Canada

In the first quarter of 2018, global equity markets corrected for some of the strength seen late in 2017 and in January. This wasn't surprising, but the speed and violence of the market moves caught many participants unprepared.

Global trade has also come into the spotlight. Ongoing NAFTA negotiations, combined with the fear that American trade policy could impact Canadian trading relationships, certainly had an impact.

Canada's corporate sector is being forced to re-evaluate its competitive position in light of the new tax regime in the U.S., which combines lower rates with accelerated depreciation allowances for capital spending.

While the behavior of the market in the first quarter was very different than the preceding quarter, the underlying themes behind the markets changed very little. Here's what we expect to see as we get further into 2018:

1

Synchronized global growth continues, despite volatility

Broad-based growth continues to be strong but has stopped accelerating. Volatility is likely to continue and may be exacerbated by geopolitical events.

2

Inflation and rates to drift upward

We are not expecting a sharp increase in inflation, but a U.S.-led upward drift in 2018 should result in modestly higher rates, mainly in the shorter maturities. This will act as a headwind to fixed income returns.

3

Dispersion among stocks to increase

The first quarter showed an increasing tendency for individual stock movement with some notable large, technology-related, high-momentum names among the biggest movers.

4

Equities to gain on strong earnings

Global earnings are exceeding expectations so far this year, which is lowering the price-to-earnings multiple. We see this as a positive and healthy development for the medium-term outlook.

“Prediction is very difficult, especially if it's about the future.”
The underlying global environment is equity-friendly
Maintain a long-term perspective

While trade, inflation, geopolitics and other factors can interrupt the economic cycle, don't let the vagaries of the short-term news cycle distract you from your long-term goals.

Ensure you are diversified

While we're confident in the market environment, we do see some clouds forming on the horizon. That said, we think it wise to remain at or slightly above target equity allocations.

Take advantage of active management

The increase in dispersion among stocks should provide a good backdrop for active managers to select stocks with the potential for strong performance.

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