Global equity markets remained volatile in the second quarter, largely influenced by the Brexit vote and the uncertainty this result created. A flight to safety after Britain voted to exit the European Union led to falling stock prices and bond yields reaching near all-time lows. Safe-haven assets (e.g. gold, U.S. dollar, Japanese yen) all rallied. Europe and Japan continued with their easing of monetary policy leading many countries’ interest rates into negative territory now.
The Canadian stock market remained positive with a strong 5.1% return in the second quarter of 2016. Outperformance in the resource sectors (Energy +9.5%, Materials +27%) were the main drivers of this strong performance. Gold companies led the way with the Gold Miner’s sub-industry index up 40% in the second quarter. The Health Care sector dropped another 15% in the second quarter, mainly due to ongoing concerns with Valeant Pharmaceuticals. There are concerns with the Canadian economy due to continuing low oil prices and the repercussions of the Alberta wildfires for the second half of 2016.
Foreign equity returns were again somewhat influenced by both the rise of the Canadian dollar in the second quarter of 2016 and the Brexit vote. The U.S. S&P 500 Index returned 2.8% in the second quarter and is up 8.2% over the one-year period. The MSCI World Index was up 1.3% in the second quarter and 1.4% over the one-year period (all in Canadian dollars). Largely as a fallout of the Brexit vote, the British market is down almost 9% so far in 2016. Both Europe’s and Japan’s economies continue to struggle with slow economic growth due to weak consumer demand and low business confidence.
The Canadian bond market returned 2.6% in the second quarter of 2016 with a one-year return of 5.2%. The Bank of Canada left its main policy rate unchanged again at 0.5% in the second quarter and remains somewhat cautious in its view of growth in the Canadian economy for the rest of 2016. The U.S. Federal Reserve also did not increase rates in the second quarter as they remained cautious about the level of global economic growth. Global disinflationary factors are driving inflation expectations and interest rates lower. Almost 30% of all global bonds now trade at negative real interest rates.