the total global market capitalization, which shows the size of the opportunity that exists, to invest outside of Canada. It would be prudent for long-term investors, particularly those that wondering how to invest their retirement savings, to consider this opportunity to hold well-diversified portfolios with the appropriate level of global exposures.
There are still a number of concerns around the world that continue to weigh in on the markets from time to time, such as the Chinese growth engine slowing, the Russia-Ukraine standoff, any potential exit of Greece from the Euro Zone, the impact of weak commodity prices on several emerging markets (Brazil, Argentina, Venezuela), etc. There is also an ongoing debate about whether some of the markets, such as the US trading at its highs, are over-valued. In our opinion, these concerns are healthy for markets, as history tells us that equity markets often climb such walls of worry. Prudent investors only get concerned when there is a general feeling of euphoria in the markets, which we think is not the case today.
We believe long term investors should continue to remain fully invested in accordance with their investment plan, holding diversified exposures across various global markets.
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