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MAY 2015
Markets’ Review
X
Greece’s finances were yet again brought to question
in the month of May, as investors weighed the
prospects of a sovereign default. Greece faces a
potential exit from the euro zone if it fails to meet
obligations on €1.6 billion worth of debt in June. On
that note, fears of a “Grexit” contributed to mixed
performances on the equity and bond front during the
month.
Sluggish data out of the U.S. also dominated headlines
and led some investors to push back their
expectations for rate hikes by the U.S. Federal
Reserve (Fed). These concerns, however, were
somewhat tempered by Fed Chair Janet Yellen, who
reassured markets by saying it would be “appropriate
at some point this year” to increase the federal funds
rate if the economy continues to show improvement.
Here at home, the Bank of Canada kept rates
unchanged at 0.75% despite lacklustre data that
indicated the Canadian economy stalled in the first
quarter. The central bank also expressed concern over
the implications of slower growth south of the border,
given Canada’s reliance on the U.S. economy.
However, the bank’s Governor Stephen Poloz believes
Canada will rebound soon, eliminating the need for
further stimulus measures going forward.
Oil staged a brief rebound in the month of May,
exhibiting some volatility but trading within the
narrow range of $57-$61. Adding to uncertainty in this
sector was the election to government of the leftwing New Democratic Party (NDP) in Alberta. Some
critics believe the incoming government poses a risk
for already burdened oil producers in the region.
Meanwhile, a number of forest fires in Alberta cut
into Canadian crude oil production, which declined by
more than 15% in May.
Overseas, efforts of the European Central Bank (ECB)
in stimulating its economy began to bear fruit as
deflation concerns were somewhat alleviated. Core
inflation rose to 0.9% with the ECB affirming that its
quantitative easing (QE) program is beginning to pay
off. While this caused some uneasiness in markets as
investors began to speculate over an early withdrawal
of stimulus, the central bank somewhat eased fears
by stating that achieving its ultimate inflation target
Returns*
EQUITY INDEXES
May 2015
Year-toDate
MSCI World Index
3.50%
13.55%
MSCI EAFE Index
2.65%
17.40%
MSCI Emerging Markets Index
-1.07%
13.91%
Dow Jones Industrials Average
Index
4.45%
10.08%
S&P 500 Index
4.38%
11.25%
Russell 2000 Index
5.41%
12.06%
S&P/TSX Composite Index
-1.22%
3.79%
S&P/TSX Small Cap Index
0.26%
4.75%
* Total returns, expressed in Canadian dollars.
Source: Standard & Poor’s, MSCI, Bloomberg
of 2% depends on carrying the QE plan out to the
letter (end date is September 2016).
In Asia, exporters in Japan were somewhat impacted
by negative data out of the U.S. and China (its two
largest trading partners). Despite this, the Bank of
Japan did not employ more quantitative easing
measures and instead delayed the time frame as to
when it expects to reach its 2% growth objective.
Elsewhere, China continues to face overcapacity
issues and problems within its property market. In the
month of May, Chinese policymakers announced
another 25 basis point rate cut (third cut in five
months) to counter its ailing economy.
Heading into June, markets remain on uncertain
ground. However, consensus believes that the
slowdown in the U.S. during the first quarter was
“transitory” and better economic days lie straight
ahead. Increased U.S. momentum should subsequently
fare well for Canada’s respective growth problems.
This is the view of most voting members of the
Federal Market Open Committee (FOMC) in the U.S., a
view that may translate into interest rate hikes as
soon as September. That being said, the recent
flambé in the U.S. dollar combined with still benign
inflation, may keep the Fed sidelined until 2016, some
believe.
MARKETS’ REVIEW — MAY 2015
Canada
Canadian economic output declined by -0.6% in the first
quarter as lethargic growth in the U.S. weighed heavily on
exports. Gross domestic product fell by the largest amount
since the height of the financial crisis in 2009, tumbling to
the surprise of many experts, who forecasted a 0.3% gain.
Meanwhile, Bank of Canada Governor Stephen Poloz
defended his decision not to cut rates in May, reassuring
investors that Canada will eventually begin feeling the
benefits of the initial rate cut via the export and
manufacturing areas of the economy.
