Market Commentary – First Quarter 2016

The investment results in the first quarter of 2016 were almost a complete reversal of the equity returns in 2015. Commodity prices rebounded strongly in the second half of the first quarter, especially oil prices and most metal prices. These price increases led to a large and surprisingly quick rise of the Canadian dollar since its movement is closely correlated to oil prices. Interest rates were also held steady in North America. Europe and Japan continued with the easing of their monetary policies leading their interest rates into negative territory now.

The Canadian stock market returned a very positive 4.5% in the first quarter of 2016 after dropping -8.3% for the year in 2015. Outperformance in the resource sectors (Energy +8.9%, Materials +20%) and defensive sectors (Telecommunications +11.5%, Utilities +9.6%) were the main drivers of this strong performance. The rise in resource stocks was not so much based on improved fundamentals as it was on investors willing to take on more risk. The Health Care sector dropped 67% in the first quarter, reflecting ongoing concerns with Valeant Pharmaceuticals, which dropped 75% in the first quarter.

Foreign equity returns were largely influenced by the strong rise of the Canadian dollar in the first quarter of 2016. Negative returns in U.S. equities (-4.9%) and global equities (-7.2%) in the first quarter of 2016 were a large reversal from their strong returns in 2015. The Canadian dollar rose approximately 7% against the U.S. dollar in the first quarter which reduces our foreign equity returns when these investments are translated back into Canadian dollars. U.S. equity returns are up 4.4% over the one-year period and global equity returns are now negative over the past year at -1.4%. Although the U.S. economy has shown some strengthening, this has not been the case in most other foreign countries. Both Europe and Japan’s economies have been struggling with poor consumer demand and weak business confidence.

The Canadian bond market returned 1.4% in the first quarter of 2016 with the one-year period return now at only 0.8%. The Bank of Canada left its main policy rate unchanged at 0.5% in the first quarter and expressed a somewhat guarded view of growth in the Canadian economy for 2016. The U.S. Federal Reserve also provided a less optimistic view of their improving economy leading to a lowering of expectations around the size and/or frequency of any U.S. rate hikes in 2016. Almost 30% of all global bonds now trade at negative real interest rates.