Investment Review: Third Quarter of 2012

Capital markets posted encouraging results in the third quarter of 2012.  After a brief decline early in the period, several of the world’s major equity indexes rallied through the summer months, resulting in positive returns for quarter and the year-to-date.

The MSCI World Index was up 6.8% in local currency terms in the quarter, and the S&P 500 Index in the U.S. increased 6.4%, extending its year-to-date gains to 16.4% and reaching its highest level in four years. Here in Canada, the S&P/TSX Composite Index rose 7.0% for the quarter, and is now up 5.4% for the year-to-date.

 

Overseas, European indexes continued to mirror the economic and fiscal uncertainty in the region, but many of those markets also benefited from more forceful commitments by politicians and central bankers to tackle the sovereign debt crisis. Near the end of July, the European Central Bank pledged to do “whatever it takes” to preserve the euro, and later announced a bond-buying program to help control borrowing costs for indebted nations such as Spain. As a result, solid gains were recorded in Germany, France and the U.K. In Asia, indexes posted mixed results in light of  the slowing economy in China. While the Chinese market lost ground, others such as Hong Kong, Korea and Singapore were up.

Bond prices edged higher and yields continued to decline through the period, with the DEX Universe Bond Index rising 1.2% for the quarter and 3.3% for the year-to-date. It is worth noting that the 10-year Government of Canada bond now has a yield of about 1.7%. Bond investments remain an important part of most portfolios because of their stability; however, yields at these levels provide negative returns after inflation
and taxes (for non-registered accounts).

The second quarter’s mainly positive equity market results can be attributed to several factors, most notably the anticipation and implementation of quantitative easing programs designed to maintain low interest rates and support the financial system in the U.S., Europe and Japan.

Despite these gains, many observers remain anxious. Factors that are fuelling concern include the Eurozone’s ongoing sovereign debt problems,  the rapidly approaching “fiscal cliff” in the United States that threatens to dampen economic growth, and the slowdown in China and other emerging markets.  In the meantime, many public companies are doing well and creating value for investors, as can be seen by taking a longer view of the market. Since the March 2009 low point following the financial crisis, the S&P 500 Index has more than doubled in value, and the S&P/TSX Composite Index is up more than 50%. Economic recoveries rarely proceed uniformly upward. But many of the conditions necessary for continued progress are in place, as indicated by corporate profit reports. As the saying goes, markets have been “climbing a wall  of worry.”

The past quarter has shown once again that it is not easy to predict when the market will move up. As a result, I continue to believe that a well-diversified portfolio that includes equity funds makes sense for most investors. Equities remain the best way to benefit from long-term economic growth and to stay ahead of inflation.

Should you have any questions about your RRSP, TFSA, RESP portfolio or the markets in general, my team and I are here to help.

 

The information in this letter is derived from various sources, including CI Investments, Signature Global Advisors, Harbour Advisors, Globe and Mail, National Post, Bank of Montreal Economics, and Morningstar Canada.  Index information in paragraphs 2 to 4 were provided by TD Newcrest, PC Bond, and the Bank of Canada.  This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.

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