Wednesday August 13th, 2014
July can be summarized as a volatile month which initially saw a continuation of the equity market rally, but ended with a sharp correction lower into month end. Consequently, volatility came off multi-year lows, rebounding higher as equity markets sold off. Geopolitical concerns in Ukraine were front and center with the EU and U.S. jointly increasing sanctions on Russian entities to put a stop to the escalating conflict.
The U.S. economy strengthened further, with improving employment, manufacturing and higher inflation increasing the probability of a rise in interest rates. China equities strengthened with stronger manufacturing numbers. Europe was volatile as markets reacted to a potential bank default in Portugal.
In commodities, base metals outperformed while energy, precious metals and agriculture declined. Copper outperformed on improving manufacturing data in the U.S. and China. Oil declined as supply was not impacted by rising tensions in the Middle East. Gold and silver were uncharacteristically lower even as rising inflation and major geopolitical events affected the markets. Corn continued to decline after the WASDE report showed a 9% increase in corn acreage, a potential bumper crop for 2014/15. Soy also declined in anticipation of a bumper 2014/15 harvest.
In the credit markets, high yield sold off as general risk aversion and anxiety over higher interest rates caused investors to pare back.
The U.S. dollar rebounded across major currencies on improving interest rate differentials and safe haven demand. The U.S. dollar was up to 1.09 levels versus the Canadian dollar by month end. The weaker Canadian dollar was attributed to weaker energy prices and the BoC’s continued commitment to low rates.
The Fund declined in the month of July which was attributed to a decline in value equities and FX volatility. The best performing sectors were financials, materials and industrials, while the worst performing sectors were utilities, energy and consumer discretionary.
The best performing stocks were George Weston, LyondellBasell and Royal Bank. Weston gained in July as it benefitted from its majority ownership of Loblaws and Choice Properties. Loblaws reported Q2 earnings which beat expectations from lower interest expenses and lower share count; they also achieved their integration targets for Shoppers Drug Mart. This led to an upward revision in their NAV adjusting for the increase in Loblaws valuation. LyondellBasell was up during the month after commenting on a possible MLP conversion.
The Fund’s worst performing stocks were Entergy, Kraft Foods and Mattel. Entergy declined on the news that it had received a proposal from the DoE calling for the shutdown of their Indian Point nuclear plant for three months during peak season for New York State’s electricity grid. Kraft declined during the month after earnings showed that it was exposed to higher input costs and an unfavourable operating environment with declining volumes and lower returns on promotions. Mattel declined after earnings which showed a $0.06 eps impact from their MEGA Brands acquisition and a 14% decline in sales for Q2. The portfolio holds 18 U.S. equities and 22 Canadian equities, and continues to hedge USD currency exposure maintaining a net USD exposure at approximately 10% of the Fund’s NAV. The residual long USD exposure contributed positively to performance as the USD appreciated to 1.09 levels at month end.