As we come to the end of the first half of the North American capital markets have essentially spun their wheels so far this year, with both the TSX and S&P 500 providing year to date appreciation between 1.5 and 2.5%. Although the noise surrounding the markets has led many investors to believe otherwise.
The market headlines continue to be dominated by the debt negotiations between Greece and the IMF and European Union Central Bankers. Without bothering to rehash the same detail as last week and the one previous to that, let’s just say there is no deal yet and deadlines continue to be extended. As one of Bond Desk economists put it today “It was supposed to be a line in the sand, but instead it’s just more useless sand”.
In North America we continued to see positive economic data points with Personal Income and Spending levels increased yet again in the month of May. Along with yet again stronger employment data we continue to rapidly approach the tipping point for interest rates to rise in the United States. As both the equity and fixed income markets adjust to price in the shift within the macroeconomic environment, so to should the individual investor.
Traditional fixed income assets such as government bonds or long term preferred equity typically perform very well when interest rates are declining, however when interest rates rise their prices tend to drop which can catch many people off-guard. Fixed Income assets such as floating rate and high yield bonds tend to provide better returns for investors during periods of rising interest rates, thus we have been increasingly shifting our fixed income investments towards them. Fixed income investing is similar to sailing in that when the wind is at your back and rates decline you go faster, when you are in a headwind and rates are rising you have to be very tactical and you tend to go slower.
For portfolios where an even greater control over the volatility and risk management is a priority then the employment of actively, alternative strategy management, such as Picton Mahoney Income Opportunities, Canso / Lysander Corporate Value and even Vertex Enhanced Income provide the very different tools one needs to better manage their fixed income.
Global equity markets have posted a very wide range of returns for investors over the first half of the year; however we would caution that not all markets are the same. To illustrate this point we need only to look at the Shanghai Composite in China, where investing is more akin to gambling that anything else. Even as the Chinese economy has showed signs of slowing, the Shanghai Index had risen just over 40% through May, while June has seen a very scary U-turn. This was highlighted by yesterday’s stunning 7.4% decline with 90% of all equities listed on the exchange posting declines of greater than 9% in just one day. This volatility illustrates our belief that emerging or smaller market equity indexes are better to be held within a globally diversified ETF, such as the MSCI EAFE Index ETF.
To put the benefit that a globally diversified ETF versus a single emerging market country ETF into context, the Shanghai Index was up 40% for the first five months of the year and is now teetering on the verge of entering a bear market with nearly a 20% decline this month alone. Whereas the MSCI EAFE Index ETF was up 15% and down 2% over those same time periods, with risk managed ETFs such as Purpose Tactical International Hedged Equity or First Asset Low Risk ETFs having provided even better downside risk protection.
The parabolic five month rise of the Shanghai Index ETF sounds fine and dandy, but I would much rather have the downside protection that diversified developed markets and certain risk management strategies provide.
This weekend marks the beginning of the quarterfinals playoff round for the FIFA Women’s World Cup. For those of you lucky enough to have tickets to the Canada England match tomorrow have a great time cheering on our team. For those of you who do not take comfort in knowing that you get replays and commentary, your own private bathroom and much cheaper snacks and drinks.
Go Canada Go!!
We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group