Knowledge Centre

Q4 2019


2019 was a dynamic and unpredictable year. It ended with a triumphant, broad-based rally on a scale not seen in quite some time. Rarely has everything worked simultaneously like it did last year; large and small cap stocks, developed and emerging market stocks, bonds, commodities and real estate — all generated returns of 5% or more for the first time since 2010. In the year ahead the markets will likely struggle to replicate 2019’s impressive results. While the global economy should be able to avoid any sharp economic downturns, recent weakness does justify some caution.

Canada now boasts the highest short-term interest rates amongst G7 nations and a very strong balance sheet which gives it incredible ammunition to deal with whatever may come our way. As a result, 2019 was a great year for the Canadian dollar, which gained more than all but a handful of currencies in the world. Canada’s financial system appears to be in a relatively good place to weather any potential storms as necessary. Recent efforts to stabilize domestic household debt and cool the housing market have been worthwhile; all while the country’s savings rate has jumped to its highest since 2015. Canada is holding up well, even as growth remains slow, however a modest pick-up in global growth could provide a decent tailwind for the economy.

The U.S. economy is not in the kind of trouble that investors feared last year. It is time to relax a little: the job market is holding up; inflation is tame; consumer spending (which accounts for 70% of economic activity) remains solid; corporate profits have been better than expected; stocks are at all-time highs; the housing market is strong (especially after three interest rates cuts in 2019). Clearly, the trade war is doing significant damage to the economy; however any rollback of tariffs combined with a global upswing and pro-growth election year rhetoric will ensure the current record long expansion, now in its 11th year, will continue.

The global economy could gain some steam after being in the doldrums. Europe has been trapped in a downswing for the past several years, but the resolution of Brexit, easy monetary policy and improvements in global trade should help boost their lagging economies. The lifting of Brexit uncertainty and increased U.K. fiscal stimulus should support Britain’s economy and possibly lead to a significant boost in growth. The Asian markets are well poised if the U.S. / China trade war is resolved and global growth accelerates. Japan’s economy is suffering the after effects of the consumption tax hike in October, its exposure to the global manufacturing downturn and its own trade tensions with South Korea, so the government launched a sizeable fiscal stimulus package. China’s growth is admittedly slowing due to elevated trade uncertainty, as the country tries to balance its short-term requirement for stimulus versus the medium-term necessity to reduce leverage in the economy. The Australian economy remains soft, given high debt levels and slow wage growth. Emerging Markets are positioned to grow this year as well.

It was a very good year for investors in 2019. So good, in fact, that it was almost impossible to lose money. Canadian stocks gained 22.9% for the year and 3.2% in the fourth quarter. U.S. stocks paced the world once again last year climbing 26.5% (all figures in Canadian dollar terms) and 7.0% last quarter. International equities also saw good gains, up 17.7% for the year and 6.1% in the quarter. Even beleaguered Emerging Market stocks jumped 13.9% in 2019 and had a very strong fourth quarter rising 9.8%. Bonds surged out of the gate at the start of the year, but fell back to earth, gaining 6.9% for the year, but losing 0.8% in the last quarter.

2020 promises to be a year of challenges and opportunity. Investing has always required a belief in the future; a belief that an asset will be worth more tomorrow than it is today. So, while the uncertainties of Brexit, Eurozone political risk and U.S. / China tension will weigh on confidence; global growth will likely remain resilient and as such concerns should be set squarely on the back burner.


2019 ended with most economies in slow growth mode or even near recession amid an unsettling global trade war. Slow growth in many of the worlds’ economies was opposite to the performance of their domestic stock markets, many of which were in positive double digits territory: a rare occurrence only seen twice in the past decade. Contrary to some of its counterparts in Europe and Emerging Markets, the Canadian economy has been relatively resilient on the backdrop of strong employment and consumer confidence. The S&P / TSX index returned 3.2% in the final quarter of the year and posted a strong 22.9% over 2019, a sharp reversal from 2018’s 8.9% decline. It was enough to make it one of 2019’s strongest performers.

