Despite increased volatility caused by rising geopolitical tensions, the markets generally performed well in May. The difficulty in forming a government in Italy as well as the U.S. administration’s approach to international affairs, prompted investors to shun certain regions of the globe. The exodus weighed on emerging markets but enabled fixed income to record a positive return during the month. In this context, the U.S. dollar rose against a large number of currencies. In return, the economic environment continued to be favourable, thanks to sustained growth and moderate inflationary pressures, and developed markets stock exchanges generally continued to progress.
The Canadian bond market benefited from flows into safe-haven assets and recorded a positive performance during the month, with the yields of medium- and long-term securities falling by about 10 basis points. As for the Canadian stock market, it had another excellent month, as reflected by the 3.2% advance of the MSCI Canada Index. It should be noted that all sectors contributed to the return.
The U.S. market was also up, with the MSCI USA Index gaining 2.4% in local currency. Owing to the strength of the U.S. dollar, the return for the month rose to 3.7%, when this result is translated into Canadian currency. The information technology sector fared well, contributing to almost three-quarters of the value added.
Political disagreements emanating from Europe cast a shadow over the Mediterranean area, limiting the bull market potential but also weakening the common currency (euro). The MSCI Europe Index recorded a modest 0.3% gain in euros but a 1.9% loss in Canadian currency. The financial sector was especially affected by the increase in political risk and was the weakest contributor during the month.
In a context of global trade tensions, the Asian stock market was negative, with a return of -0.9% in local currency. However, this result was offset by the weakness of the Canadian dollar against all the foreign currencies in the MSCI Asia Pacific Index. As a result, the benchmark portfolio recorded a net gain of 0.3% in Canadian currency. The defensive sectors, such as consumer staples and health care, helped limit the losses.
As for emerging markets, the highlight of the month was undoubtedly investor concern over the impact of the rising U.S. dollar, in addition to possible trade wars. Sentiment was controlled, however, as shown by the performance of the MSCI Emerging Markets Index, which returned -2.2% in local currencies and -2.4% in Canadian currency.
Source: Bank of Canada and MSCI Inc.
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