Manager Views

First half of 2011:

Solid economic growth, mixed markets

After returning almost 59% over the last two years, the Canadian stock market slowed to a 2.6% gain over the first six months of the year. The benchmark index hit a two-year high in April, but it retraced some of its gains in late spring in response to slower than expected growth in the US, continuing sovereign debt problems in Europe and upheaval in the Middle East.

The Canadian economy grew at a 3.9% annual rate in the first quarter, and Canada's unemployment rate fell to 7.4% in May from 7.6% in December as over 160,000 jobs were added over the five months. Canada’s economic strength is reflected in the high-flying Canadian dollar, which stayed above par with the US dollar into early June. The loonie has gained in response to higher commodity prices and to weakness in the US dollar, as Washington struggles for solutions to the country’s $1.65 trillion deficit.

Even moderate global economic growth boosts demand for commodities, a positive for the Canadian dollar.  But rising commodity prices, particularly higher energy costs, also feed into inflation. Particularly worrisome to emerging market countries is food inflation, as food represents a greater proportion of household spending. To combat this, policymakers may opt to slow growth, which affects stock markets.
Inflation in China, for example, has been running at 5.4%.

Inflation pressures also became more pronounced in Canada, with the Consumer Price Index now up 3.3% over the past year, largely on the back of rising gasoline prices, which reached $1.50 a liter in many parts of the country. Your advisor can provide you with investment strategies to hedge against inflation.

Despite the pressures that held markets back in May and early June, the International Monetary Fund is forecasting global growth of 4.4% for 2011 and 4.5% in 2012. This economic environment will support higher corporate profits, allowing companies to raise dividends or expand. So, although there will inevitably be short-term periods where markets pull back, investors should continue to benefit in the long term from a well-diversified portfolio. According to Mackenzie Chief North American Strategist, Norman Raschkowan, the recent strength of the Canadian dollar also makes this an interesting time to discuss the merits of foreign diversification within equity portfolios with your advisor.