Global economic growth remains strong, and inflation is gradually picking up as labour markets continue to tighten. However, financial market volatility may creep higher given market uncertainty surrounding trade issues and rising interest rates. Accordingly, we continue to stress the importance of diversifying portfolios across multiple asset classes, including equities, fixed income and cash investments. Potential market risks we intend to monitor as we head into the second half of the calendar year include political developments in Europe (Italy and Spain) and Latin America (Brazil and Mexico) and emerging markets’ rising debt levels.
The discount at which Western Canadian Select (WCS) heavy crude oil trades relative to the West Texas Intermediate (WTI) benchmark widened to US$26/bbl earlier this month as (i) a proposed change to a major Canadian pipeline’s shipper nomination process, (ii) a Canadian railway strike, and (iii) refinery maintenance all weighed on the Canadian heavy oil quote. However, that discount narrowed sharply early last week as all three factors subsided. Nevertheless, in our view, Canadian energy investors should expect volatility in the WCS-WTI differential over the coming years as transportation capacity constraints will likely continue to pressure Canadian heavy oil prices. As such, we reiterate our preference for gaining exposure to the energy sector through energy infrastructure companies, which are relatively less susceptible to commodity price changes than energy producers and whose shares offer better long-term risk-adjusted return potential, in our view.