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Mawer Management's First Quarter 2014 Newletter

April 17, 2014 | About:
Holly LaFon

Holly LaFon

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Global equity markets continued to rise during the first three months of 2014. This extends their rally to five years, with only periodic interruptions. One such interruption occurred when the political standoff between Russia and Ukraine prompted some investors to assess the implications of Russia's aggression from the sidelines. The ensuing equity correction was relatively modest and short-lived, as global equity markets soon resumed their upward trajectory, with the MSCI World Index (C$) finishing the quarter with a 5.2% gain.

Unlike previous quarters, Canadian equity markets were among the frontrunners, as illustrated in Chart A. Canada's rise was fuelled by significant gains by resource companies, particularly early in the quarter. Chart A also shows the strong quarterly results achieved by equity markets in the U.S. and Europe, although it should be noted that the depreciation of the Canadian dollar relative to most major world currencies had a significant influence on the magnitude of these returns. For example, though the S&P 500 Index (C$) reported a 5.8% return, the gain in U.S. dollars was a healthy, but less pronounced rise of 1.8%.

The most notable exception to the strength in global equity markets was Japan, where the MSCI Japan Index (C$) shed 1.9%. Japanese authorities have undertaken unprecedented measures to revive their economy, but an imminent hike in the sales tax, from 5% to 8%, has renewed concerns that consumption and economic growth may stagnate. Incredibly, the annualized return over the last 25 years in the MSCI Japan Index (C$) is –1.0%; a painful reminder of how unkind Japan has been to investors.

Emerging market equities once again failed to keep pace with their developed peers. The standoff in Crimea and the political turmoil and social unrest in Thailand sparked steep corrections in their respective equity markets. Meanwhile, the Chinese stock market yet again posted negative returns. Some of this underperformance among emerging market equities may be attributed to the unwinding of the carry-trade, where investors borrowed U.S. funds at low rates and redeployed this capital into higher-growth emerging markets. With the U.S. Federal Reserve continuing their exit strategy with respect to economic stimulus, and newly-appointed Fed Chairman Janet Yellen speaking openly about the timeframe to increase interest rates, the attractiveness of this carry-trade is diminishing. This may explain the sizeable flow of funds out of emerging markets and back into U.S. dollars, which has put some emerging market currencies under pressure, and seemingly their equity markets as well.

While this quarter was rewarding for equity investors, Canadian fixed income markets newsletter First Quarter 2014 also delivered healthy returns with the FTSE TMX Canada Bond Universe Index gaining 2.8%. This was a welcome reprieve for fixed income investors that suffered a 1.2% decline during 2013, the first annual decline since 1999. As Chart B illustrates, performance among provincial and corporate bonds was noticeably higher than the federal sector, while mid-term and long-term securities performed particularly well:

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