Staying Focused

The performance of global capital markets in Q1 2018 was characterized by fear and controversy resulting in unprecedented volatility.  Wide price fluctuations across all major asset classes undermined investor confidence as fears of trade wars and central bank policy errors took center stage.

We began 2018 with three major investment assumptions: 1) interest rate normalization would produce sub-standard fixed income returns hence our minimum allocation to this asset class; 2) stimulative fiscal policy led by recent US tax cuts would boost corporate profits and equity values thereby supporting our maximum equity allocation; and 3) Canadian economic performance would be negatively affected by a heavily indebted consumer, unfavourable conditions in the energy sector and a sizeable current account deficit leading us to underweight Canadian equities and to remain un-hedged on currency exposure.  Notwithstanding market turbulence, we see no reason to alter our investment posture.  We suspect that inflammatory remarks emanating from the White House on trade and regulation are politically motivated with an eye to influencing the outcome of the US mid-term elections to be held in November.  We do not believe this is the start of a Depression Era trade war.  Similarly, we believe that the Federal Reserve under its new Chairman Jay Powell will continue to prudently adjust monetary policy with the goal of interest rate normalization.  Recent fears of a Fed policy error are unjustified.

We remain focused on the favourable fundamental underpinnings of global capital markets and believe that portfolio returns will improve in subsequent quarters as market volatility subsides.  In our opinion, a multi-asset, multi-region portfolio will continue to provide the best combination of investment return and reliable risk management in a turbulent and emotionally charged atmosphere.


Equity Market

ETF Symbol

Price EPS 2018e

2018 Multiple

United States – S&P 500 SPY 263.15 15.77 16.7x
International Developed – MSCI EAFE EFA 69.68 4.98 14.0x
Canada – MSCI Canada EWC 27.56 1.93 14.3x
Emerging Markets – MSCI EM EEM 48.28 3.92 12.3x

*Prices and earnings are in US dollars; Prices as of market close March 29, 2018.  

Source: FactSet