Powerful Rally In All Sectors

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At the close of business on Friday, global equities were higher on the week as financial conditions loosened amid expectations that the US Federal Reserve has reached the end of its hiking cycle. From week-ago levels, the yield on the US 10-year Treasury note declined 36 basis points to 4.51%. The price of a barrel of West Texas Intermediate crude oil fell to $83.50 from $84.75 a week ago. Volatility, as measured by the Cboe Volatility Index (VIX), slid to 15.3 from 20.3 last Friday. The US Dollar index fell about 1.2%.



The outlook for most major developed economies remains uncertain. Economic growth in the US is likely to be subdued and stay below its long-term trend, while Europe is not expected to recover yet. We expect earnings growth to be low next year. Industry surveys point to a drop in services consumption, which represents 70% of economic activity in the US, while non-residential investment is also likely to fall because of high interest rates and a tight labour market. All this should weigh on the world economy, which we expect to grow just 0.5% year on year in 2024, well below its pre-pandemic trend. Europe also remains weak as the economy feels the chill from tightening monetary policy and our leading indicator and consumer confidence are weakening. Developed central banks are continuing to withdraw more liquidity from the financial system. This means that stock picking becomes more important.



Your fund managers are purchasing fixed income assets that offer competitive advantages, the ability to generate substantial cash flow over sustained periods, and attractive stock prices relative to our estimate of intrinsic value. Your portfolio is currently positioned with an interest rate sensitivity (duration), with much of this position taken in higher-yielding US Treasuries, as opposed to lower-yielding Government of Canada bonds. This should provide a hedge against an economic slowdown, should one occur, as we believe interest rates are poised to fall later this year as central bank tightening takes a stronger hold. They have also increased investment grade corporate weight. Your fund managers believe that investment grade corporate bonds still look attractive. Even if there was a modest economic downturn later in the year, we believe the yield carry on IG bonds more than offsets the potential spread widening that may occur. We are still constructive on high-yield bonds, but we remain cautious as HY spreads are historically narrow.

As we gain further clarity on the trajectory of global economic activity with global central banks nearing the end of historic tightening cycles, we believe there will be opportunities in credit, interest rates, and currencies. Your fund managers continue to actively manage portfolio duration, focusing on diversification across global yield curves with duration closer to the higher end of historical ranges. Bond yields across several global markets exhibit value, given recent volatility. They will continue to adjust interest rate exposures dependent upon incoming economic data, changes to central bank policies, or instances of pricing dislocation associated with event or geopolitical risk. From a sector perspective, they continue to find opportunities in corporate credit. However, recognize that quality, industry, and issuer selection are more important factors today than they were earlier in the credit cycle. In addition, valuations have improved across several areas of fixed income, including global developed market governments/local authorities/municipals, mortgage-and asset-backed securities, and select emerging markets, which can provide total return opportunities and diversification away from pure corporate risk.

Regarding currencies, we expect the U.S. dollar to gradually weaken over the long-term but expect instances of geopolitical and idiosyncratic risk to support further two-way volatility and periods of dollar strength in the near-term. As a result, they will actively manage currency exposures and balance the longer-term, cyclical opportunities with the risk of continued headline driven volatility.


Fighting intensified this past week as Israel moved ground forces into the Gaza Strip in an effort to roust Hamas. On Wednesday, foreigners began to be evacuated from Gaza into Egypt, with 74 Americans with dual citizenship among those allowed to leave. The US and Israel are reportedly considering the possibility of a multinational peacekeeping force taking control of Gaza once the war ends. US Secretary of State Antony Blinken this week rejected a call for a Gaza ceasefire, saying such an action would preserve Hamas’ gains. Israeli Prime Minister Benjamin Netanyahu also ruled out a ceasefire. According to an Israeli government spokesperson, Israel has hit over 12,000 Hamas sites and that over 9,000 rockets have been fired at Israel since October 7. The Pentagon announced it was deploying an additional 300 US troops to the region. On Thursday, the Israeli military said that Gaza City had been encircled by its forces.



In Canada, your fund managers are acutely focused on cash flows and valuations and the portfolio.

Industrials remain the top active weight. The largest sector underweight in the portfolio is energy, primarily because of an underweight in pipeline companies. Utilities is another significant underweight because of extended valuations, the higher interest rate environment, and limited free cash flows. The cash position in your funds continued to decrease this past quarter. Currently, the cash weight is approximately 5%. Fund managers are ensuring that they diversify the portfolio across many business risks and are avoiding companies with high levels of leverage on the balance sheet.



With just over 80% of the constituents of the S&P 500 Index having reported for Q3 2023, blended earnings per share show that earnings rose 3.7% compared with the same quarter a year ago.

Your fund managers in the US limited exposure to Energy and Materials and no exposure to Real Estate, and Utilities sectors. They are overweight in Consumer Staples and Financials.

News that the United States created fewer jobs than expected in October (and the prior two months, after revisions), and that the unemployment rate ticked up to 3.9%, was welcomed by financial markets as it helps cement the notion that the Fed has finished its tightening cycle. Nonfarm payrolls rose 150,000 in October, below the 180,000 consensus forecast and about half of September’s downwardly revised 297,000 gain. Wage growth slowed, the data show, with average hourly earnings advancing a modest 0.2% month over month. Odds of a further hike from the Fed eased after the data, while markets increased bets that the central bank will begin cutting rates in mid-2024. A portion of the 35,000 jobs decline in manufacturing employment is seen as a temporary consequence of the since-settled United Auto Workers strike.

After holding rates steady on Wednesday, the Fed acknowledged that tighter financial conditions are likely to weigh on economic activity, hiring and inflation. While much of Chair Jerome Powell’s press conference suggested that the Fed retained a tightening bias, the market’s interpretation is that the rate-hiking cycle has likely peaked. Investors were further cheered by Powell’s comment that the supply side of the labour market has improved amid a rise in both participation and immigration, which should help temper wage gains. The decline in long-term bond yields accelerated after the Fed announcement.

The US manufacturing sector lost ground in October as the Institute for Supply Management’s manufacturing index fell to 46.7 from 49. The new orders index declined to 45.5 from 49.2. he US services sector also cooled in October, with the ISM non-manufacturing index falling to 51.8 from 53.6.



Europe’s manufacturing PMI was little changed at 43.1, while the UK slipped to 44.8 from 45.2.

Euro zone inflation fell faster than expected in October, easing to 2.9% year over year, down from 4.3% the month before and lower than the 3.1% consensus forecast. Lower energy prices, compared with a year ago when natural gas was in short supply, were responsible for the decline. Core inflation rose 4.2% from a year ago.

Economic growth in the euro zone remained stagnant for the fourth quarter in a row, rising only 0.1% in Q3.



China’s Central Financial Work Conference said it will set up a mechanism to resolve local debt risk by potentially transferring local government debt to the central government. The push follows a move made last week to increase the government’s borrowing capacity by 0.8% of GDP. Further measures are being considered to mitigate other financial risks, including those from real estate developers and small and medium-sized banks.




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