WEALTH Matters — FALL 2013

INVESTMENT MARKET COMMENTARY

Canadian stocks were flat overall for the third quarter, while US stocks continued their string of gains despite US budget and government shutdown issues. Global stocks gained mainly on the strength of a gradual recovery in Europe. In the graph below, the blue line shows the price movements of the Canadian TSX (red line), US S&P500 (blue line) and Global MSCI EAFE (green line) indices over the past 12 months. (Source: Yahoo Finance, October 2013)

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BONDS DROP IN 2013

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There are three investment themes that help us understand what has happened in Q3:

1. The increase in growth in the developed world and decrease in growth in the developing world.

2. The continued massive growth in debt by the United States and their continued bond buying program, and the uncertainty as to when that will be tapered off.

3. The gradual improvement in the US and European economies and return to normal stock market valuations.

And, as a result, investors’ appetite for risk seems to be increasing.

Fixed Income

It comes as no surprise that bond prices have declined and yields have gone up due to the anticipation that the United States Federal Reserve will eventually taper its US $85 billion per month asset purchase program.  In September the Fed confirmed that the program will continue unchanged for now, giving stability to the market.  The DEX Universe Bond returned 0.11% (C$) for the quarter ending September 30th.  The year to date performance is still negative at -1.57% (C$).

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Below are total returns in Canadian dollars for a variety of market indices (source: PC Bond Analytics, Guardian Capital Advisors).

US Equities

The S&P 500 reached a record high during the quarter with a return of 2.97% (C$).  The year to date performance stands at a very nice 23.84% (C$).  The marked improvement is a combination of the US Federal Reserve maintaining the current bond asset purchasing program and the continued improvement in the US employment and housing numbers.  The housing market is strengthening, with home prices climbing about 8% in July from the year earlier and sales activity is up 6.5% in the same time frame.  Applications for unemployment benefits hit their lowest level in over five years.

Canadian Equities

The S&P/TSX showed signs of strength in the quarter posting a gain of 6.25% (C$).  The year to date performance has now risen but only to a tepid 5.31% (C$), well below the S&P 500.  The improved Q3 performance was due to stronger performance in materials, energy, mining and financial sectors.  The utilities sector was the only laggard for the quarter.

Global Equities

The European market has improved tremendously from time of the European debt crisis two years ago.  Many companies within Europe are benefiting from reduced debt servicing costs, which is allowing them to reinvest for future growth to replenish inventories and provide shareholders with a better return on investments.  The MSCI EAFE posted a 9.15% (C$) return for the quarter and 20.06% (C$) year to date, almost equal to the S&P 500.

Outlook

The Canadian economy will continue to grow modestly but may not keep pace with the rest of the developed world’s recent liftoff.  Canada has benefited from a robust consumer spending and a hot housing market while many other countries suffered in the aftermath of the financial crisis.  Now that Canadian residents are holding increased amounts of financial debt, eventual rising rates rise will likely impact both housing and consumer spending.

The US economy will continue to improve as housing prices and employment gain ground. The Fed will not remove the bond purchase program until the recovery is more robust. And of course political fighting will likely rear its ugly head again.

Europe’s exit from recession and the strong performance of Japan are good signs for the global economy, although both still face significant structural barriers to growth. Despite the steepening yield curves in recent months, financial conditions should remain supportive of developed country demand.