The Canadian stock market performance was broad-based with most sectors in positive double digits territory. The leadership baton was passed back and forth between defensive and cyclical stocks and as a result, the TSX tested all-time highs on numerous occasions during 2019 peaking on December 24 at 17,180 points. The best-performing sector in 2019 was Information Technology with an outstanding 60.2%. This represents its second consecutive year of double digit returns. Utilities were also very strong, posting a 31.6% return, followed by Industrials at 24.6% and Materials at 22.1%. On the flip side, only Health Care was negative (-11.2%) in 2019; almost the same decline as in 2018. Energy was relatively weak although it posted a modest 5.9% gain. The energy sector has been under pressure for many years on the backdrop of pipeline issues that continue to cause Canadian crude to be discounted compared to U.S. and International oil.

Despite the S&P / TSX’s strong gain in 2019, performance over the last decade has been far less impressive as some heavyweight sectors like Energy and Materials endured protracted price declines. Canadian equity investors gained less than half of what U.S. equity investors gained over the past ten years and only marginally surpassed a composite government bond benchmark during the same time frame. Nonetheless there is some positive news as the last decade saw the index reach all-time highs by adding more than $700 billion in value. For instance, a few individual bets in Health Care, Consumer Discretionary and Industrials saw stratospheric performance in the thousand percentage range, an indication that Canadian markets are still offering great opportunities for investors.

The strong rebound of Canadian equities and its peers across the globe in 2019 should not overshadow the fact that global GDP growth recorded its slowest pace in a decade and most of the market returns stemmed from PE (Price/Earnings) ratio expansion due to lower rates rather than pure corporate growth. In Canada, the economy has been remarkably resilient in 2019 with record job numbers and unemployment at historical lows shrugging off the USMCA trade dispute as well as the U.S. / China protectionist policies.

The loonie was the best performing major currency, having benefited from a resilient and steady Bank of Canada key rate compared to more dovish rate decisions in other major economies. Job numbers were very strong though they slowed in October and November with back-to-back losses totaling 73,000 jobs. As for Canadian markets, a strong reversal from the previous year’s decline and frequent all-time highs should not automatically trigger calls for a market peak or a bearish S&P / TSX outlook. The index is still seen as a ‘value proposition” with a PE ratio at around 15 versus 18 for the S&P 500: the largest discount since the last great recession. As historically most markets over time revert to their means, Canadian equities still appear to be low hanging fruit for investors.


The Canadian FTSE TMX Universe Bond Index lost 0.8% in the fourth quarter of 2019 but was up 6.9% for the year. The Bank of Canada has kept its benchmark interest rate steady at 1.75%. The rate remains at its highest level since December 2008. In the U.S. the Federal Reserve cut its benchmark interest rate at the end of October to a range of between 1.5% and 1.75%.

The Bank of Canada kept its key interest rate unchanged for its final rate decision of 2019 citing signs of a stabilizing global economy and the resilience of Canadian consumers. The central bank’s target for the overnight rate remains at 1.75%, where it has stood since October 2018. The bank continues to hold rates steady despite a wave of cuts at other central banks around the world in the face of slowing growth and the uncertainty surrounding the U.S. / China trade war. The central bank said that Canada’s inflation rate continues to remain near the bank’s 2% target which is “consistent with an economy operating near capacity”.

Canada’s policy rate is now the highest of the countries to which it is usually compared. Canada’s relatively high overnight rate mainly reflects the central bank’s success in achieving its 2% inflation target. Inflation has been at 1.9% or above since March 2019 and most recently has risen to 2.2% compared with a year ago. Inflation heated up in November as gasoline prices posted their first year-over-year increase since October 2018 and the closely watched core inflation number, considered a better gauge of underlying inflation, was 2.2% compared with a revised figure of 2.1% for October. What this means is that real short term interest rates (adjusted for inflation) in these other countries are much closer to their Canadian equivalent than can be seen by only considering nominal short term rates.

In the U.S., the Federal Reserve cut short term rates three times in 2019, ending the year with a range of between 1.5% and 1.75%. Speaking to Congress’ Joint Economic Committee in mid-November, Chairman Jerome Powell said that the Fed is likely to keep its benchmark short term interest rate unchanged in the coming months. “Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labour market, and inflation near our symmetric 2% objective as most likely”. By lowering borrowing costs on mortgages and other loans, the rate cuts have spurred home sales and boosted the economy. The Committee questioned Powell about negative interest rates, which President Trump also called for, and he responded that they “would certainly not be appropriate in the current environment.” Negative rates occur “at times when growth is quite low, and inflation is quite low, and you really don’t see that here,” Despite President Trump’s attacks, both Republican and Democrat lawmakers took a largely respectful approach to Powell. Several complimented him for the “Fed Listens” events the central bank has held around the country, which have sought input from a range of groups, including unions and non-profits, on ways the Fed could update its monetary policy framework.