Canadian equities, as gauged by the broad-based S&P/TSX
Composite Index, ended the month in negative territory.
From a sector standpoint, Health Care, Consumer
Discretionary, Telecommunications and Consumer Staples
posted the largest gains.
The Health Care sector posted double-digit gains of 11.42%
in the month of May, propelled by Quebec-based Valeant
Pharmaceuticals, which returned 13.26% during the month.
Valeant Pharmaceuticals has surpassed Toronto Dominion
Bank (the second largest company in the S&P/TSX
Composite) in terms of market capitalization and is second
only to Royal Bank of Canada in size. The company has been
involved in a series of deals, with the most recent talks
centered on a possible acquisition of Egyptian-based Amoun
Pharmaceutical. Furthermore, the company recently had
its Xifaxan drug (used to treat irritable bowel syndrome)
approved by regulators.
Second to Health Care was the Consumer Discretionary
sector, which gained 5.23% on the month. From an
individual security standpoint, Amaya Inc. and Magna
International were among the best performing stocks
within this sector. Amaya Inc, one of the world’s largest
online gambling companies, posted first quarter earnings in
May and rallied thereafter. The company’s revenues
increased more than 2,500% this quarter relative to the
same quarter last year. Elsewhere, Magna International
also posted positive first quarter earnings results. Revenues
dropped by 7% to $8.33 billion but beat consensus
estimates. Earnings per share also beat estimates.
Telecommunications followed suit, yielding 1.71%. Among
some of the sector’s biggest gainers were Telus
Corporation and Manitoba Telecom Services. During the
month, Telus Corporation reported a 10% increase in its
quarterly profit, as revenues from its wireless and wireline
business segments continued to add value. In contrast,
Manitoba Telecom Services was upgraded during the
month by some analysts who believe that Allstream (a
division of the company) should become a more interesting
candidate for a buyout over the next year.
Meanwhile, the Consumer Staples sector returned 1.65% in
May, propelled by companies such as Cott Corporation and
Loblaw. Beverage producer Cott Corporation announced in
May that its revenue was up nearly 50% from the same
02
_
S&P/TSX Composite Index
Sector Performances ($CA)
May 2015
YTD
Energy
-6.04%
-0.47%
Materials
-0.71%
6.21%
Industrials
-3.46%
-5.30%
Consumer Discretionary
5.23%
7.97%
Consumer Staples
1.65%
1.91%
Health Care
11.42%
66.35%
Financials
-1.57%
1.11%
Technology
0.29%
8.80%
Telecom
1.71%
1.69%
Utilities
-2.63%
1.50%
Source: Standard & Poor’s
quarter last year. In contrast, Loblaw posted gains after
reporting an increase in first quarter profits. Net income for
the grocery chain soared by more than 21% compared to the
same time last year (rising to $146 million).
In terms of laggards, Financials, Utilities, Industrials and
Energy hovered at the bottom of the rankings table.
Within the Financials sector, Canadian banks posted strong
earnings results. National Bank of Canada hiked its
dividend after reporting a rise of 12% in profit while Royal
Bank of Canada, Toronto Dominion Bank and Canadian
Imperial Bank of Commerce also posted gains. Despite this
however, bank shares lagged and the Financials sector
ended the period in negative territory. The largest laggards
in the sector were AGF Management, Canadian Western
Bank and Home Capital Group.
Lastly, apart from the interest rate sensitive Utilities sector
- which continued to wane as investors anticipate a rate
increase south of the border – the Industrials and Energy
sectors were the two largest negative performers in May.
Within the Energy sector, Enerplus Corporation and
Trilogy Energy were among some of the biggest laggards.
Enerplus, one of North America’s largest producers of
crude oil and natural gas, posted a very weak first quarter
net loss of $293 million in May (compared to a net gain of
$40.04 million at the same time last year). Meanwhile,
Trilogy Energy was partly impacted by news that the New
Democratic Party (NDP) was elected into power in Alberta.
