January 13, 2014
Fourth quarter 2014
Bond investors did well during 2014, confounding the experts, many of whom had predicted interest rate hikes. Instead North American fixed income yields declined almost throughout the curve. Initially this was due in large part to Federal Reserve led money printing, which tapered gradually as the year progressed.
However demand for both US and Canadian bonds remained strong even after US central bank assets purchases ended, due in large part to rising global uncertainties. This led to a “flight to quality,” into government securities in the two countries, which are among the few that have the coveted AAA rating. Canada in particular continues to benefit from its healthy banking system which many regard as the world’s strongest.
In fact global investors remain hampered by a lack of fixed income alternatives. The Abe government’s election victory has fixed Japan firmly on a currency debasement course and Europe is also expected to re-start its own bond buying program early this year. Canadian two, five, 10 and 30 year treasuries ended 2014 yielding 1%, 1.33%, 1.82% and 2.34%, down by 10.1, 66.2, 96.9 and 90.5 basis points respectively.
Canadian stocks also did well last year. The S&P/TSX gained 7.42%, during the period, excluding dividends. This was a stellar performance during a time when interest rates are near-zero in real terms (in some cases below zero).
That said, the benchmark Canadian index underperformed its US counterpart, due in large part to weakness in commodities issues. Falling oil prices, which continued into the New Year, were a significant drain. Minerals explorers and producers have also been hard hit. That said, equities market gains were tempered somewhat by the 9.39% drop in the loonie during 2014, which significantly hit Canadians’ international buying power.
The S&P 500 for its part registered significant gains during 2014, rising by 11.39%, in local currency terms, excluding dividends. Canadian investors (those un-hedged) gained doubly, when foreign exchange gains on the rising greenback are included. The strong performance was due in large part to a strong US job market, which registered a series of 200,000+ monthly job gains. Low interest rates and rough foreign markets also helped, by pushing investors to the US, which some likened as the “cleanest in a drawer full of dirty shirts.”
Japanese stocks finished the year strongly. The Nikkei 225 gained 7.12% in local currency terms, excluding dividends, in large part due to the Japanese Central Bank’s policy of buying almost anything that moves, including equity market futures, in a bid to pull the economy out of recession.
European stocks for their part closed the year with the major indexes (The UK’s, France’s and Germany’s FTSE, CAC and DAX) flat, or up mildly, when dividends are included. Continued weak economic growth, due in large part to demographic headwinds and unwillingness to restructure in the face of increased global competition, are reigniting the deflation threat. The big question in international market right now is China, which has been a major driver in global growth and thus the international profits of Western multinationals. Growth has been slowing and investors remain concerned about both the country’s real estate market and its shadow banking system.
In short, 2015 was a great year for Canadian balanced investors, particularly in light of the fact that the healthy gains made, came on the heels of a particularly strong 2014.
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Peter Diekmeyer Communications Inc.