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Global Economic Growth Remains Strong, and Inflation is Gradually Picking Up

Investment Navigator - July Newsletter

July 4, 2018

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.

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Recent Economic Data for the First Quarter of 2018 Suggests the Global Economy Cooled off from its Red-Hot Pace of the Second Half of Last Year

Investment Navigator - June Newsletter

June 6, 2018

Recent economic data for the first quarter of 2018 suggests the global economy cooled off from its red-hot pace of the second half of last year. However, economic activity remains well above its trend (or potential) growth rate, resulting in diminished excess capacity across most economies. This is reflected in declining unemployment rates and rising capacity utilization rates. As a result, inflation readings have ticked higher as tighter labor and goods markets result in stronger wage gains and quicker price increases. In response, central bankers, including those in Canada and the United States, have become more confident in tightening monetary policy. Strong growth, diminished excess capacity, and rising inflation and interest rates are all consistent with an economy in the later stages of its business cycle. Officially, this is the second-longest U.S. recovery in the post-war period at 8 years and 10 months so far. However, most reliable recession risk indicators (such as yield curve slope, real interest rates, output gap, unemployment rate, credit spreads, etc.) continue to suggest the odds of a recession materializing in the next twelve months remain modest. Thus, notwithstanding a typical increase in market volatility at this point in the cycle, we remain constructive on equities relative to fixed income with a bias toward economically-sensitive segments across asset classes.

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