Richardson GMP
MARKET OUTLOOK

This month marks the start of the seventh year of a bull market. Global stocks continue make new highs, and valuations are no longer depressed. The MSCI All Country World Index has generated a total return of over 180% since its bottom in 2009, with double digit gains in five of those six years. These returns have been driven by steady economic growth, strong corporate earnings and improving investor confidence in the U.S. market (a 50% component of the global index). Today, many investors fear that a bear market may be lurking around the corner as capital markets volatility has increased: oil prices have been halved since last year, the yield on 10-year U.S. Treasuries reached 1.64% in January, a mere 20 basis points (bps) higher than a 50-year low set in 2012, and the U.S. dollar (USD) has rapidly appreciated versus major currencies.

Although there are uncertainties, as there always are in capital markets, fundamentals in the U.S. are still good. During the first quarter, the strongest part of the economic picture was the labour market – over the past three months, the average job gain was 288,000 per month. Personal consumption and income data were good, if below expectations given the energy price decline. We believe consumers have been slow to adjust their spending in response to lower energy prices, and an eventual increase in spending should provide a tailwind for the retail market. We expect the GDP growth rate for the first quarter of 2015 to be positive but below 3%, the rate we think is required for a more powerful, self-fulfilling economic expansion.

In March, the U.S. Federal Reserve (the Fed) removed the word “patient” from its guidance on interest rates but also scaled back expectations on how fast it will initiate its first interest rate increase – essentially signalling more patience. The Fed’s qualitative assessment of the economy was slightly dovish, as it tempered its 2015 expectations for the rate of both GDP growth and inflation. We believe the Fed’s first rate increase will be in June; however, a lower growth and inflation outlook might suggest the first rate rise will not happen until September. In our view, whether its June or September is irrelevant: the more important aspect is the Fed’s commitment to a gradual approach in raising rates. We anticipate the rate structure will be 50 basis points higher by the first quarter of 2016 than it is today, irrespective of when the Fed starts to raise rates.

In Canada, the fall in oil prices has had a widespread impact on the economy. Layoffs and a softening housing market have yet to be reflected in the economic data. However, in anticipation of a slowing economy, the Bank of Canada (BOC) cut interest rates in January. Because of the increased interest rate gap between the U.S. and Canada, the Canadian dollar promptly fell about four cents versus its U.S. counterpart. The BOC’s inaction at its subsequent meeting and comments about inflation expectations being balanced suggest this rate cut was sufficient, and we feel the likelihood for another rate cut is low. In fact, outside of the resource sector, we see some signs of positive economic growth, and we believe Canada is not at a recessionary level.

In Europe, the big headline this quarter was the European Central Bank’s (ECB) launch of an expanded asset purchase program of €60 billion per month. Beginning in March 2015, and scheduled to end in September 2016, the ECB’s quantitative easing (QE) program is expected to be greater than €1.1 trillion.

Questions are rising about the unity of the European Union as the ongoing political complications in Greece seem to be heading in the wrong the direction. Two sources within the International Monetary Fund have recently stated that, in its 60 years of providing financial aid to nations, Greece (represented by the newly elected Greek administration) has been the most difficult to assist. We believe the odds of Greece’s departure from the European Union have significantly increased, from one in twenty under the old Greek government, to one in three under the new regime. The combination of the QE program and the potential for a “Grexit” has contributed to a weaker euro, despite an increase in capital inflows into European equities. These capital inflows – which tend to prop up a currency – have been overwhelmed by the capital outflows derived from the ECB’s quantitative easing and directed towards U.S. Treasuries.

Japan’s February core CPI inflation figure was weaker than the market expected and, in fact, slowed to zero after excluding the impact of a recent increase in the consumption tax. The Bank of Japan is unlikely to react to lower inflation because it views the impact of inflation expectations as more important. Japan’s economy came out of a recession in the fourth quarter of last year, although the recovery remains fragile because of sluggish household and business spending.

In China, the People’s Bank of China (PBOC) cut interest rates for the second time in less than four months and lowered its GDP growth guidance to 7%. An analysis of energy consumption and of imports leads some to believe the real growth rate is closer to 3.5%. China is in the process of reworking its economy from one driven by infrastructure and investment to one driven by consumption, and as a result of this vast change, its GDP growth rate is likely to fluctuate from quarter to quarter. From a financial perspective, the PBOC has cleverly restructured local government debt into federal government debt. This has the benefit of reducing the interest rate burden by lowering coupons from approximately 8% – 12% to 4% – 6%. In the meantime, China continues to deal with the lingering issue of too much debt leading to a sub-optimal economic growth rate.

Source: Sentry Investments

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Jefferson|Steele

Dwight Jefferson, CIMA®
Senior Vice President
Portfolio Manager
Tel.: 604.640.0555 • Email

Tyler Steele, CFA
Senior Vice President
Portfolio Manager
Tel.: 604.640.0554 • Email

Paul Rietkerk, CIM, FMA
Associate Portfolio Manager
Tel.: 604.640.0562 • Email

Neil Kumar
Associate Investment Advisor
Tel.: 604.640.0406 • Email

Wendy Lloyd
Associate
Tel.: 604.640.0556 • Email

Jessica Dewey
Associate
Tel.: 604.640.0405 • Email

Brenda Geib, BA
Associate
Tel.: 604.640.0559 • Email

Richardson GMP Limited
500 – 550 Burrard Street
Vancouver, BC V6C 2B5

Toll Free: 1.866.640.0400
Fax: 604.640.0300

www.JeffersonSteele.ca

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The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NS and PEI. Additional administrative support and policy management are provided by PPI Partners. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.