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Market Intelligence for Q3

We are happy to share insights from the Capital Markets Strategy team of Manulife Investment Management and their outlook for the third quarter of 2020.  The team of experts analyzes and interprets the economy and provide commentary and strategies on allocation among asset classes and geographic regions.   As Investment Advisor's, we work with our clients to make strategic portfolios that match your risk, time horizon and objectives.  While we may change the weighting tactically to take advantage of opportunities, the conservative approach is to have some exposure to most asset classes, rather than trying to move all assets to the asset class that did well in the most recent quarter.   We are summarizing views from our Capital Markets Strategy team for our investors.   The report used to inform this blog is found here. 

Looking back to where we've come from

In Canada, the S&P/TSX Composite Total Return Index regained almost 17% from its lows in late March, and as of June 30, 2020 the S&P/TSX index was -2.18%.  Weakness in the first half of 2020 stemmed from the world price of oil, and the lower interest rates dampened returns from bank stocks.

The US equity markets had the strongest rally in history with the S&P 500 (USD) index up 20% in Q2 and was +7.49% in the first half, or 11% in Canadian dollar terms.  US markets benefitted from an influx of liquidity and stiumulus from the US Federal Reserve and the US government.

International equities rallied in Q2 and by June 30th year to date returns of  the MSCI Europe (CAD) were -2.19% and MSCI EAFE (Europe Asia Far East) (in CAD) were at -0.82%.   Since Asia and Europe felt the effect of COVID-19 earlier, they were also earlier than North America in opening their economies.  

Fixed Income has benefited as global central banks continued their monetary support, keeping interest rates low.  The FTSE Canada Univers Bond (CAD) returned 5.15% up to June 30, 2020. 

Looking forward to the Q3 Outlook

In Canada, the C.D. Howe institute  has declared a recession.  The shut-downs of the first half of the year have resulted in Canada having its unemployment rate at the highest level in history, which means Canadian consumers are in a position to spend or support the economy.   The S&P/TSX is dominated by the Energy, Financials, and Materials sectors and these each face barriers to growth.  While oil prices may recover, they may not become high enough to support a full recovery.  A slow recovery for oil may limit the recoveyr in  the Toronto index and keep prices below their 2020 highs, so being selective regarding both sectors and individual businesses and stocks may be key for investing in Canada.  

The US economy also went into recession as a result of COVID-19 lockdowns.  US employment is improving but jobless claims have remained high.  The global economy appears to be in recovery and the US Purchasing Manager's Index is an early indicator we may see earnings growth begin in six months' time. US markets have been strong but uncertainty remains with the impact of COVID19, manufacturing of a vaccine, renewed China/US trade tentions, and the US election.  On the whole, the US appears to be on a path to recovery by the end of 2021.  

International markets (meaning non-North America, Europe, Australia, Far East) have shown improvement, but will continue to face risks from COVID-19 as well as geopolitical risks.  Projections from the International Monetary Fund are that many regions around the world could grow faster than the US in 2021.  Countries in the Eurozone have flattened their coronavirus curve and as their economies reopen, companies will benefit from increased demand and improved earnings.  While US equity markets have outperformed International equities in recent years, exposure to international markets or Asia can help provide appropriate diversification to a portfolio.  

While central banks have committed to keeping short-term interest rates low through 2022, yet long term rates are subject to market forces.  Monetary stimulus from increasing money supply and fiscal stimulus from public policy will combine to increase inflation and raise long-term interest rates.  Since rising rates means lower bond yields,  short-term bonds will out-perform longer-term bonds.  Corporate bonds have enjoyed a strong rally due to the stimulus and may continue to outperform government bonds.  Since some corporate bonds will default as corporations suffer under COVID lockdowns, security selection and credit analysis rise in importance.  The short-term moves of the Canadian dollar have been related to the global price of oil, more than to interest rates, and the Canadian dollar is expected to remain between US$0.75-0.77.   Fixed income investors will need to be flexible to go to different types of fixed income solutions in different environments.  

Always invest after speaking to your professional financial advisor.  As always, you may contact your advisor team to discuss how the Manulife Capital Markets Strategy team's Q3 Outlook Report may be applied to your situation.  During Ontario's state of emergency, our joint advisor team is available by phone, email, and video-chat.  It's another way that we are here for you.

  • Elaine Kelly, MBA CFP, FCSI,  Senior Investment Advisor, Manulife Securities Incorporated
  • David Wyatt, BA, B.Comm, CFP, Senior Investment Advisor, Manulife Securities Incorporated 
  • Katlin Wyatt, BA, Investment Advisor, Manulife Securities Incorporated
  • Diana Kancko, Executive Assistant, Manulife Securities Incorporated
  • Terry Wyatt, Executive Assistant, Manulife Securities Incorporated

 Click here for the full Manulife Capital Markets Strategy Outlook Report 

This publication contains opinions of the writer and may not reflect opinions of Manulife Securities Incorporated. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer or Manulife Securities Incorporated or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you, This publication is not meant to provide legal or account advice. As each situation is different you should consult your own processional Advisors for advice based on your specific circumstances.

The Advisors and Manulife Securities Incorporated ("Manulife Securities") do not make any representation that the information in any linked site is accurate and will not accept any responsibility or liability for any inaccuracies in the information not maintained by them, such as linked sites. Any opinion or advice expressed in a linked site should not be construed as the opinion or advice of Elaine Kelly, David Wyatt or Katlin Wyatt or Manulife Securities. The information in this communication is subject to change without notice.