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Investment Commentary |
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Economic and Capital Markets Monthly Update |
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August, 2010
Volume 3, Issue 8 |
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July, 2010
Volume 3, Issue 7 |
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June, 2010
Volume 3, Issue 6 |
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May, 2010
Volume 3, Issue 5 |
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April, 2010
Volume 3, Issue 4 |
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March, 2010
Volume 3, Issue 3 |
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February, 2010
Volume 3, Issue 2 |
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January, 2010
Volume 3, Issue 1 |
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December, 2009
Volume 2, Issue 12 |
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November, 2009
Volume 2, Issue 11 |
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October, 2009
Volume 2, Issue 10 |
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September, 2009
Volume 2, Issue 9 |
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August, 2009
Volume 2, Issue 8 |
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July, 2009
Volume 2, Issue 7 |
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June, 2009
Volume 2, Issue 6 |
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May, 2009
Volume 2, Issue 5 |
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April, 2009
Volume 2, Issue 4 |
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March, 2009
Volume 2, Issue 3 |
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February, 2009
Volume 2, Issue 2 |
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January, 2009
Volume 2, Issue 1 |
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December, 2008
Volume 1, Issue 11 |
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November, 2008
Volume 1, Issue 10 |
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October, 2008
Volume 1, Issue 9 |
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September, 2008
Volume 1, Issue 8 |
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August, 2008
Volume 1, Issue 7 |
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July, 2008
Volume 1, Issue 6 |
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June, 2008
Volume 1, Issue 5 |
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May, 2008
Volume 1, Issue 4 |
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April, 2008
Volume 1, Issue 3 |
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March, 2008
Volume 1, Issue 2 |
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February, 2008
Volume 1, Issue 1 |
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February, 2008
Encore |
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January, 2008
Volume 12-2 |
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January, 2008
Volume 12-1 |
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December, 2007
Volume 11-24 |
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November, 2007
Volume 11-23 |
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November, 2007
Volume 11-22 |
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October, 2007
Volume 11-21 |
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October, 2007
Volume 11-20 |
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September, 2007
Volume 11-19 |
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September, 2007
Volume 11-18 |
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August, 2007
Volume 11-17 |
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August, 2007
Volume 11-16 |
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August, 2007
Volume 11-15 |
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July, 2007
Volume 11-14 |
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June, 2007
Volume 11-13 |
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June, 2007
Volume 11-12 |
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May, 2007
Volume 11-11 |
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May, 2007
Volume 11-10 |
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April, 2007
Volume 11-9 |
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March, 2007
Volume 11-8 |
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March, 2007
Volume 11-7 |
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March, 2007
Volume 11-6 |
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March, 2007
Volume 11-5 |
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February, 2007
Volume 11-4 |
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February, 2007
Volume 11-3 |
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January, 2007
Volume 11-2 |
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January, 2007
Volume 11-1 |
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News & Announcements |
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Economic & Capital Markets Commentary |
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Economic and Capital Markets Monthly Update
February, 2010 - Volume 3 Issue 2
THE ECONOMY
Canada
The Canadian economy advanced 0.4% in November, growing for the third straight month and putting it on track for a 3.3% annual growth rate in the fourth quarter.
Nationally, 43,000 net new jobs were created in January, more than double expectations. The jobless rate dipped slightly to 8.3%, from 8.4% in December and a peak of 8.7% last August.
Housing starts jumped to 174,500 annualized units in December, well above expectations. The construction sector has created more than 51,000 jobs since July 2009 and should remain a firm support for the economy in 2010.
Ontario, which represents approximately 40% of Canada’s overall economy expanded in the third quarter of 2009 for the first time since the second quarter of 2008. Growth was broad-based with strength in domestic demand offsetting a decline in net exports.
United States
The U.S. economy is estimated to have grown at a surprising 5.7% annual rate in the fourth quarter, the fastest pace in six years.
The manufacturing ISM Index rose in January to its highest level in nearly 5 ½ years bolstered by continuing inventory rebuilding. However, spending on construction, particularly for offices and commercial use, remains very weak.
Auto sales ended on a high note in December with sales rising well above weak year ago levels. However, sales are still far below the trend for most of the last decade.
The housing market remains in a deep slump, hampered by the weak job market and tight credit, with prices still falling in key markets.
International
After six quarters of declining real GDP, the UK economy pulled out of recession in the fourth quarter but at only a meager 0.4% annualized.
Euro zone growth remains modest but there was improvement in the manufacturing, services and retail sectors in January.
The Chinese economy grew 10.7% year/year in the fourth quarter, the fastest pace since 2007. China is now very close to overtaking Japan as the world’s second largest economy and has replaced Germany as the world’s largest exporter.
Japanese industrial production rose for the ninth month in a row in November and is now down only 4% year/year. However, economic recovery remains fragile.
