As expected, inflation continued to fuel discussion, whether among savvy economists or ordinary people. Even so, during the second quarter the yield curve barely budged in the face of this threat and the bond markets emerged unscathed. This matter is open to debate, and in these pages we will try to shed light on it.

In a context where economic and epidemiological results are surprisingly positive and a number of stock markets periodically set new records, it is important that as investors we temper our enthusiasm and maintain an overview. We will therefore also look at the indicators to watch as well as portfolio positioning for the coming quarters.

The cyclical recovery continued in the second quarter, propelling the markets to new highs. Even though returns were positive across all regions, the developed countries of North America and Europe enjoyed a distinct advantage. 

This observation coincides with the vaccination statistics, which pointed up disparities in terms of access to vaccines, the ability to deploy an effective campaign and the population’s willingness to take part.

In line with our expectations, the accelerating global recovery smiled on Canada’s resource-based economy. As a result, the energy sector once again found itself among the main contributors to performance. In a sign that some of the changes brought about by the pandemic are here to stay, the ecommerce platform Shopify regained its status as the Canadian stock with the largest capitalization, recording a return that made the information technology sector the leading contributor in the second quarter of the year. 

As a result, as measured by the MSCI Canada Index, the Canadian stock market remained number one in our universe² with an 8.6% return during the period.

The good news for the Canadian market is that the economic recovery will continue for several quarters. In addition, progress with the vaccination campaign suggests a full and safe reopening in the coming months. Even so, two headwinds have just appeared: the market’s valuation, which has become less attractive, and, what is even more important, the Chinese economy, which is showing signs of a slowdown. It would therefore not be surprising to see China’s appetite for resources moderate and undermine future results. In short, the outlook for the domestic market is still positive but less so than at the start of the year.

Given the unparalleled support measures, the likelihood that the U.S. market will disappoint investors is very low. Unsurprisingly, it ranked first in terms of returns in local currency. That being said, the increase in the price of crude oil during the quarter caused the loonie to strengthen and slightly reduced the result in Canadian dollars.

From a sectoral point of view, continuing low interest rates stimulated real estate, which found itself the top contributor. Just behind it, information technology and communication services also reminded us that growth stemmed from the means of operation adopted collectively over the past 12 months.

Illustrating the extent of the U.S. economy’s momentum, only utilities experienced a decline from the previous period, while all the other sectors made a positive contribution. In the second quarter, this market returned 7.3% (in C$), as measured by the MSCI USA Index.

The U.S. Federal Reserve has a dual mandate of price stability and full employment. The atypical nature of the contraction we experienced briefly last year and the measures taken in response have blurred the relationship between certain economic indicators. As a result, the Fed currently has to manage a dynamic involving a higher number of unemployed workers than before the pandemic but also more unfilled positions.

As the following table shows, even though surveys of U.S. households indicate a sharp increase in the ease of finding a job, this situation has not lowered the unemployment rate.

For global equities, the second quarter brought mixed results, depending on the region.  Europe did not disappoint, delivering a solid performance across almost all sectors. As with the U.S. market, only the utilities sector ended in the red. Then came emerging markets, which fell short of expectations despite their exposure to resources. Limited access to vaccines in the poorer countries combined with the emergence of a new variant delayed the reopening of some economies. Finaly, the Asian market disappointed the most, mainly because it was very much affected by the situation cited above, especially in India, but also by the Chinese central bank’s preventive tightening of credit conditions.

As a result, the MSCI Europe Index closed the quarter with a 6.1% return in Canadian currency, while the MSCI Emerging Markets Index and the MSCI All Country Asia Pacific Index returned 3.5% and 1.1%, respectively.

An upturn in emerging markets and Asia requires better deployment of vaccines in these regions. This was one of the major topics of discussion at the most recent G7 meeting, held in the United Kingdom. China’s tightening has paid off, and signs of slowing have appeared. Despite this headwind, growth is expected to remain above its potential, and the Chinese authorities will certainly not seek to stifle it unduly. We can therefore hope that in the coming months Asian and emerging stocks will catch up in terms of their valuation.

So far this year, the financial markets have met investors’ high expectations in several respects. The conditions for a continuing recovery require that we have the ability to shift gears smoothly and make the necessary adjustments to our investments with a view to the future.

At this point, the stock markets that have seen strong gains have less attractive valuations, but the outlook remains positive. In the United States, recent indications of tightening by the Fed surprised the markets briefly; that being said, the central bank’s actions will remain conducive to further strong growth and will avoid a stock market correction.

China’s slowdown will reduce the demand for commodities, which should hurt margins in Canada as well as in emerging markets but not prevent all stock markets from continuing to advance. We must keep in mind that monetary conditions will continue to be very accommodative and that the savings accumulated during the lockdown should logically be deployed.

The bond market will continue to come under pressure, probably because of rising real rates rather than persistent inflation. Corporate bond risk premiums should remain at current levels and partially offset the low yield on government securities. Finally, it might make sense at this stage to favour cyclical securities in a selective fashion within consumer discretionary. The hotel, restaurant and transportation subsectors will benefit from the final phase of a return to normality.

Have an enjoyable summer as the economy reopens!