The Canadian stock market declined again in the fourth quarter, in contrast with the solid rebound in global markets. Again, the decline was led by materials stocks, which fell 3.8%. Energy was also weak, falling 1.8%. Health care, almost entirely represented by Valeant Pharmaceuticals (VRX, Financial), was down 36.9%. We do not own, nor have we owned, Valeant Pharmaceuticals.
A late summer sell-off in the third quarter spooked many investors, including the U.S. Federal Reserve Board, which backed off of raising interest rates in September, despite global equity markets proceeding to recover. Unfortunately for Canadian investments, that did not include materials, although forest products did see a meaningful recovery. Energy, while weak, did see exploration and production companies unchanged, which was a respite from the negative trend in the year.
Much of the decline in cyclical stocks is rooted in slow emerging market growth and China, which continues to experience a slowdown in manufacturing as well as fixed asset investments.
The combination of slower Chinese growth as well as overcapacity in a number of areas such as steel and aluminum continued to pressure commodity prices. A similar picture persists for oil, which faces more supply from Saudi Arabia looking to take back market share, resurgent production from Iraq, and a highly anticipated return of oil exports from Iran, likely in February. World demand, while slightly positive, is not strong enough to offset the supply, especially as many emerging market countries that are key to more structural future demand continue to face economic headwinds of their own.
The fund outperformed its benchmark slightly during the quarter. The outperformance is almost entirely attributable to the contribution from health care since we do not own Valeant, the pharmaceutical company that imploded during the quarter. We also owned a number of positive contributors in health care like Thermo Fisher Scientific (TMO, Financial) and Allergan (AGN, Financial).
Detractors included the information technology, materials, and consumer discretionary sectors. In technology, Apple (AAPL, Financial), NXP Semiconductors (NXPI, Financial), and Western Digital (WDC, Financial) underperformed. Apple faces investor uncertainty with respect to its next product cycle of the iPhone. The stock is not expensive. Western Digital continues to be under review as management has disappointed, yet valuations are extremely attractive at current levels.
In consumer discretionary, gaming company Amaya (AYA, Financial) has struggled this year. After reviewing the fundamentals in detail as well as our investment thesis, we decided to add to our position. We believe there has been an overreaction to some disappointing but not game-changing events. This bold step is predicated in the belief that these setbacks are temporary.
In materials, BHP Billiton (BHP, Financial) was negatively affected by a major mining accident in Brazil, where a tailing dam breeched and flooded an inhabited area with toxic material.
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This report may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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