Of the various factors that could affect the markets negatively throughout the year, few people foresaw the outbreak of an epidemic as a baseline scenario. Providing evidence that many surprises can occur in the short term, the emergence of coronavirus has forced investors to revise their forecasts to include this risk and its potential impact on global growth. As a result, the price of oil fell by more than 15% in January, taking with it the Canadian dollar, which depreciated against many foreign currencies.
Despite this new headwind, the Canadian stock market had a good start to the year. As measured by the MSCI Canada Index, it advanced a respectable 1.6% in January. From the sector standpoint, while Information Technology and Utilities did very well, Consumer Discretionary, Health Care, Materials and Energy lagged. The evolution of interest rates has propelled bond performance above that of the stock market. A decline of about 40 basis points along most of the yield curve lifted bond prices, despite the negative impact of widening credit spreads.
The impact of the virus was more apparent south of the border. The U.S. stock market rose a more modest 0.2% in local currency, as measured by the MSCI USA Index. However, the depreciation of our currency against the greenback improved this monthly return, increasing it to 2.2% in Canadian dollars. Several sectors contributed to the performance, including Utilities and Information Technology, whereas Energy and Materials dragged the overall performance down.
With the exception of the more defensive sectors, such as Utilities and Health Care, Europe struggled during the month. As measured by the MSCI Europe Index, the European market returned -1.6% in local currencies. However, the appreciation of the major European currencies helped offset some of the underperformance; expressed in Canadian dollars, it was -0.6%. As on the North American markets, the Energy and Materials sectors suffered the most during the month.
Not surprisingly, as the epicentre of the new vector of uncertainty, Asia was hit harder. In local currencies, the benchmark MSCI Asia Pacific Index returned -2.2%. Only the Health Care sector ended the month in positive territory. The Energy sector has been hit pretty hard in Asia as well. The relative weakness of the Canadian dollar against the basket of Asian currencies in the index limited the loss, which was -0.9% in Canadian dollars for the region.
Emerging markets were also affected by the risk of a pandemic. As measured by the MSCI Emerging Markets Index, their return in local currencies was -3.3%. All sectors except Health Care contributed negatively to the total performance. Following an exceptional month of December, a certain return of the pendulum has probably exacerbated the decline. The sector most heavily affected was Real Estate, followed by Energy. Currency fluctuations had a slightly positive impact on the return, which was -2.8% in Canadian dollars.
Sources: Bank of Canada and MSCI Inc.
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