Market Review & Outlook
All asset classes – fixed income, Canadian equities, and global equities – produced a positive return in the first quarter. Equities continued to advance higher, with the MSCI World Index, up 5.8%, outperforming S&P/TSX Composite Index, which was up 2.4%, following an excellent performance in 2016. The FTSE Canada Universe Bond Index returned 1.2%, a significant rebound from the -3.4% return seen in the fourth quarter of 2016.
Not much has changed since last quarter in the economic landscape. The improvement seen in the global economy during the second half of 2016 continued into the first quarter of 2017. Economic data continues to surprise to the upside in both advanced economies and emerging economies, and as a result, forecasts for global economic growth have drifted higher. With economic growth around the world becoming more synchronized, the likelihood of economic momentum sustaining itself has improved. At this point, both the Organisation for Economic Co-operation and Development and the International Monetary Fund are forecasting stronger global economic growth in 2017 than in 2016, and for global growth to strengthen again to 3.6% in 2018.
What has changed however, is the euphoria surrounding President Trump’s pro-growth policies. Failure to repeal the Affordable Care Act along with House Speaker Ryan’s comment that the Republicans focused on health care first, because they were closer together on Obamacare repeal-and-replace than they were on tax reform, has created doubt in the new administration’s ability to implement tax cuts, new infrastructure spending, and reduced regulation. This doubt caused bond yields to move lower and has resulted in the underperformance of stocks, which benefitted most from proposed tax changes and from a “Make American Great Again” agenda. Taking a positive view, the failure to repeal the Affordable Care Act has put the Republicans under more pressure to deliver something substantial before mid-term elections next year. But even with this interpretation, it is fair to say that the expected stimulus provided by tax cuts and spending increases will be less and stretched out over a longer period than envisioned only a few months ago. Indeed, many of the risks we pointed out in our last quarterly report, such as the Republicans’ ability to stomach deficits, the risk that Trump interferes with the independence of the Federal Reserve Board (Fed), and rising protectionism still exist and as a result, our reasonably positive outlook may turn out to be too optimistic.
The range of potential outcomes may be wider than they have been in years, but our base case is still for improving real global economic growth and modestly higher inflation, which means higher growth rates for nominal GDP. This environment argues for higher bond yields, but it also supports rising equity markets because it is nominal GDP that drives government and corporate revenues, and hence corporate profits. This environment will remain reasonably positive until either inflation rises to concerning levels, causing central banks to put on the brakes, or until one of the many risks we discussed in our last quarterly report (or some unforeseen event) damage confidence and the economy. On the inflation front, our view is that nominal GDP, although better, is still too weak for inflation to start to feed on itself. On the risk front, we are monitoring several issues – Brexit, European elections, trade wars, etc. – and assessing their potential impact on the markets. Overall, the odds of a recession occurring over the next year or two seem low when you consider that employment is still strong; the Fed has only just started to increase rates; the yield curve is still upward sloping; the purchasing managers index is well over 50 at 57.2; there is still lots of capacity in the manufacturing sector; leading economic indicators are positive and housing starts are up year over year. As a result, moving to a defensive posture in our asset mix seems premature as there are few signs that a recession is on the horizon.
Based on the 18.6% return by the Canadian equity market over the last year, it seems obvious why Indigo, a Canadian book store, is using the slogan “The World Needs More Canada” on its bags. The slogan is commemorating Canada’s 150-year anniversary, but it could also point to how well-positioned Canada is among the world’s developed countries. Since the fourth quarter of 2007, Canada’s economy has cumulatively outperformed all other G7 economies, including the U.S. Canada’s fiscal position is also much stronger than the other G7 economies, providing Canada with the ability to spend on infrastructure, which the Federal government remains committed to as outlined in its most recent budget. Now that the oil shock is behind us, Canada’s economy is closing the gap with the U.S. In fact, economic growth is expected to rebound in 2017 and be on pace with U.S. growth this year which should lead to a decent rebound in corporate profits, especially in the energy sector. Despite elevated debt levels, consumers are showing resilience as a result of strong employment growth, rising housing prices, and low interest rates. Also, purchasing managers’ indices have been rising throughout the world and this usually implies rising industrial production and better economic growth which in turn will support industrial commodity prices.
However, Canada faces a couple of risks. The first is escalating housing prices, largely contained to Toronto and Vancouver. Steps have been taken to cool prices in Vancouver with some success, but Toronto’s market continues to move higher with existing home prices up 33% in March. Since neither higher interest rates nor weak employment growth (two crucial factors that can cause house prices to decline) are on the horizon, Mr. Morneau, Canada’s finance minister, has called a meeting with Ontario’s finance minister and the mayor of Toronto to find viable solutions. Higher prices have created incredible wealth for long-term home owners, but for new owners and those who do not yet own a home, the increased cost to carry a home or rent a home squeezes their ability to spend on other things. The good news is that policy-makers are serious about taking steps to curtail the market, while being mindful of the risks of unintended consequences. The second risk is oil prices. With U.S. oil production increasing, it’s important for the Organization of the Petroleum Exporting Countries to extend its agreement to cut production beyond the end of May so that the oil market remains in balance and prices hold at reasonable levels. With oil prices stabilizing around $50, we should begin to see some rebound in investment spending and employment in the energy sector. This will help relieve the regional disparity we see in the economy between energy producing provinces (particularly Alberta) where the unemployment rate has risen significantly, and non-energy producing provinces where employment remains resilient.
Asset Mix Direction
The Fund’s asset mix is close to its benchmark at this point, a position we view as reasonable, given the risks and the wide range of potential outcomes that investors face. It is also reasonable given that most asset prices appear expensive, with broadly similar potential returns. We have a slight bias towards equities over bonds, although the prospects for bonds have improved over the last 6 months. There is currently a cash position in the Fund, which we will deploy on market weakness.
For more information about Natixis Strategic Balanced Funds, please contact your financial advisor.
*Effective October 17, 2016, the portfolio manager for the NexGen Turtle Canadian Balanced Registered Fund and NexGen Turtle Canadian Balanced Tax Managed Fund («NexGen Turtle Canadian Balanced Funds») were changed to Cidel Asset Management Inc. and the NexGen Turtle Canadian Balanced Funds was renamed Natixis Strategic Balanced Registered Fund and Natixis Strategic Balanced Tax Managed Fund, respectively. The investment strategies of the NexGen Turtle Canadian Balanced Funds were changed on this date (indirectly in the case of NexGen Turtle Canadian Balanced Registered Fund) to reflect the investment style of Cidel and to provide for increased flexibility in achieving their investment objectives. NexGen Turtle Canadian Balanced Registered Fund seeks to achieve its investment objective through investing substantially all its assets in units of NexGen Turtle Canadian Balanced Tax Managed Fund.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
This release may contain “forward-looking statements” which reflect the current expectations of NGAM Canada LP and/or its sub-advisor, Cidel Asset Management Inc. (“Cidel”). These statements reflect the applicable management’s current beliefs with respect to future events and are based on information currently available to such management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements including, without limitation, those listed under the heading “Risk Factors” in the NGAM Canada LP’s NexGen Funds prospectus, which is available on NGAM Canada LP’s website and on SEDAR at www.sedar.com. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this release. Although the forward-looking statements contained in this release are based upon what NGAM Canada LP and/or Cidel believes to be reasonable assumptions, NGAM Canada LP and Cidel cannot assure investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this release and NGAM Canada LP and Cidel do not assume any obligation to update or revise them to reflect new events or circumstances.