The NDP is talking about hiking corporate taxes, reviewing
oil and gas royalties and controlling emissions. This has
added to uncertainty in a sector that has already been
facing a myriad of difficult challenges.
In the Industrials sector, Canadian Pacific Railway was the
largest detractor, falling nearly 11% in May. Some investors
believe the oil price slowdown threatens to cut into
Canadian Pacific Railways’s revenues as less oil is
transported across the country. From a valuation
perspective, others believe the railway is overvalued
compared to the industry and a correction is warranted.
MARKETS’ REVIEW — MAY 2015
U.S.
Investors began reassessing their prospects for U.S. growth
in May, as first quarter gross domestic product was revised
downwards to -0.7% (down from a previously reported 0.2%
gain). The pace of economic activity was impelled largely
by poor weather and a rising U.S. dollar, which cut into
exporters’ top lines and contributed to widening the U.S.
trade gap.
While U.S. consumer confidence waned in this environment
(according to a gauge by the University of Michigan), U.S.
Federal Reserve Chair Janet Yellen appeared impervious to
the sluggish economic data and reiterated that she still
expects to raise rates this year if her expectations are
met. Core inflation (excluding food and fuel) rose more
than expected in April, suggesting that the Federal Reserve
is inching closer to achieving its ultimate goal of rate
normalization. Further solidifying the case was the
unemployment rate, which fell to a seven year low of 5.4%
in April.
Equity markets also appeared to shrug off the data, with
the S&P 500 Composite Index advancing by 4.38% in
Canadian dollar terms. Nine out of ten sectors ended the
period in positive territory, driven by the Health Care,
Information Technology, Financials, Consumer Discretionary
and Consumer Staples sectors.
The Health Care sector topped the rankings list, racking up
a gain of 7.72%. From an individual securities standpoint,
Humana Inc., Cigna Corporation and Regeneron
Pharmaceuticals were among some of the sector’s top
performers. Health-insurance company Humana soared on
the back of rumours that one or more industry players are
looking to make a bid on the company. Although
unconfirmed, one of the companies believed to be
interested in Humana is Cigna Corporation, another top
performer in May. Speculation that the next wave of deal
making activity in the Health Care space would soon take
place has been the subject of talks over recent weeks, with
low interest rates being one of the primary catalysts in the
current environment. Lastly, biotechnology company
Regeneron Pharmaceuticals also yielded positive returns
over the period. The company, which specializes in the
development of medicines and treatments for serious
medical conditions, saw its shares trade above $500 for the
first time ever in May, leading some analysts to believe that
the stock may be poised to go even higher.
The Information Technology sector followed suit during the
month, with Broadcom Corp, Avago Technologies and
Skyworks Solutions leading the charge. Both Broadcom
Corporation and Avago Technologies’ shares surged more
than 30% during the month on news that the two companies
were merging with one another. The $37 billion deal would
make the combined entity the third biggest company in the
semiconductor sector. Also in the semiconductor industry,
Skyworks Solutions’ shares rose more than 22% in May.
Some investors believe Skyworks could be a possible
03
S&P 500 Index
Sector Performances
_
May 2015
Year-toDate
Energy
-1.85%
6.34%
Materials
3.54%
12.72%
Industrials
3.39%
7.18%
Consumer Discretionary
4.42%
14.39%
Consumer Staples
3.92%
8.91%
Health Care
7.72%
18.40%
Financials
4.95%
7.69%
Technology
5.43%
13.48%
Telecom
1.23%
13.81%
Utilities
3.75%
2.42%
Source: Standard & Poor’s
acquisition target for the industry’s second biggest player
Qualcomm. Qualcomm is flush with cash but experiencing
somewhat of a slowdown in growth in an industry that has
seen much mergers and acquisitions (M&A) activity lately.
The Financials sector also had a good month. Although the
sector has not been particularly favoured by investors
lately, some feel it is poised for a turnaround.
Fundamentals appear strong, as a series of earnings
announcements and recent dividend increases have proven
to be positive on the whole. Also seen as positive are Fed
rate hikes and U.S. economic momentum. Some experts
believe that the slightest upturn in economic health could
have a hugely positive impact on the sector at large, as
consumers become more willing to borrow and loan
repayment rates begin to improve. In the month of May,
industry giants Goldman Sachs and JP Morgan figured
among the sector’s top ten performers.
