ETF Portfolio - 1st Quarter Market Commentary

Erica Szczech - May 05, 2016
The first quarter of 2016 was characterized by extreme volatility and yet moderately positive total returns, leaving many market participants frustrated and under-invested.  Major market indices hit their respective lows in mid-February then recovere

The first quarter of 2016 was characterized by extreme volatility and yet moderately positive total returns, leaving many market participants frustrated and under-invested.  Major market indices hit their respective lows in mid-February then recovered consistently for the remainder of the quarter, driven by fierce rallies in the most beaten down sectors, e.g. energy, materials and financials.

 

Commodities staged a similar relief rally, with oil leading the charge up 46% from its low, and U.S. dollar strength reversed decisively, falling 12% against the Canadian dollar from its January peak.

 

These key reversals combined with large-scale fiscal stimulus supported Canadian equities and let to a strong +4.5% quarterly result. 

 

Technical backdrop: More balanced at present

 

Our market views have evolved from quite bearish in the fall and winter to more balanced now.  Looking at the S&P 500, the end of March saw over 90% of stocks trade above their 50-day moving average. Sector leadership show signs of early cyclical rotation, commodity complex has stabilized and fiscal and monetary stimulus continues to flow unabated. 

 

U.S. earnings season looks better than it is, with the worst negative earnings revisions since the financial crisis which makes it a challenge to expand. Revenue surprises have been better than last quarter, and earnings have come in +3.6% better on average, but tracking lower year over year.

 

Recent polls in the "Brexit" scenario which are unfolding, indicate a draw at 42% to remain and 41% to leave.  The referendum is on June 23rd and market signals indicate some nervousness of the undecided vote.  Although the likeliness of it happening may be low, it would be a major financial event which we must consider. The EU treaty sets out a 2-year time frame for departure but this understates the regulatory and legal complexity of the situation which we feel could take 4-5 years to complete.

 

Canada is improving but it is early days - the whole market is one big oil trade as we see in the Canadian dollar appreciation mirroring the price of oil. The outlook for energy is improving but remains decidedly mixed.

 

Portfolio Positioning

 

European and Asian equities continue to struggle for various reasons and remain underweight across all portfolios; however, Canada is demonstrating early signs of relative outperformance on the back of stabilizing commodity prices and significant fiscal stimulus. While risks remain, Canadian market and sector indicators have become more balanced, leading to a neutral position across the portfolios. 

 

The U.S. remains in clear geographic leadership and remains overweight, with sector preferences for technology, consumer staples, industrials and gold.  USD exposure has been shifted back to a modest overweight position following the move to neutral in late December.

 

Snapshot Market Views

 

                                    Sector                        Region

Overweight        Financial Services           Europe, Asia

                                 Industrials                       USA

 

Underweight     Consumer Staples                USA

                                     Gold                            USA

 

Please click here to read the full First Quarter Commentary.

As always, please let me know if you have any questions or comments.