The weaker Canadian dollar added to returns from international investments for Canadian investors. Major benchmarks in Canada, the U.S. and EAFE areas touched record highs before giving back nearly all gains in the final weeks of the period as bond yields rose. Of the major U.S. indices, only the S&P 500 Index Total Return $ CAD finished higher for the quarter. The S&P/TSX Composite Index Total Return posted a gain of only a small fraction of a percent.
Major European equity markets were mostly higher with Italy leading the way, while Germany’s DAX Index declined. Japanese equities surged in September after Prime Minister Yoshihide Suga announced he would not run for re-election in the Liberal Democratic Party's leadership race, increasing the prospects of more fiscal stimulus. Hong Kong assets sold off alongside turbulence in Chinese mainland stocks as the government’s regulatory crackdown extended to several additional industries. Toward the end of the period, selling focused on property developers after heavily indebted China Evergrande told major lenders not to expect scheduled interest payments, raising concerns about a possible systemic shock to the wider bond and stock markets.
Growth-oriented stocks and large-capitalization stocks outperformed value-oriented and small-capitalization stocks in most regions. Equities mostly shrugged off concerns about economies hitting a soft patch. Instead, investors took heart from robust corporate earnings growth and indications from most central banks that they were in no hurry to raise interest rates, even though expectations for the timing of tapering of asset purchases have moved forward.
In the TSX, industrials and consumer staples led sector performance. Health care led declining sectors with a drop of close to 20%, mainly due to weakness among shares of cannabis companies. The consumer discretionary sector was down, mainly due to Magna International Inc., which cut revenue forecasts because of ongoing shortages of semiconductors. The materials sector fell as lower gold prices weighed on shares of mining companies. In the S&P 500, financials, utilities and communication services were the top-performing sectors. Industrials was the worst-performing sector, weighed down by the poor performance of railways and airlines. The materials sector fell with lower commodity prices.
Canadian fixed-income markets were mostly lower due to rising yields, while most international bond markets made slight gains in Canadian dollars. Benchmark yields fell in the first part of the period due to concerns about slowing economic growth and the steadfast conviction of central banks that inflation was transitory and official interest-rate hikes were a long way off. The second half of the period was marked by rising yields and falling bond prices as several central banks displayed more hawkish tones, either moving to taper their asset purchase programs (quantitative easing) or talking about doing so imminently. U.S. bonds slightly outperformed those from other regions and corporate bonds slightly outperformed government bonds.
The outlook remains bullish for equities heading into what is typically the strongest quarter of the year. The macroeconomic outlook is consistent with continued expansion. Central bank policies continue to be accommodative, even with a reduction of asset purchases. If pricing pressures prove to be transitory, central banks will not raise benchmark rates anytime soon. Bond markets may still be challenged by higher yields due to economic growth and anticipation of asset purchase tapering. Volatility will likely remain elevated due to several sources of risk, including economic slowing, pandemic-related uncertainty, U.S. congressional wrangling over spending plans and the debt ceiling, and the possibility that unrest in China becomes a headwind for global markets.