U.S. retail sales fell in April according to a report in May.
Separate data also showed that consumer spending was
weak. However, manufacturing and construction picked up
pace towards the end of May, casting doubt over the
lacklustre data. In this environment, both the Consumer
Discretionary and Consumer Staples sectors yielded positive
performances. The top performers within these two
sectors, however, came from Consumer Discretionary, with
Cablevision, Time Warner Cable and Expedia leading the
charge.
Lastly, the only sector that ended in the red was Energy. In
the month of May, energy-related exchange traded funds
(ETFs) witnessed outflows of more than $1.5 billion. Oil
prices hit a high in May but since then detracted.
Meanwhile, U.S. crude stockpiles were the highest in more
than two decades, suggesting that investors may be
questioning whether the recent price surge was warranted
by demand. Over the period, Pioneer Natural and QEP
Resources were some of the sector’s largest laggards.
MARKETS’ REVIEW — MAY 2015
Elsewhere in the World
European investors continued to receive mixed signals over
Greece’s negotiation talks with creditors. Fears that the
indebted country would not be able to meet its bailout
repayments weighed heavily on sentiment and briefly
sidetracked the Stoxx 600 in May. Despite this, the broad
equity gauge eked out gains at month end. From an
economic standpoint, the economies of Ireland and Spain
continue to remain strong while those of France and Italy
faced a number of headwinds.
In Asia, Japanese equities were positive in May and
extended their year-to-date gains beyond 17%. According to
some experts, valuations continue to remain attractive
from both a historical standpoint and on a relative basis
(compared to the U.S.). Earnings also proved to be quite
impressive, as many Japanese companies in the first
quarter posted better-than- expected earnings (as a weaker
yen boosted competiveness for these firms).
Despite rallying sharply this year, Chinese equities plunged
at the end of May, a pullback that saw the Shanghai
Composite decline by 6.5% in just one day. The decline,
which came after a 15% rally during the 7 days prior,
sparked concerns over the possibility of a further
correction. Some experts have attributed the one day
decline to a removal of liquidity by the Chinese central
bank and cautioned traders not to overreact by dumping
their positions (given their belief that some significant
tailwinds still remain).
04
_
Returns
BOND INDICES
May 2015
YTD
FTSE TMX T Bill 91 Days Index
0.06%
0.33%
FTSE TMX Overall Universe
Index
0.20%
2.94%
FTSE TMX Overall Short Term
Index
0.40%
1.85%
FTSE TMX Overall Mid Term
Index
0.28%
3.27%
FTSE TMX Overall Long Term
Index
-0.13%
4.20%
FTSE TMX Corporate Universe
Index
0.22%
2.76%
FTSE TMX Government
Universe Index
0.19%
3.01%
J.P. Morgan Global Govt Index
0.88%
4.41%
Merrill Lynch High Yield Bond
Index*
0.34%
4.28%
* 85% MLHY “BB/B,” U.S. Cash Pay Index and 15% MLHY “C” U.S.
LEVEL
(London Close)
∆ May 2015
CAD/USD
1.211
3.05%
USD/EUR
1.121
-2.16%
CAD/EUR
1.357
0.83%
CAD/CHF
1.293
2.35%
USD/JPY
0.008
-3.57%
CAD/JPY
0.010
-0.62%
CURRENCY
Source: PC BOND, BofA Merrill Lynch
Cash Pay Index.
Fixed Income and Currencies
Signs that economies are responding to central bank stimuli
in certain areas of the world, as well as an overall lack of
liquidity, contributed in part to a sell-off in global bond
markets in May. Inflation in the euro zone has recently
ticked up for the first time in six months while regulations
requiring market intermediaries to mitigate risks
contributed somewhat to a liquidity drought.