Recent U.S. data suggests that growth remains healthy as the economy expanded 2.1% in the third quarter despite being down from 3.1% in the first three months of the year. The unemployment rate is at a historic low and hiring is strong enough to potentially push the rate even lower. A problem has been that many businesses have delayed or cut back on their spending on large equipment but a partial resolution of the trade war may help revive business investment.

Fixed income volatility increased considerably in recent months as yields rose sharply in early September and have since retreated lower. Markets appear to be struggling with clear signs of slowing global growth which may be challenging for central banks to counterbalance. Ten year U.S. Treasuries are trading at an extremely low yield, which has historically been consistent with economic distress, but the U.S. remains a sea of calm as unemployment is at an historic low. Corporate leverage has grown, but so have corporate earnings, As a result default rates are running below their historical long term average and default forecasts from bond rating firms remain low.


The Standard & Poor’s 500 index skyrocketed 9.1% in U.S. dollar terms over the fourth quarter. In Canadian dollar terms the index was up a healthy 7.0%. For 2019 as a whole the U.S. equity benchmark climbed 31.5% in U.S. dollar terms and was up 26.5% in Canadian dollars. The stellar 2019 performance is partly explained by a relatively low starting point as one year earlier the index lost 13.5% in U.S. dollar terms over the final quarter of 2018. At the time there was an expectation for an ongoing deterioration in global macro conditions and regulators responded in the U.S. by cutting interest rates. Strong employment numbers and low interest rates have been very supportive for U.S. equities. The S&P 500 share index is now in the eleventh year of its bull market expansion.

The U.S. unemployment rate is the lowest it has been in 50 years at 3.5%. Initial jobless claims, a measure jobs lost, fell at the end of 2019 to near post 2008 recession lows. Challenger, Gray & Christmas, a company that tracks employment trends, said the number of announced layoffs fell in December to its lowest level in a year and a half. The fourth quarter announced layoffs were the smallest since the autumn of 2018, reversing an uptrend that began earlier last year, and only a few of the job losses were attributed to the U.S. / China trade war.

The rise in the stock market was largely driven by institutional investors as retail investors remained on the sidelines, focused on trade war headlines. As a result 2020 could be another strong year for stocks as many retail investors are expected to shift from bond funds into equity funds, as was last seen in 2013. Extremely cautious retail investors are now seeing bond yields that are quite a bit lower following a series of central bank rate cuts. Years of high bond flows, such as 2012 and 2017, and now 2019, have typically been followed by weak bond fund flows. 2019’s strong equity market, driven by institutional investors, may now see retail investors following the equity market’s strength.

One of the main causes of concern is the ongoing trade war between China and the United States with both sides taking damage. Investors are hoping for the de-escalation of economic hostility between the two largest economies in the world. Phase one of the deal that the Trump administration has put together has brought calmness to the markets, which has helped propel the stock market to new highs. The trade dispute had caused reductions in capital expenditures across the globe so any positive announcements by either the U.S. or China will provide stability for investors. The market will continue to rally if the optimism of the phase one trade deal acts as a building block for economic relations between the two countries.

We may be on the cusp of a recovery through the first half of this year thanks to central bank easing, the de-escalation in the trade war and tentative green shoots in global manufacturing. 2019 has seen the largest amount of central bank easing since the 2008 financial crisis and the central bank easing of 2019 may prolong the aged cycle. The main reason for the longevity of this cycle has been the persistence of economic slack. This has allowed the U.S. and other developed economies to grow without generating significant inflation pressure and has deterred central banks from lifting interest rates. The trade war has been a cycle extending global deflationary shock, in that it forced central banks to reverse previous tightening before monetary policy became restrictive.

