Economic Outlook for the World’s Largest Economies —(Canada most sensitive to U.S. and Chinese growth)
U.S.—looking good after a very soft first quarter. Consumer sector, which accounts for 70% of growth, is benefitting from growing employment, rising wages, lower debt levels and improved housing prices. The potential for a Trump victory is the major cloud on the horizon.
China—growth is steady around 6.5%. Monetary and fiscal stimulus is supporting growth. Concerns about debt levels and imbalances remain: overcapacity in some industries, reliance on investment versus consumer spending, high personal savings and a limited social safety net.
Europe—uncertainty surrounding Brexit, if indeed it actually occurs, is hurting economic growth in Europe. The fallout from the 2008 financial crisis is still weighing heavily on this region — particularly the banking sector — so it is not in a strong position to weather the current storm. As a result, the European Central Bank is likely to implement further stimulus to support growth.
Global Equity Indices — (TSX a leader in the first half of 2016)
The TSX Composite is regaining some of the ground lost to other world indices over the last two years due mainly to the collapse in oil prices. The index is up 10% to the end of June. Should the TSX surpass our 2016 target of 14,200 and hold above it, the index would be in a new trading range with a potential target of over 15,000.
The S&P 500 is down 2.6% in Canadian dollar terms. The rise in our dollar and less commodity sensitivity is limiting the returns on U.S. stocks. Our research indicates U.S. stocks represent fair value and have attractive long term return potential.
EAFE (Europe, Asia and the Far East) has experienced a return of -7% in Canadian dollars. Brexit and disappointing weakness in the Japanese economy have hurt results. Indications are European stocks are undervalued and this reflects the weak growth outlook.
TSX Composite — (2016 return powered by Energy and Materials)
Financial Services—make up 36% of the TSX Composite. Banks and insurance companies are the largest components. The group is up 3% so far this year (not including dividends). While low interest rates make the dividends in this sector very appealing, they are a headwind for earnings growth.
Energy—20% of the Composite. This sector is up 17% due to the recovery in oil and decline in bond yields. Pipelines and energy producers have performed better than the less cyclical integrated companies. Pipelines offer very attractive dividend yields with modest growth potential—a winning combination in this low interest rate environment.
Materials—have recorded a whopping 51% gain so far this year and account for 14% of the TSX. Mining stocks have led the rally on the back of a higher gold price and improvement in base metals prices like copper. Fertilizer stocks have been held back by soft demand due to weak grain prices.