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June Monthly Market Commentary & Forecast

Date: July 6, 2018

Stock markets remained volatile in June appearing to unsettle investors and continuing several recent months of choppy performance.  Investors are still concerned about escalating trade tensions, political instability, stock market volatility, global geopolitical tensions, US raising interest rates and what some investors believe are stretched equity valuations.  Overall global markets were flat for the month as measured by the MSCI World index 0% return.  Most of the global weakness was experienced in European and Asian markets driven by the escalation to a trade war with the US.  The North American picture was better with US old-economy stocks in the Dow finishing down 0.50% while the S&P and Nasdaq were up 0.60% and 0.92% respectively.  Note that the Dow is more prone to share prices being affected by trade-related news than the S&P or Nasdaq because its multinational constituents receive a more significant amount of their revenues from overseas.

The TSX outperformed the global markets with a strong return of 1.70% and an even healthier 6.7% total return for the quarter.  Most sectors moved higher within the TSX this month except for the Industrial and Financial sectors.  Strong performances were shown in the Health Care, Consumer Staples, Utilities and Energy sectors.  There continues to be a tug of war between the bulls looking at the solid global earnings and a strong economic backdrop compared to the bears that are looking at the risk of a trade war and global geopolitical tensions hampering global growth, raising US interest rates and its impact on equity valuations.

MARKET PERFORMANCE

Market

Return (%)*

Canada (S&P/TSX)

1.7

US (S&P)

2.0

MSCI (World)

1.2

Best (Mexico)

8.2

 Worst (Argentina)  (20.2)

*In Canadian dollar terms as at June 30, 2018

We believe we are entering into the lazy, hazy days of summer when it comes to the stock market.  Markets may drift sideways on news of Trump, tariffs, China, negotiations with the Rocket Man and NAFTA discussions but the overall theme is generally positive.  We are starting to see evidence of these doldrums as the US experienced its second largest weekly outflow of equities on record with a $25B outflow in June.

Energy has surprised many as it was the best-performing sector in the S&P for the second quarter even surpassing Technology.  Lead by a surging price of crude oil with WTI up 11% for the month and 17% for the quarter, US energy equities returned 12% for the quarter and Canadian energy names were also strong returning 13.7% over the same period.  Oil companies are generating excellent cash flows and paying back shareholders in the form of dividends. The dividend yield on energy companies at 2.6% is now higher than the dividend yield on the S&P of 1.85%.  The surging oil price is on the back of a disciplined OPEC-Russia supply response as well as surging demand from the global GDP growth.  This is leading to record production in the US but surging exports to global markets is resulting in record inventory drawdowns both in the US and globally.  The US had its biggest weekly drop in inventory since September 2016, at 9.9M barrels in June.  Supply disruptions are being experienced in other parts of the world such as in Canada with a Syncrude fire halting production, Venezuela with economic and political turmoil affecting production and Libya with a force majeure on its oil export facilities.

After a six-month pause on interest rate policy, the Bank of Canada (“BoC”) is giving mixed signals on its next move on interest rates given the challenging hand of cards it has been dealt.  On the one hand, the economy is operating at potential and inflation is close to its intended target.  On the other hand, BoC Governor Poloz has issues such as household debt, housing and trade to deal with.  On top of that, NAFTA negotiations do not appear to be making any progress. Investors are hoping the US will avoid placing further trade barriers on Canada and Mexico, even if it leads to bilateral agreements with the parties involved. NAFTA has a new variable with the election of new Mexican President Obrador.  Globalization has played a major role in the growth of corporate earnings and any move toward protectionist policies would impede global economic growth.  Given the unpredictability of Trump, we can see why Governor Poloz is non-committal on interest rate policy.

We believe the recent selloff in technology stocks – down  approximately 4.5% from their highs but individual names down much more – is not a reason for concern.  Enriched by corporate tax cuts from the Trump administration and a strong global economy, these companies continue to generate excellent cash flows and are paying back shareholders in the form of dividends and share buybacks.  Technology disruption and favourable government court decisions are creating a healthy mergers and acquisitions market.  There has been $2.35T in deals announced globally this year, up 57% from the same time in 2017.  Given the increasingly robust global economy, CEOs are more confident in entering these types of deals.   We think the recent move out of technology equities is transitory and part of normal sector rotation.  Given their robust growth profiles, the sector should attract renewed interest in due course.

We remain invested and are committed to companies that provide revenue growth, improving free cash flow and higher earnings per share. We are active portfolio managers with a disciplined investment process including the implementation of various risk management tools. Our fund performance has been improving over the short term – the Dividend Growth, Growth and Global Growth funds are 1st quartile over the one-year period.

FUND PERFORMANCE

Fund

1 Month Return*

Fund

Benchmark

Stone Dividend Growth Class, Series F1

1.1

1.8

Stone EuroPlus Fund, Series F2

0.6

0.8

Stone Global Balanced Fund, Series FF3

0.8

1.2

Stone Growth Fund, Series F4

2.7

1.9

Stone Global Growth Fund, Series F5

1.8

1.4

Stone Select Growth Class, Series F6

(0.2)

2.2

Stone GaleForce Dividend Growth Pool

0.8

FUND BENCHMARKS:  180% S&P/TSX Composite, 20% S&P 500 C$   2MSCI Europe $C    315% S&P/TSX Composite, 15% S&P 500 C$, 30% MSCI World C$ and 40% FTSE TMX Canada Universe Bond   450% S&P/TSX Composite and 50% S&P 500 $C   5MSCI World $C   650% S&P/TSX Capped Energy, 50% S&P/TSX Capped Materials             

 *As at June 30, 2018

 


There are risks associated with investing in mutual funds. Please refer to the simplified prospectus or offering memorandum for details of the risks associated with these funds. The principal risks associated with the Stone Dividend Growth Class are market risk relating to fluctuations in the stock market and equity risk relating to fluctuations in individual securities. The principal risks associated with the Stone Global Balanced Fund are market risk relating to fluctuations in the stock market, equity risk relating to fluctuations in individual securities, credit risk associated with investments in bonds and interest rate risk associated with fluctuations in interest rates. The principal risks associated with the Stone Growth Fund are market risk relating to fluctuations in the stock market and equity risk relating to fluctuations in individual securities. The principal risks associated with the Stone Global Growth Fund are market risk relating to fluctuations in the stock market, equity risk relating to fluctuations in individual securities and foreign investment risk associated with investments in foreign companies.

All mutual funds carry the risk that the mutual fund may decrease in value. The degree of risk varies depending on the investment objective and strategies of the mutual fund. Before investing in any mutual fund discuss with your financial advisor how it works with your other investments and your tolerance for risk. Please refer to the simplified prospectus or offering memorandum for more information regarding the risks associated with these funds.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus or offering memorandum before investing. Any indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with a fund’s performance, rate of return, or yield. If distributions paid by the fund are greater than the performance of the fund, then your original investment will shrink.

Distributions paid as a result of capital gains realized by a fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information contained in this publication is based on sources such as issuer reports, statistical services and industry communications, which we believe to be reliable but are not represented as accurate or complete. Opinions expressed in this publication are current opinions only and are subject to change.

Stone Co