Manager Commentary - Q3 2019

The last six-month period was marked by an escalation of geopolitical tensions. There was little advancement in negotiations between the U.S. and China on their ongoing trade dispute. As the months go by, it has become increasingly unlikely that the two countries will come to an agreement by the November 2020 U.S. presidential election. The launch, in late September, of an impeachment inquiry into U.S. President Donald Trump added further uncertainty about any resolution to the U.S-China dispute. As the last quarter ended, there was an increase in tensions in the Middle East, which could potentially lead to an increase in the geopolitical risk premium on the price of oil by the end of the year.

The global economy showed signs of a slowdown, partially as a result of global trade tensions, and the slowdown began to reach the U.S. The importance of the U.S. labour market was demonstrated in recently published data that showed that the U.S. economy was largely being supported by household consumption. Significant job growth and wage gains have greatly benefited the wealth of U.S. households, but those same households have been exposed to the potential of a stock market decline.

The U.S. Federal Reserve (the Fed) began easing its monetary policy in the third quarter, cutting its policy rate twice in a row. The Fed’s tone changed drastically in past months, and the market anticipates three more interest-rate cuts over the next 12 months.

Despite all this uncertainty, stock markets clung to, in many cases, all-time highs. U.S. equities, as measured by the S&P 500 Index, posted a return of 6.1% (5.1% in Canadian dollars) over the period, while the Canadian stock market, as measured by the S&P/TSX Composite Index, advanced 5.1%. The MSCI EAFE Index rose 4.6% (1.7% in Canadian dollars), the MSCI Europe Index posted a gain of 6.1% (2.2% in Canadian dollars), and the MSCI Emerging Markets Index returned -1.6% (-4.5% in Canadian dollars) over the same period.

Stock selection within developed markets in Asia Pacific contributed to the Fund’s performance, as did selection in western European countries. Stock selection in the industrials and healthcare sectors contributed to performance. Top individual contributors to performance included an overweight allocation to Microsoft Corp.

Stock selection in Ireland detracted from the Fund’s relative performance. From a sector perspective, selection in the financials and communication services sectors detracted from performance. Individual detractors from performance included chemical company DuPont de Nemours Inc. and Glanbia PLC, which produces protein powder and cheese. Emerging markets underperformed, and the Fund’s position in an emerging markets index also detracted from performance as these markets are not included in the Fund’s benchmark.

The fund manager added a new position in HSBC Bank PLC, which replaced a holding in Royal Bank of Scotland Group PLC. HSBC represents a more diversified bank, with a client base that is mostly in China and emerging markets. Royal Bank of Scotland was eliminated from the Fund as a result of poor prospects for European banks in the U.K. A new holding in Masco Corp. was added given the company sold poorly performing divisions, which the fund manager believes will enable it to improve its profits. An existing position in Sundrug Co. Ltd. was increased for its attractive valuation. Boston Scientific Corp. was increased as well. Temporary and minor execution issues created an opportunity to add shares at a reasonable price. The company is a best-in-class medical technology firm with good potential for growth acceleration.

Carnival Corp. was eliminated from the Fund amid problems linked with fuel and oversupply in the travel industry. Exxon Mobil Corp. was sold in favour of Chevron Corp. Alibaba Group Holding Ltd. and LVMH Moet Hennessy Louis Vuitton SA were both reduced due to high valuations and a projected slowing in Chinese consumption. Microsoft Corp. was trimmed to take profits after strong share price performance.

In light of significant risk factors, trade tensions and an economic slowdown, the fund manager expects continued uncertainty. Interest-rate levels and bond market volatility demonstrate that investors are nervous about the outlook for economic growth. The same can be said about the currency market, with a strong U.S. dollar and currencies of emerging markets countries under pressure.

Despite this, it may not be the case that the strong equity market, which has continued for more than 10 years, will stop in the next few quarters. Central banks have begun a somewhat synchronized easing of monetary policy, which should support the economic cycle in the next six to 12 months. The fund manager notes that market fluctuations provide new buying opportunities.

Low interest rates and slow growth in corporate earnings generally come with rising volatility in stock markets. There has been a U.S. equity correction, on average, every nine months since the Second World War. It would not be surprising, even if they cannot be predicted in the short term, to observe such a correction in the coming months.

 

Fund and Benchmark Performance as at: September 30, 20191 year3 year5 year10 years
IA Clarington Global Value Fund - Series A-3.4%5.2%6.9%7.8%
MSCI World Index4.3%10.5%10.8%11.3%

 

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1The performance data comparison presented is intended to illustrate the Fund’s historical performance as compared with historical performance of widely quoted market indices. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of 23 developed market country indices. The Fund’s market capitalization, geographic and sector exposure may differ from that of the benchmark. The Fund’s currency risk exposure may be different than that of the benchmark. The Fund may hold cash while the benchmark does not. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance.