Markets Maintain Steady Progress
The first quarter of 2015 was characterized by strong performance from the U.S. equity markets, with the S&P 500 Index up 10.39% in Canadian dollar terms. Domestically, energy stocks continued to weigh on the Canadian market, which led to its comparatively weaker performance. The S&P/TSX Composite Index returned 2.58% over the quarter. Energy stocks began a modest recovery around the middle of March, and we are starting to see an increase in global merger activity as the historically low valuations of many energy companies draw out buyers.
All eyes remain on the U.S. Federal Reserve (Fed) as the capital markets try to anticipate when the Fed will start to increase rates, and by how much. Over the shorter term, the U.S. market has been impacted by changes in language from the Fed, and improvement in the broader economy as market participants place bets on when the current accommodative monetary policy will start to be retracted.
In Canada, the central bank continues to grapple with the effects of lower oil prices, lower government revenues and the likelihood of continued weakness in the Canadian dollar. A low Canadian dollar should help Canadian manufacturers and exporters in the short term. As the energy sector represents a large portion of our economy and capital markets, an anticipated stability in oil prices will restore some certainty to economic projections.
European markets did not start the year well, but gained strength throughout the quarter. The Greek debt crisis continues to create headwinds for the markets, however, lower energy costs, a weaker Euro and continued monetary easing by the European Central Bank (ECB) should help boost the eurozone economy this year. The ECB is unlikely to scale back monetary policy stimulus in the next 12 to 18 months.
For global equities, the ongoing weakness in the eurozone remains a principal concern and the risk of prolonged deflation remains real. European economies remain generally weak with the unemployment rate registering at 9.8% across all 28 EU members in February. This was nonetheless an improvement year-over-year. The ECB is being aggressive in its quantitative easing policy and the weaker Euro is a benefit for exporting companies who can sell in U.S. dollars and manufacture in Euros.
The North American mandates within IPC Private Wealth were negatively affected by weaker energy prices in most portfolios. However, our investment specialists in the North American dividend and value mandates have begun to increase their exposure to energy, with a selective focus on companies that can sustain their current dividend payout and companies that are trading at attractive valuations. Some strategies such as the North American Sector Rotation mandate remain uninvested in energy as managers wait for stronger signals that price momentum has changed in the sector.
As we move further into 2015, we believe that market expectations for a Fed rate increase in response to stronger U.S. fundamentals are likely correct. As the Fed normalizes its monetary policy, we expect to see increased market volatility in the short term. This is consistent with past experience in an increasing interest rate environment. We are confident that our investment specialists are mindful of the macro environment and committed to adding value in their respective disciplines.