Though bond yields soared in most areas of the world under
these circumstances, the largest increases were seen in
Europe (with the exception of the United-Kingdom and
Switzerland). Meanwhile in the U.S., 10 year treasuries rose
marginally as the prospects for interest rate increases
continue to remain data-dependant. In contrast, yields in
the emerging markets plummeted, spurred by declines in
Russia, Turkey, Brazil and India. Yields in certain Asian
countries such as South Korea and Taiwan also fell in May.
In Canada, the FTSE TMX Canada posted gains as shorter
and medium term issues outpaced their longer term
counterparts over the period.
On the whole, high-yield bonds emerged once again as one
of the top performing securities in the fixed income
universe, as did emerging U.S. denominated bonds.
On the currency front, an improvement in U.S. economic
data (after a weaker first quarter GDP revision) and a
reassurance by the U.S. Federal Reserve that rates would
most like go up in 2015, curtailed worries that rate hikes
would be postponed. In this environment, the U.S. dollar
regained its vigour and outpaced the euro, Japanese yen
and British pound.
The Canadian dollar moved in lockstep with oil prices and
ended the month lower against the U.S. greenback, as
Canada’s economy was shown to have contracted the most
in four years.
MARKETS’ REVIEW — MAY 2015
Point of Interest
05
_
What does the future hold for the Health Care Sector?
The number of Health Care companies in investors’ portfolios has
gradually increased in recent years. This trend has largely
contributed to outperformance in this sector, which rallied more
than 9% in 2015 and nearly 140% in a little over five years (see this
in the graph on the right). Demand for this “defensive” sector has
been rampant as a number of central banks worldwide have begun
easing, interest rates hover near record lows and market
uncertainty continues to remain prevalent. What has also been a
driver is mergers and acquisition (M&A) activity, as large cash-rich
companies continue to buy out smaller ones to broaden and enrich
their product pipelines and gain an upper hand in innovation. But
as U.S. investors brace for normalization in interest rate policy,
many are beginning to question whether the Health Care boom is
nearing its end. Though investors typically favour Health Care as a
buffer for uncertainty, it seems to have also gained traction among
investors wanting a steady stream of income in a yield-deprived
world. With yield alternatives likely materializing in other areas as
rates rise, will appetite for Health Care dissipate?
Technological advances should transform the Health Care sector
Advances in technology are literally transforming the sector, with everything from mobile applications to supercomputers expected to
play a crucial role in driving the sector forward in the coming years. Supercomputers are being developed in order to better diagnose
disease, recommend treatments and keep track of patient histories. Mobile applications are also gaining widespread popularity, as part of
a broader trend towards preventative medicine, whereby patients are using their phones and devices to better monitor their overall
health by watching their eating habits, sleep and exercise patterns.
The advent of preventative medicine
As mentioned above, more and more people are taking an interest in staying healthy. Health conscious consumers are living better, eating
better and exercising more. The gaming industry is also benefiting from this new trend, developing interactive games that promote both
mental and physical health. As growth in this space is expected to continue, this should create much opportunity for companies catering
to this new type of consumer.
Drug approvals - Treatments and cures on the rise
Patients worldwide are expected to pour money into the industry as researchers continue to develop new drug and treatment
breakthroughs. Though the number of innovative drugs that have been approved has steadily increased since 1950, this number has spiked
significantly as of 2010 and is expected to soar much faster in 2016 and beyond*; suggestive that more innovation could come. Due to the
spike in innovation, people are also living longer with chronic disease, as better treatments are leading to a higher probability of survival
after diagnosis. The U.S. Food and Drug Administration (FDA), which is the benchmark for other health regulators across the world, has
contributed to this broader trend by being quicker to approving new life-saving drugs and therapies.
Smart money bets
Though some might consider the recent rally in Health Care issues to be excessive, hedge fund inflows were largely concentrated in the
Health Care sector in the first quarter of 2015. According to data provider S&P Capital IQ, the ten largest hedge funds funnelled nearly
$4.8 billion in the sector, suggesting that the “smart money” might still be finding value in these investments.
The “smart money” is tracking consensus, which is suggesting that Health Care earnings should be north of 12% this year, as opposed to
less than 1% for the broad market. This higher than market earnings growth is also expected extend into 2016.
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