Our portfolio management teams remain optimistic on the outlook for Canadian equity markets.  Although we are likely in the later stages of the economic cycle, the Canadian economy is expected to continue benefiting from strong demand for goods and services from the United States.  This should allow for continued strength in corporate profits resulting in positive equity market returns. 

There has been a greater dispersion of returns among Canadian stocks this year than in recent years past. On balance it does seem that the majority of the "winners" fall in the growth stock camp. This has made it difficult to outperform. However, we are finding value in several pockets of the market for the first time in a while.

We expect interest rates to continue rising in the period ahead as inflation and real rates move higher.  This should be positive for earnings of banks and life insurance companies.  Insurance stocks have lagged the overall market recently however fundamentals remain sound and the stocks are relatively inexpensive.  Bank earnings growth is likely to decelerate as residential housing activity declines, resulting in slower mortgage loan growth.  However, higher interest rates should allow banks to drive profitability higher.  Over the medium term, we are constructive on the outlook for the energy sector as the lack of investment in the sector results in global oil supply constraints while demand continues to surprise to the upside.  Commodity prices in the energy sector are expected to remain volatile as higher prices spur a supply response, particularly from US shale producers.   

We continue to monitor key risks in the market.  The tariffs put in place by the US government together with the retaliatory actions of other trading nations has created some uncertainty in the market.  The negative rhetoric from the United States regarding trade with Canada has increased recently and could adversely affect ongoing NAFTA negotiations.  We continue to closely watch these proceedings and assess potential outcomes.  Additionally, we also continue to monitor the effects of higher interest rates on global economic growth.  We are likely entering a period of global central bank tightening which has the potential to slow economic growth going forward.  This is likely to result in higher equity market volatility as uncertainty increases.   

Concerns around trade tariffs potentially imposed by the U.S. and retaliating measures from the impacted countries, such as China, have lead to market volatility.  While global GDP was up in the second quarter, the continued uncertainty surrounding global trade has negatively impacted many markets outside the U.S., as well as business sentiment.  However, even with heightened concerns over trade, capital spending increased in parts of Europe, the U.S. and Japan. China, on the other hand, has seen lower fixed investment growth which impacts GDP growth and increased concerns over its slowing economy would be negative as China is the second largest economy in the world.   

Despite these headwinds, global equity market valuations are above the historical long-term median as the expectation of a global recovery continues.  However, valuations are not near the high end of the historical range either.  Regions that still appear reasonable in terms of market valuation include Japan and Emerging Markets.

With all of this in mind, our managers remain focused on the long-term, under the assumption that modest positive economic growth should drive continued growth in earnings.