EQUITY MARKETS
The New Year started off with a flourish as the S&P/TSX Composite Index rallied to a new post-credit crisis high, with the Index reaching 12070. From there, however, profit-taking set in. As China moved to cool its economy and the debt crisis continued to brew in portions of the euro zone, global markets and commodities saw sharp sell-offs. In January, the S&P/TSX Composite Index posted a -5.4% return. Not surprisingly, sectors that led the market lower during the month included the Materials and Energy groups. Our long-term constructive outlook for Canadian equities has not changed. Given the sharp run-up in the market from the lows of last March, a correction should not be surprising or alarming. The global recovery thesis remains intact with the monetary backdrop very accommodating and supportive of equities. Emerging economies look set to post sharply higher growth in 2010 with China appropriately managing its growth. The difficulties within the Euro zone will ultimately be dealt with by the ECB. This correction may not yet have fully run its course, but we remain of the mind that this is a correction and not the end of the cyclical bull market for Canadian equities.
The US equity markets fell in January, with the S&P 500 ending the month down by 3.6%. Only the Healthcare sector posted a positive return in the month, ending up a modest 0.4%. Consumer Staples stocks performed relatively well also because of their defensive characteristics. On the other hand, Technology and Materials lagged the market due to profit taking and fears that recent economic growth is unsustainable. While employment and housing in the US are showing preliminary signs of improvement, both remain in a fragile state. The ISM manufacturing data continues to show that the US manufacturing sector is expanding at a robust pace. However, it remains uncertain whether this manufacturing activity will extend beyond a simple replenishment of inventories. Furthermore, investors remain fearful of potential default by Greece, and of recent steps taken by authorities in China to slow their economy’s rapid pace of growth. These issues argue for a volatile investment environment in 2010.
FIXED INCOME MARKETS
The DEX Universe Bond Index experienced strong gains in January of 1.84%, primarily driven by declining interest rates across all sectors of the Index. For example, the 10 year Government of Canada bond yield declined from 3.61% on December 31 to 3.35% on January 31. Even with this yield decline however, Government of Canada 10 year yields still remain firmly entrenched in a narrow range from 3.20% to 3.65% since May, 2009. As in the past several months, the corporate bond sector returns were the highest, returning 2.28% vs. Government of Canada returns of 1.50% and provincial bond returns of 1.99%. One of the reasons for the solid January bond returns was the effect of investors moving to the relative safety of fixed income investments during a period of substantial weakness in stock markets, not only in Canada but around the world.
We expect bond yields to continue to trade in a narrow range over the next few months as investors assess future economic growth prospects in Canada and the exact timing and extent of the Bank of Canada’s removal of monetary stimulus expected in the second half of 2010.
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| Canadian Economic Indicators |
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G.D.P. (real)
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0.6
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-2.5
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2.7
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Exports
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-5.5
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-14.1
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4.2
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Consumer spending
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3.1
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0.1
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2.5
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Business investment
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3.0
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-13.9
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1.9
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Corporate Profits (pre-tax)
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9.9
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-34.2
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12.7
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Unemployment rate (%)
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6.1
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8.3
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8.5
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Inflation Rate (all items)
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2.4
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0.3
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1.6
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| Interest Rate Trends (%) |
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Canadian Bank Prime
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3.50
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2.25
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2.25
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U.S. Bank Prime
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3.25
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3.25
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3.25
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30-Day Commercial Paper
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| Canada |
2.24
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0.36
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0.36
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| U.S. |
0.38
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0.20
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0.18
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5-Year Bonds
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| Canada |
1.69
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2.77
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2.46
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| U.S. |
1.55
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2.68
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2.37
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30-Year Bonds
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| Canada |
3.46
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4.08
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3.95
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| U.S. |
2.68
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4.64
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4.49
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Cdn./U.S. dollar
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82.05¢
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94.95¢
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93.42¢
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| Market Index Returns (%) |
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S&P/TSX Composite Index
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35.05
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-5.35
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-5.35
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S&P 500 Composite
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8.08
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-1.90
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-1.90
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MS EAFE (net)
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12.62
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-2.73
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-2.73
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MS Japan
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-9.07
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3.69
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3.69
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MS Pacific (ex Japan)
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47.89
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-5.15
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-5.15
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MS Europe
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16.92
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-4.25
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-4.25
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MS Emerging Markets
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53.00
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-3.90
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-3.90
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DEX Universe Bond
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5.41
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1.84
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1.84
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GWL Real Estate Fund (gross)
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1.61
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0.28
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0.28
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All returns are in Canadian dollars and include income.
Source: TD Newcrest/"PC-Bond, a business unit of TSX Inc. Copyright © TSX Inc. All rights reserved. The information contained herein may not be redistributed, sold or modified or used to create any derivative work without the prior written consent of TSX Inc."
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The views expressed in this commentary are those of GWL Investment Management Ltd. ("GWLIM") as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their representative for advice based on their specific circumstances. GWLIM is a subsidiary of The Great-West Life Assurance Company. Great-West and GWLIM are members of the Power Financial Corporation group of companies.
© GWL Investment Management Ltd. 2010
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