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Total Return to Sept. 30, 2013, C$

1M

3M

6M

9M

12M

2Y

3Y

5Y

10Y

Canadian Fixed Income

 

 

 

 

 

 

 

 

 

91-day T-Bills

0.09%

0.29%

0.53%

0.76%

1.05%

1.00%

1.00%

0.93%

2.11%

DEX Universe Bond

0.52%

0.11%

-2.25%

-1.57%

-1.28%

2.03%

3.55%

5.63%

5.22%

DEX Government Bond

0.58%

0.01%

-2.52%

-2.16%

-2.05%

1.34%

3.16%

4.98%

5.00%

DEX Corporate Bond

0.40%

0.36%

-1.56%

-0.06%

0.73%

3.85%

4.58%

7.42%

5.83%

DEX High Yield

0.44%

1.61%

1.65%

3.28%

6.89%

10.20%

6.03%

8.88%

7.53%

Canadian Equities

 

 

 

 

 

 

 

 

 

S&P/TSX Composite

1.40%

6.25%

1.91%

5.31%

7.12%

8.14%

4.09%

4.81%

8.37%

S&P/TSX Equity Income

1.05%

4.71%

3.63%

8.98%

11.23%

11.70%

9.80%

9.56%

-

S&P/TSX Preferred Share

0.48%

-1.57%

-4.58%

-2.32%

-0.96%

2.70%

3.55%

5.70%

3.08%

S&P/TSX SmallCap

1.69%

7.96%

0.03%

0.67%

-1.34%

2.08%

-0.92%

5.73%

4.09%

S&P/TSX Sectors

 

 

 

 

 

 

 

 

 

Cdn. Energy

2.45%

9.25%

5.95%

8.76%

4.87%

7.69%

0.25%

-0.58%

9.70%

Cdn. Materials

-4.98%

4.54%

-19.29%

-27.67%

-32.48%

-19.19%

-15.00%

-2.88%

7.11%

Cdn. Industrials

5.07%

3.37%

3.27%

18.30%

27.82%

25.63%

13.17%

11.46%

9.41%

Cdn. Consumer Discretionary

3.34%

8.32%

17.67%

32.48%

39.93%

27.46%

13.48%

11.65%

7.25%

Cdn. Health Care

-3.73%

3.03%

14.61%

31.94%

26.83%

25.44%

24.35%

24.21%

4.21%

Cdn. Financials

2.17%

8.61%

9.58%

14.54%

22.31%

16.36%

10.69%

7.52%

9.72%

Cdn. Telecommunications

3.96%

3.91%

-4.72%

5.11%

9.80%

12.94%

13.22%

11.33%

11.76%

Cdn. Utilities

2.21%

-3.09%

-7.41%

-7.28%

-6.10%

-1.38%

2.47%

6.18%

8.44%

Cdn. Div. Metals & Mining

4.13%

13.03%

-8.09%

-20.42%

-9.97%

-1.29%

-10.53%

9.57%

18.71%

Cdn. Real Estate

4.88%

0.04%

-3.28%

-1.06%

1.94%

11.21%

10.10%

10.70%

10.54%

Global Gold

-11.48%

3.67%

-30.27%

-41.09%

-48.73%

-32.20%

-23.01%

-6.97%

-0.12%

S&P/TSX Cdn. REIT

2.93%

-3.00%

-9.88%

-8.42%

-7.60%

6.72%

8.48%

11.48%

10.81%

U.S. Equities

 

 

 

 

 

 

 

 

 

S&P 500 (LargeCap)

0.52%

2.97%

9.68%

23.84%

24.78%

24.03%

16.22%

9.36%

4.68%

Russell 2000 (Small Cap)

3.68%

7.83%

15.05%

32.00%

35.98%

30.32%

18.24%

10.49%

6.70%

International Equities

 

 

 

 

 

 

 

 

 

MSCI World (Net)

2.33%

5.84%

10.25%

21.25%

25.69%

20.30%

11.77%

7.19%

4.69%

MSCI Europe

4.48%

11.20%

14.94%

20.65%

30.64%

20.88%

9.37%

6.07%

6.15%

MSCI EAFE (Net)

4.66%

9.15%

11.87%

20.06%

29.41%

18.07%

8.43%

5.71%

5.11%

MSCI EM (Emerging Markets)

3.83%

3.61%

-1.29%

-0.82%

5.94%

8.49%

-0.04%

6.92%

10.12%