The rising interest rate environment – along with geopolitical shifting – is still sparking volatility in global equity markets, with the largest impact felt on bonds and emerging market securities. Looking forward, we can expect more of this volatility, driven by geopolitical inconsistency and rising yields, but we do expect the solid economic data to continue driving growth forward. The ups and downs can seem hard to stomach, but this trend is becoming a new normal. With positive fundamentals guiding us forward, it’s worth the ride.
As expected, volatility is on the rise, most recently fueled by bargaining tactics and a clash of egos that are threatening to provoke a trade war between the two largest economies in the world. Global markets were shaken by the news in March, as we see reflected in increased volatility and a drop in equity markets.
In February, we saw a reintroduction of volatility in the market. The steep drops early in the month were partially clawed back as cooler heads prevailed, but that left many investors with chilly reminders of the recession of 2008. Despite the perceived similarities, we believe this situation is far from the economic fall 10 years ago, as stated in our letter to investors here. Having said that, we see higher volatility persisting in the near future. In this economic update, we’ll talk about why volatility is here to stay and how to manage it. First, let’s start with a note on the Canadian economy.
Global equity markets have had a solid start to the year, particularly outside of Canada. Even with the stronger Canadian dollar offsetting some gains, most developed markets still performed very well. Emerging markets have also kept a strong pace as the China’s response to tighter credit quieted doubters as the market has chugged along.
Looking back over the past year, global equites ended up performing stronger than most analysts predicted, consumer confidence improved, volatility was down, and central banks kept inflation in check. All in all, besides weakness in the US dollar and underperformance in Canada, portfolios had a very strong year.
Following the election of Donald Trump in November 2016, the outlook for the year ahead held the promise of political volatility and, as a result, economic volatility. It’s fair to say that politically, we’ve been let down, but the market has actually had one of its least volatile years on record, and global markets are all in the black. In this update, we’ll look at the key drivers to this low volatility and discuss whether the trend will persist going forward.
Global markets surged in October setting a series of records throughout the month. For many investors, the question now is whether the current valuations are stretched or if there is still room to go. While there is no shortage of black swan events that could derail the current rally (i.e. North Korea and Washington), market fundamentals support the current valuations.
North American equity markets showed resilience to significant geo-political tensions and natural disasters in September. On one hand, the North Korean threat to the world escalated significantly with the latest nuclear test, while on the other hand hurricanes Harvey and Irma caused devastation in various parts of the US and the Caribbean.
In Canadian dollar terms, global developed markets evened out in August. While the month was relatively tumultuous from a geopolitical standpoint, economic news has remained much the same. The Canadian dollar has kept its relative strength versus the US dollar, driven partially on expectations of rising Canadian yields but, more importantly, on weaker demand for USD.