A Third of the Year in Review
Tomorrow is not just the last trading day of April, but also marks the end of the first third of 2017. I thought this was as good an opportunity as any to look back at the year to date and see how some of the world's markets have performed. As always, please keep in mind that some of these trends may continue to the end of the year, but most will likely change somewhat while others may completely reverse.
The Benchmark
With apologies to our clients worldwide, we Canadians consider the Canadian market to be "the benchmark" for our investments----- and, yes, my use of benchmark is mostly tongue-in-cheek. Even though I don't believe investors should anchor themselves to their home market, for the purposes of our base and this newsletter, we'll refer to the Canadian market as the benchmark.
It was one of the poorer global performers this year, yet the Canadian all-cap index has been positive.
Returning about 2%
so far, it's trending for about 6% on the year, which really isn't too bad considering how strong last year's performance was.
The Elephant
The U.S. all-cap index has
returned over 5% this
year. As mentioned in a previous letter, I'm concerned with current valuations of the U.S. market, but have consistently reduced some of this risk via our last few portfolio rebalances. Although the U.S. looks expensive now, it doesn't mean it won't continue to increase for another few years. This is less a prediction than a history lesson, which has shown the improbable can, and often will, happen.
The Rock Stars
The emerging markets (EM) index is up
over 11% on the
year following a positive year last year as well. EMs continue to be cheaper than any other major index in the world. Given their relatively low GDP per capita, which provides a competitive advantage, their economies should grow faster than those of the developed world. I'm also hearing anecdotal stories from investment wholesalers that this recent outperformance is causing other investment professionals to look into EM options. Should this be accurate, this increased demand can only be good for future EM returns. We are overweight and diversified within the EM landscape.
The big surprise has been the strength of gold this year. We own gold as a hedge against the unexpected, and it has had a tremendous start to the year (currently
up almost 11%).
It's often hard to know exactly why an asset has performed well, but I believe part of its recent performance results from the geopolitical sabre rattling over the last few months. Should that continue, or even escalate, it's possible gold will continue its strong run.
Middle of the Pack
You know you're having a good year when your middle of the pack performers are
returning about 7% after
only four months, but that is exactly what the international index (mostly Europe and Japan) and real estate investment trusts (REITs) have done to date. REITs have been fairly solid over the last few years, but the international index has been more of a surprise. Their performance is largely due to the fact that the economies in Europe and Japan haven't exactly set the world on fire with economic growth over the last few years. Having said that, they are fairly valued, relative to North American markets.
The Donkey
The only equity or commodity position we own that has been negative this year is energy. And it's been a real stinker---- currently
down about 11%. Since
storing oil is considerably more expensive than storing commodities like gold, it is prohibitively more expensive to have a long term investment based on the price of oil.
F
or this reason we own an index of Canadian energy producers. Energy has been one of the most volatile asset classes over the last few years ranging from the low $100s per barrel to the high $20s early last year. While oil has bounced back since last year, it has fallen off of its recent highs of mid- to high- $50s, depending on whether you look at Brent or Sweet Crude prices. As you may have guessed, our frequent rebalancing has protected our portfolios from the full impact of this decline.
Oil prices are still historically cheap and worth holding on to for the time being, but I wouldn't be surprised if they remain volatile for the foreseeable future.
In the review queue
The Song of the Dodo by David Quammen: Ever notice that some of the most unique animals are largely found on islands? Among many other things, this far-reaching work explains why islands and isolation has led such unique life to evolve the way it has. Although I found the book fascinating, I wouldn't recommend this for you unless you are very interested in evolution, and you don't mind a long (700 pages) and sometimes meandering read.
Milk and Honey by Rupi Kaur: A deeply personal and moving book of poetry.
Lazy Work, Good Work by Morgan Housel: Today's world requires a higher level of intellectual consideration and expertise than ever before. Sometimes taking a step back or away from your work is the fastest way forward.
Is ignorance the problem? by Seth Godin: Part of the reason so many people disagree with each other is that we expect everyone else to know what we know and see the world through the prism we look through. Unfortunately, as Godin points out, that is rarely the case.
Some End-of-the-Week Inspiration
