Newsletter Content
Global Market Summary
Economy
The economic backdrop is quite good, with many of the macroeconomic indicators at or near cycle highs.
Inflation is firming, but seems to simply be transitioning to more normal levels after many years of being too low, rather than shifting higher to problematic levels.
A key risk that remains is the aging business cycle, rising interest rates and protectionism, but we should not ignore the potential tailwinds from structural reforms in Japan and fiscal stimulus in the U.S.
On balance the global economy is on track to grow at its fastest pace in eight years.
Fixed Income
Central banks are likely to continue dialing back monetary accommodation in an environment of improving economic growth and rising inflation.
The consensus is that the long-term direction for bond yields is higher, but that the meaningful increase in yields over the past quarter has alleviated valuation risk in the near term.
Although rising yields could act as a drag on fixed-income returns for many years, bonds play a critical role in a balanced portfolio serving as ballast against market volatility.
Equity Markets
Stocks corrected in February after a year of strong performance and unusually low volatility, as investors were unsettled by the prospect of higher inflation and interest rates.
Rising interest rates and inflation are a mild drag on equity-market valuations. That said, price-to-earnings ratios may be even more susceptible to investor confidence, which is currently high and bolstered by the outlook for double-digit growth in corporate profits.
How ETFs Work
Exchange-traded funds have grown in popularity with assets globally of almost $4.8 trillion. 1 However, many investors don’t fully understand how ETFs work.
A fund that trades like a stock
Exchange-traded funds (ETFs) work like mutual funds except that they're listed, bought and sold on a regulated stock exchange, typically through a broker or brokerage platform.
ETFs offer the opportunity to invest in a portfolio of securities that provide the same diversification benefits of mutual funds with the trading flexibility of stocks.Most ETFs in Canada are passively managed index investments that seek to track the performance of a broad market or a specific portion of it. Actively managed ETFs are also available, making up about 15% of Canada’s ETF market by assets.2
ETFs exist in both what is known as the primary market, where certain institutional investors create and redeem them, and in the secondary market, where individual investors buy and sell them.Click here for full article about How ETFs work.Smart Beta Investing
The goal of smart beta is to obtain what is known as alpha, or the marginally higher return above what the benchmark earning. Smart Beta seeks to create an optimally diversified portfolio by combining a variety of different investment strategies and "factors"; such as size, value and volatility. There is no single approach to developing a smart beta investment strategy, as the goals for investors can be different based on their needs and the allocations to each "factor" would be based on each investors' unique risk and objectives. Factor Boxes: A Visual Representation Smart beta strategies have seen huge inflows in recent years. According to Morningstar, smart beta assets under management in 2008 amounted to approximately $108 billion US$. As of 2015 that figure had grown to approximately $616 billion US$. With the increasing popularity of Factor Investing the need to provide investors with more information and standards to compare is of the utmost importance. One such standard was created by MSCI FaCS, where "Factor Boxes" with 8 Factor Groups and 16 Factors have been designed to provide investors with a standard framework and tool for to easily analyze, compare, implement Factor Investing strategies.
Click here for full article about Smart Beta and Factor Investing.Volatility Stikes Back
When volatility returned to global stock markets in early 2018, headlines cast this concept in its familiar role as investors' most fearsome enemy. And yes, it's true that market volatility is an emotional roller coaster that can make even the most veteran of investors a little nervous. On the other hand, have we ever stopped to think that volatility may be getting a bad rap? It may not be a villain (although in many cases it seems that way) and it's not always synonymous with portfolio losses. A closer look at the concept can better help us understand what it is, why we shouldn't expect a return premium for holding equities without it, and what we can do ro manage our emotions when volatility once again makes the market headlines. Ignorance (toward volatility) is BlissWhat investors may not be aware of is that short-term volatility is the price for long-term outperformance. As an investor, you have to be willing to put up with the occasional roller coaster ride in the markets. Historical data show that over the long-term, investors have been rewarded for holding riskier assets with higher returns than those of less risky assets. while we may have seen larger fluctuations in recent years, over the long-term investors must resist the urge to head for the exits. As stated by Nobel Laureate Daniel Kahneman, "If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do". The table below demonstrates how over the long-term returns grow at a faster rate than the standard deviation of returns, aka volatility, and as time goes on, the likelihood of realizing a positive return increases. Once again, this highlights the importance of a long-term focus when investing, as any single day offers just better than a 50% chance of positive returns. Investors who ignore short-term volatility and follow a disciplined investment plan will realize that when it comes to long-term returns, time is on their side.
1Source: Calculation by The Vanguard Group, Inc. using data from ETFGI as of December 31, 2016.2 Source: Strategic Insight as of December 31, 2016.
