The third quarter of 2016 started on a note of uncertainty following the surprise Brexit vote result in late June. Equity markets had been volatile and bond prices rose and yields declined after the British vote to leave the European Union. Markets soon steadied, however, and volatility moderated through the quarter. By the end of September, most asset classes, supported by slow, steady global growth and expansive monetary policy, had gone on to register gains for the three-month period.

Global equity markets bounced back early in the third quarter and finished mainly higher. The S&P 500 Index in the U.S. added 3.9%, while the MSCI World Index was up 5.0% in U.S. dollar terms. With the U.S. dollar strengthening during the period, these returns grew to 5.4% and 6.6%, respectively, in Canadian dollar terms. Overseas, markets in Germany, the U.K. and France trended higher, as did indexes in China, Japan and Hong Kong.

The benchmark Canadian S&P/TSX Composite Index gained a healthy 5.5% (including dividends) in the third quarter. Energy-related companies benefited from a rally in oil prices and the market was also buoyed by strength in the financial sector. With a year-to-date return of 15.8%, Canada’s market, after lagging the U.S. market for the past five years, is among the best performers globally.

Although it is still expected to raise interest rates before the end of the year, the U.S. Federal Reserve left rates unchanged at 0.50% during the quarter, opting to wait for evidence of continued progress in the areas of employment and inflation. The Bank of Canada also kept its overnight lending rate unchanged at 0.50%, where it has been since mid-2015. Central banks in Europe and Japan, meanwhile, continued programs designed to boost economic activity. The European Central Bank’s strategy of buying corporate and government bonds, for example, has resulted in bond yields in some countries, such as Germany and France, falling below zero. The FTSE TMX Canada Universe Bond Index, a measure of corporate and government bonds, returned 1.2% for the quarter, and was up 5.3% for the year-to-date.

Looking ahead, there are a number of reasons to remain cautiously optimistic about the global economy and markets. A recent report by the International Monetary Fund in Washington, for example, forecasts a continuation of subdued global growth, and that central banks will keep monetary policy accommodative in order to stimulate business activity. However, volatility may reappear as markets contend with the results of the U.S. election, the continued fallout from the Brexit process and a potential Fed rate increase.

In the meantime, I remain focused on helping you create an investment portfolio that is best suited to your long-term goals and outlook, based on your unique circumstances and risk tolerance. Should you have any questions about your investments, please do not hesitate to contact me.

Source: CI Investments,All returns in CDN$

New Mortgage Rules to Reinforce Soft Landing in Canadian Housing 

Highlights

Early this month the Canadian government introduced another round of policy changes aimed at safeguarding the health and stability of Canada’s housing market, marking the sixth time the government tightened residential mortgage lending regulation since 2008. While, previous rounds of adjustments to mortgage policy targeted high-ratio borrowers requiring mortgage insurance, the recent announcement instead outlined a multipronged approach, intended to limit the risk taken by households and lenders, as well as curb speculation activity. The measures include adjustments to income testing rules for borrowers requiring mortgage insurance, limits to the use of portfolio insurance by lenders, and increased oversight of the principal residence tax exemption rule.Most of the past changes resulted in near-term volatility, but helped anchor existing home sales closer to their long-run average. Still, these past measures proved temporary, with activity subsequently rebounding helped along by falling interest rates. As such, mortgage regulation has increasingly become an important tool in the policy-kit, helping manage risks in a low interest rate environment. The most recent set of rules are expected to have a comparable impact, helping to reinforce the return of housing activity to more normal levels among the more heated markets – already embedded in our housing market forecast for next year (Chart 1). Their impact should also prove more longer-lasting, especially alongside gradually rising interest rates. Above and beyond the near-term volatility, the recent policy changes inject some additional risks into the outlook, particularly in light of their scope and timing.  

New tax measures to stem speculative activity

The newly announced measures also include adjustments to the tax structure, in which the impact is far less certain. Proceeds from the sale of real estate are currently taxed in three different ways:

The new rules disallow the use of the principal residence exemption for purchasers who were not residents of Canada at the time of purchase. The rules have not been changed for Canadian residents, but the transactions will come un­der more scrutiny. The sale of a principal residence is now required to be reported along with income tax filings to the Canadian Revenue Agency (CRA). Previously, the CRA only required a seller to kept records of the transaction.

