Capital Market Highlights: Stock Market Performance

Record High US Equity and Canadian Markets

Equity markets have shown some interesting trends in 2016. The S&P 500 and Dow index, at its record high, shrugged off the Brexit and Trump turbulence, however, concerns on sustained growth overshadows the market. The Dow pushed through 20,000 in early 2017 driven by stronger corporate earnings in Q4 2016 and increasing investor confidence in Trump’s proposed policies to stimulate the economy. Although China’s economic growth have slowed down, its stimulus package has induced stability in the global market. Equities in most countries posted strong returns in a risk-on environment, the Americas and UK markets gained while China and the Euro zone erased its gains amid increased uncertainty.

A total of $4.1 billion of equity capital was raised in just the first month of the year on the TSX and TSX Venture, of which $353 million was attributable to the mining sector. The TSX and TSX Venture index outperformed the US equities driven by the heavily-weighted mining sector in 2016. Through the year, a combined $62.2 billion of capital was raised from 2,180 financings on the TSX and TSX-V, with $9.4 billion in the mining sector which represented over half of the world’s mining financings. According to TMX, over 600 mining companies listed on the TSX and the TSX Venture have seen share prices increase by over 100% in 2016. Investors experienced superior returns in Canada’s metals and mining sector, with increased returns especially in mid-tier and junior companies.

Brexit Chaos

On June 23rd, 2016, the UK voted to exit the European Union. The effect of Brexit on the equity markets saw huge pullbacks from all sectors, except most notably the mining sector, as senior, mid-tiers and even junior metal producers surged as investors fled for safer returns and demand for quality mining equities skyrocketed. Global equity markets recovered shortly after, supported by expectations of easing monetary policies by central banks and stable global economic data. Theresa May’s plan involves exiting the single EU market, ending payments to Brussels, and tightening immigration rules. Since the Brexit vote the sterling remains weak and has fallen over 20% to-date against the US dollar.

A Wild Trump Card

On Election Day, November 8, 2016, Donald Trump won the election as the new President of the United States. Trump proposed an aggressive fiscal stimulus package to spend $1 trillion on infrastructure over 5 years as well as reducing income and corporate tax rates. Together, these forces imply stronger US growth and inflation as seen by higher base metals prices and likely prompting the Fed to raise interest rates much sooner. In addition, he plans on tightening trade policies globally by applying higher tariffs and renegotiating trade partnerships to create more American jobs, increase wages, and reduce the US trade deficit.

Hawkish Federal Reserve Outlooks

The Federal Reserve closely monitored the monthly economic data reported throughout 2016 to support the interest rate hike of 25 basis points in December 2016. The economic data estimates that Q4 annualized real GDP increased 1.9% from the preceding quarter, a deceleration from Q3 at 3.5% reflected by lower exports, higher imports, and reduced spending by consumers and the government. For the year, real GDP increased 1.6% compared to 2.6% in 2015, below the 1.9% projection by the Federal Open Market Committee (FOMC). However, improving labour market conditions posed a solid case for the Fed to raise interest rates during the December FOMC meeting. The Fed unanimously lifted interest rates by 25 basis points, as expected, which increased the Fed Funds rate target between 0.50% and 0.75%. Based on the FOMC participant’s projections, or known as the dot plot, the median Fed Funds rate at 1.4% in 2017 implies three additional 25 basis point rate hikes. Except for the US, interest rates set by central banks around the globe are trending lower.

Canada Grows Moderately

Canadian equity markets experienced robust growth, noticeably through the S&P/TSX Venture Composite, as investor interest returned to the many junior miners that make up the majority of the index. At the end of 2016, the S&P/TSX Venture Composite index has gained 45%. The senior TSX index has appreciated 13.4%, outperforming many other equity indices worldwide and also following the trend of the US market pushing towards new record highs. The latest GDP numbers show that the Canadian economy is performing moderately, with Q3 growth reported at 3.5% annualized rate, however, we note that it provides an offset to the decline of 1.3% in Q2. The negative results in Q2 was due to an unexpected slowdown in Alberta’s economy as a massive forest fire in Fort McMurray caused billions of dollars worth of damages, plunging Alberta into a recessionary state as many lost their homes, jobs and possessions. Many Alberta-based oil producers stopped production during the duration of the fire; however this did not have a meaningful effect on the price of oil. The Bank of Canada forecasts Q4 annualized real GDP growth at 1.6% and expects full year growth at 1.3%, reflecting its sustained growth and expectations for interest rates to remain unchanged through next year.

Asian Turmoil

Japan’s Nikkei remained relatively flat compared to 2015 as it recovers from a decline of more than 10%, despite the Bank of Japans push for more quantitative easing and current negative interest rate environment. Asian markets extended its declines on worries of China’s economic slowdown. China’s own Shanghai Composite managed to pull off a positive 2015, however it has fallen 12.3% by the end of 2016, wiping out gains in 2015. China has been a big part of the resilience in the global market as its improved economic stability has slowly contributed to pushing Shanghai and emerging markets higher as the central bank adopts fiscal stimulus, monetary stimulus, and currency devaluation.

South American Markets Are Emerging from Recession

After defaulting on $95 billion of bonds 15 years ago, Argentina returned to the debt market issuing $19 billion in bonds in 2016 which had orders more than three times the closing value and is now looking to tap into the debt market again for another $10 billion of foreign debt in 2017. The strong demand for the debt offering in 2016 indicates the economy’s emerging growth and investor attitude toward risk-on behaviour. In addition, Brazil, one of the largest emerging market economies is expected to rebound from recessionary conditions but continues to face political tensions that is applying pressure on its economic reforms. However, the Ibovespa stock index is still among the top gainers worldwide, gaining over 38% in 2016.

*Source: Wall Street Journal Market Data Center, YTD as at December 31, 2016

World  Stock Indices

12 month return

2016*

12 month return

2015

S&P 500 (US) 9.5% -0.8%
Dow Jones Industrial (US) 13.4% -2.15%
NASDAQ Composite (US) 7.5% 6.0%
S&P/TSX   Composite (Canada) 17.5% -11.1%
S&P/TSX Venture Composite (Canada) 45.0% 24.4%
Bovespa (Brazil) 38.9% -13.3%
FTSE 100 (U.K.) 14.4% -4.9%
Stoxx Europe 600 (Europe) -1.2% 6.8%
DAX (Germany) 6.9% 9.6%
CAC 40 (France) 4.9% 8.5%
RTS Index (Russia) 52.2% -4.3%
All Ordinaries (Australia) 7.0% -0.8%
Nikkei (Japan) 0.4% 9.1%
Hang Seng (Hong Kong) 0.4% -7.2%
Straits Times (Singapore) -0.1% -14.3%
Shanghai Composite (China) -12.3% 9.4%
S&P BSE Sensex (India) 1.9% -5.0%