(all returns in Canadian dollars)
The fourth quarter of 2019 concluded a spectacular year for bonds and equities. Despite escalating trade tensions between the United States and China, protests against the political establishment in Hong Kong, Lebanon, Chile, Ecuador, and many other places, Brexit uncertainty, and a slowdown in the global economy, the year progressed in a surprisingly positive fashion. In the second half of the year, global markets soaked up additional stimulus from global central banks and a first phase deal between the United States and China to extend the longest bull market in history. During the fourth quarter data seemed to stabilize, headline risks dissipated and equity markets rose significantly around the world with a few indices at or near all-time record highs. During the quarter credit spreads tightened, developed market yields broadly rose and curves steepened, while central banks broadly held policy steady; the fourth quarter bond returns were weak to negative, but bonds still had a year of strong returns (mostly a result of the declining yield trend in previous quarters).
The Canadian stock market, in line with the rest of the developed countries, had another positive quarter, returning 3.2% (S&P/TSX Composite), led by the outperformance of four sectors. Information Technology (+10.8%) was the top performing sector, helped by a 25.2% increase in Shopify. The improved trade outlook helped the more economically sensitive sectors of Energy (+7.1%) and Industrials (+5.2%) outperform. The Materials sector was up 7.8% with gold (+8.4%) and silver (+21.2%) stocks continuing to perform well, despite economic sentiment turning more positive. On the other hand, rising bond yields led to a rotation out of Real Estate (-2.4%) and Consumer Staples (-3.9%). Health Care (-5.9%) was once again the worst performing sector, as cannabis stocks extended their losses into the fourth quarter. It is important to note that while 2019 was a very strong year for Canadian equities (22.9%), it was also one with narrow leadership, making it difficult for active managers to keep pace.
Another strong quarter of performance in developed global equity markets capped off a very robust year as the MSCI All Country World Index rose almost 27% in 2019, the strongest performance since 2009. A surge in U.S. technology giants and a strong recovery in Eurozone and Asian stocks drove the rally. The MSCI All Country World Index (ACWI) was up 7.8% in the fourth quarter, led by MSCI Emerging Markets (up 9.6%) and S&P 500 (up 6.9%), followed by the MSCI Europe (up 6.6%), MSCI Japan (up 5.4%), and Pacific ex Japan (up 3.6%). Across the globe, growth sectors, such as Technology and Health Care, generally outperformed cyclical (Industrials, Energy, Materials) and defensive rate-sensitive sectors (Staples, Utilities, Real Estate).
Bonds posted solid gains for 2019, with sovereign bonds in developed markets falling in the 5% to 8% range. Monetary easing occurred globally, with central banks in the U.S., Europe, Japan, and China lowering rates and/or restarting quantitative easing. In the fourth quarter, yields rose and central banks broadly held policy steady, resulting in weaker quarterly numbers. Similarly, Canadian fixed-income markets posted strong annual numbers (6.87% FTSE TMX Canada Universe Bond Index), but negative returns (-0.85%) for the fourth quarter – Canadian yields rose across the maturity spectrum, with the Canadian 10-year yield rising 34 basis points (to 1.73%). The Canadian central bank kept its overnight rate at 1.75%, leaving it with one of the highest policy rates across developed economies.