Assessing the impact of this change requires information on the share of speculation and foreign investment in the Canadian housing market. While this remains an unknown, there is a fair bit of certainty that the share is likely high­est in the Vancouver and Toronto regions. In the case of Vancouver, the new rules will further serve to keep foreign investors out of the market, coming closely on the tail of the recent imposition of a non-resident land transfer tax. In Toronto, the new tax rules could have significant impact because an elevated sales-to-population ratio is indicative that speculative activity has been on the rise.

Bottom Line

Overall, the mix of housing policy changes recently an­nounced by the federal government is targeted at safeguard­ing the health of Canada’s overall financial system. While each individual rule is incremental in nature, when taken together they will likely serve to cool the housing market alongside other dynamics that are also in place. However, ultimately, we believe these regulations will only reinforce the moderation in housing activity already baked into our forecast. From a national perspective, we forecast sales to ease back in line with their long-run average and prices to dip slightly next year. From a regional perspective, home prices in Toronto are already expected to sharply decelerate from a red-hot 18% y/y pace in September to a pace more in line with inflation by the end of next year. The new for­eign tax rule in Vancouver has already virtually wiped out foreign investment in that city, and the additional mortgage regulations are likely to limit the market from re-heating. There is no doubt that the new rules will create some near-term volatility, but we believe these rules will anchor sales activity to its long-run average. However, how the multitude of colliding dynamics ultimately play does pose downside risks to our outlook. In many respects, the ongoing layer­ing of regulatory rules and oversight is a trial-and-error exercise to find the right balance between demand dynamics and mortgage oversight. However, demand dynamics are very fluid to economic conditions and sentiment. While the current rules may be appropriate for today’s backdrop, the day may come when the economy takes a hard downturn. In such an event, the government should consider which of the rules in those years are best positioned to alter in order to act as a counter-cyclical influence.

Source: TD Economics 

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Elections can impact markets but not as much as you might think. If you have a good plan, stick with it.

A recent Fidelity survey across the U.S. found that 74% of investors think which party controls the government has an impact on the stock market—but perhaps not the way you think. A slim 14% believe whoever sits in the Oval Office has the biggest impact, 28% say control of Congress is key, 33% say it’s a combination, while 26% say political control has no impact at all.

What are investors doing about it? Not much. Only 15% of those surveyed have already made or plan to make changes to their portfolios because of the election. The vast majority plans to stay the course.

That’s a good thing, in our view, since history suggests that elections typically have had little lasting impact on overall market performance. Among the most powerful drivers: the business cycle, interest rates, corporate earnings, and when it comes to your personal performance—your investment plan.

“The election may spur volatility—and active investors can try to take advantage of it—but for long-term investors with a solid plan, short-term market swings should be expected,” says John Sweeney, Fidelity executive vice president of retirement and investing strategies. “It’s important to take a long-term perspective. If you have a plan you like, stick with it. If you don’t, work with a professional who can help you build one that will help serve you well, no matter what may roil the markets in the short-term.”

S&P 500 Index price returns, from January 1981 to October 2016 US$. Source: YCharts.

A look back at how the stock market has behaved under different political regimes since 1960 shows that over the long-term there has been no significant difference, on average, between which party controls the White House (see graphic below): The Democratic and Republican average annual returns were both close to 12%. Stocks did about two percentage points better when Democrats swept both the White House and Congress. But a lot more was at play than politics (see graph above). In fact, even using a random criteria like investing in stocks in odd years only would have delivered about 16% average returns, four percentage points above the average, showing the limits of party impact. Says Fidelity sector strategist Denise Chisholm: “Over long time periods, the party composition of our government has not been a critical driver of market performance.”Investing based on party party wins? Since 1960, you'd have done better picking just odd years. *Average annualized returns for the 3,000 largest U.S. stocks 1960 - 2015. All returns referenced in US$ Source: FMR Co. Source: Fidelity.com