Friday July 22nd, 2016
- The Fund was negative this quarter as value and quality underperformed due to the global slowdown and Brexit fallout.
- European stocks were put under selling pressure due to the likelihood of other countries such as Italy, France, or Sweden following the U.K. out of the European Union.
- The U.K. was hit the hardest, with consumer discretionary and financial sectors bearing most of the losses.
- Japan was the second largest detractor, as flight to the Yen caused significant appreciation against the Pound, Euro, and to lesser extend the greenback. As the Yen soared, the equity markets plummeted with major exporters leading the fall across technology, healthcare, and consumer discretionary sectors.
- Going forward, we expect short term volatility as the effect of the Brexit dissipates.
This quarter, concerns over Brexit and uncertainty over the Federal Reserve’s interest rate policy outlook dominated global markets. The risk of potential events kept investors in a holding pattern ahead of the vote, prompting trading activity to move sideways in the months leading up to the U.K. referendum. The eventual decision to “leave” shocked the markets, which largely anticipated a “stay” vote in the preceding days. As a result, growth expectations for the Eurozone were lowered and the British Pound plunged as bond yields sank to multi-year lows. It also paved the way for possible additional exits from member countries which would exacerbate uncertainty for years to come.
In the U.S., the Feds’ path for another rate hike was shrouded in uncertainty. Therefore, the market had been priced in anticipation of multiple rate hikes this year. However, data that showed slowing employment, sluggish global growth and deflationary price pressures prompted Federal Reserve Chairman Janet Yellen to revert to a dovish stance.
Meanwhile, central banks in Europe and Japan initiated negative interest rate policies which accelerated a global hunt for assets with higher yields. The Canadian economy saw some slight upside surprises to GDP and jobs data. However, concerns over a housing bubble, and the expected drag to growth resulting from the Alberta wildfires in June dampened the country’s economic outlook for the remainder of the year.
Commodities rallied in general. Oil pushed through the $50 a barrel mark as supply and demand continued to adjust. Gold surged higher on safe haven flows and as a store of wealth in a negative yielding environment. Grains, specifically soybeans and corn, rallied as bad weather across South America and the U.S. negatively impacted the supply outlook.