Cidel - Q4 | Quarterly Report


Looking Back
In our opinion, these were the most important stories in Q4…
The outperformance of U.S. equity markets came to an end in the fourth quarter, as the majority of equity markets around the world declined. The S&P 500 declined 13.6% over the fourth quarter, underperforming Canadian, Europe, Australasia and Far East (EAFE) and emerging market equities for the period. The majority of the decline came in December 2018, with a multitude of large daily drops occurring mid-month and markets bottoming on Christmas Eve, just before staging a multi-day rally into year-end. The S&P declined just over 20% from its all-time intra-day high in September to its intra-day low in December, and just under 20% based on closing prices, so very close to the definition of a bear market. Volatility came roaring back into equity markets in 2018, particularly compared to 2017 which was one of the least volatile equity environments ever.
The substantial up-and-down movement in the markets was exacerbated by a combination of the low liquidity typically seen as year-end approaches, tax loss selling, China trade concerns and worries about the U.S. government shutdown. Interestingly, emerging market equities, which normally experience even larger drawdowns during risk-off periods, outperformed on a relative basis in Q4 and December, benefiting from a weakening U.S. dollar and more attractive relative valuations.
Investment losses were not contained to equity markets in 2018. There is usually an asset class (or subset of an asset class) that delivers positive performance in a tough equity market year, but 2018 was the worst year in a century in terms of the percentage of investments experiencing a negative return across asset classes. According to Deutsche Bank, roughly 90% of investments measured across 70 different categories experienced negative returns last year.
Economic data generally softened over the fourth quarter. While the U.S. employment numbers continue to be very strong, purchasing managers indexes (PMIs) – though they remained in expansionary territory – trended down over the last few months of the year. Outside the U.S., in Canada and other major developed markets, the trend in manufacturing PMIs was the same, with numbers indicating a slowdown from previous high levels, but not contraction. The general expectation is for growth in developed markets to slow down from current levels over the next few years
Interest rates moved substantially over the course of the fourth quarter. While both the Bank of Canada and the Federal Open Market Committee (FOMC) raised short term rates by 0.25% during the quarter, as was widely expected, interest rates on the longer end fell dramatically. In the U.S., 10-year government bond yields peaked in early November at 3.24% before dropping steadily over the next couple of months, ending the year at 2.68%. In Canada, 10-year government bond yields peaked in early October at 2.60% before declining even more over the rest of the quarter, ending the year at 1.97%. The above-mentioned concerns that weighed on equity markets in the same period caused government bonds to rally on a short-term flight to safety. This flattening of the yield curve is often looked at with concern by investors, since, historically, an inverted yield curve has tended to forecast a recession. However, it’s important to note that in the past, recessions followed a yield curve inversion that was sustained for a period of time, but not after a short-term blip.


Looking Forward
As we enter Q1, the points below have our Investment Team's attention...
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In 2018, a jarring fourth-quarter decline in global equity markets has divided investor views on what 2019 will bring. Essentially, there are two distinct stories being told in the market, and two distinct camps of investors. As we write this commentary, both seem to be digging into their position and focusing only on data that supports their view. While both sides have merit, we tend to be more optimistic about 2019. We believe markets will eventually get clarity and pick a direction and we believe that direction will be up.
The first view (Camp #1) – is characterized by references to changes in equities prices, the yield spread between corporate and government debt, and the direction of commodity prices. All three of these markets, according to this narrative, point to an imminent economic recession. Indeed, in December 2018, we saw one of the largest flows out of equities and high-yield bonds into short-term government bonds. Similarly, some investor surveys revealed the highest levels of pessimism since 2015, almost approaching 2008 levels. In anticipation of a recession, investors are shifting their asset mixes.
The second view (Camp #2) – holds that the economic data and corporate results certainly indicate slower economic growth ahead, but that we shouldn’t be too quick to conclude that a recession is on the way. After the market declines of the early 2000s and 2008, investors may be too quick to assume that a decline in markets will necessarily approach 50% and feel compelled to run to the safety of cash as soon as any weakness is detected. In fact, observers in this camp believe more modest market declines, like the one we experienced last fall, are much more typical, and that investors have overreacted to the potential of a recession. This camp feels the weakness in equity markets will be short lived.

The Bigger Picture!

Better Ideas and Better Outcomes.

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Charts to Watch in 2019

Senior Vice President and Head of Equities Charles Lannon discusses the the charts to watch in 2019.

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Cidel Canadian Opportunities Fund

Q & A with Vice President and Portfolio Manager Robert Spafford.

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Cidel in the News

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information contained in this document has been compiled by Cidel Asset Management Inc. from sources believed to be reliable, but no representations or warranty, express or implied, are made by Cidel Asset Management Inc. as to its accuracy, completeness or correctness. The opinions expressed are as of the date of this publication and may change without notice and are provided in good faith, but without legal responsibility. Cidel Asset Management Inc., carrying on business as Cidel, Cidel Financial Group, Toron Asset Management International, (“Cidel”) is registered as a portfolio manager, investment fund manager and exempt market dealer in Ontario. Cidel is also registered as a portfolio manager and exempt market dealer in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Quebec and Saskatchewan. This document may not be reproduced, distributed or published by any recipient hereof for any purpose.