The U.S. economy grew a respectable 2.1% in the third quarter of the year. While the U.S. economy is not rising as fast as its surging stock market, evidence suggests that economic growth has stabilized and moderate growth is expected to be maintained for the foreseeable future. There are signs that we are in a classic late cycle expansion as we are seeing an economy with almost full employment and slowing momentum which tends to foretell a decline in corporate profit margins, but while the U.S. may well be in the mature stage of its economic cycle, there is still time and room for equity markets to run.


2019 was a very good year for what most interests investors; the bottom line. Performance was remarkably strong given some of the fundamentals that the world’s major economies were dealing with. Principally, the U.S. / China trade dispute continues taking its toll on economies far and wide, although there are some signs of a truce on the horizon. However, the longer this trade war goes on, the greater the possibility it could prevent or delay a re-energization of the global economy. For now, the markets are already pricing in the prospect of such an event. But even if an agreement is forged, it is unknown if it will be enough to undo the damage already done.

While European equity performance has been very good, the economic backdrop remains difficult. Export-oriented countries have been particularly hard hit by a slump in orders from China. On a more positive note, the service sector has held up relatively well. Unemployment remains at its the lowest level since 2008, as the labour market continues its slow recovery from the European debt crisis. In order to boost the Eurozone, the European Central Bank launched a stimulus package of bond purchases and interest rate cuts and also revamped measures designed to shield banks from some of the adverse impacts of negative interest rates. Of course, the uncertainty over when and how Britain will leave the EU weighs heavily in the minds of most investors.

Greater Brexit clarity emerged after the recent election which saw the Conservatives win a large majority. This means they have the numbers to drive through Prime Minister Johnson’s Brexit withdrawal deal with the European Union. This will likely lead to a negotiated exit which will provide some degree of comfort for investors as Brexit will be behind us hopefully soon. However, due to weak global growth and moderating inflation the Bank of England has shifted to a more wait-and-see approach on the economic front. Despite these hurdles the U.K. economy has the potential to pick up this year, especially as U.K. equities have dramatically underperformed their peers last year amid an overhang of uncertainty.

Japan has recently struggled as a frail global economy and the trade war has taken the air out of the country’s recovery. Forecasts by manufacturers do not suggest output is likely to rebound soon, due to a worsening toll from trade tensions. Japan’s exports have also suffered from an ongoing dispute with South Korea and a relatively strong yen. Concern remains over the increase in the consumption tax, which increased from 8% to 10% in October. Japan is also spending significant funds to stimulate the economy as a result of the worst typhoon to hit the country in 50 years.

International stocks underperformed their North American peers last year, although the overall results were not too shabby. International stocks gained 22.7% in 2019 and a whopping 8.2% in the fourth quarter (all figures in U.S. dollar terms). European stocks climbed 20.0% on the year and 8.5% in the last quarter. Asian stocks lagged, increasing only 12.0% in the year and 6.7% for the quarter.

The early part of 2020 will be agonizingly uncertain. Reasons for optimism have been repeatedly built up and dashed as the world’s major economic powers engage in a destructive trade war. If they can arrive at a truce, then other nations can get out of from under their shadow and move forward. A U.S. / China deal by the first quarter would likely lead to a re-acceleration in economic growth around the world.


Amid high levels of geopolitical concerns and lower global growth, Emerging Markets underperformed in 2019. However, the potential for a brighter backdrop offers a compelling opportunity as growth is forecast to accelerate in 2020 and remain more than double that of developed markets. Improving fiscal, economic and monetary policies and a renewed focus on structural reforms in many emerging markets have regained traction.

China is trying to find a middle ground between supporting economic growth without resorting to aggressive steps that could saddle the country with more debt. All the while its economy is being hit by the U.S. trade war, denting factory activity and consumer confidence. Still China’s slowdown is easing. Industrial output and retail sales indicate the economy is strengthening. The property market also appears to be improving. However, the government is not reducing its vigil, so it is pouring more funds into infrastructure and the central bank is injecting more money into the economy by freeing up banks to lend slightly more. These moves are relatively modest given the vast size of the Chinese economy.

For decades, China built its economy as the world’s factory for cheap goods. However, over the past decade, it has undergone a transformation that has created a domino effect; a shift that has laid out the welcome mat for other emerging economies looking to compete. Countries such as Vietnam, Thailand, Indonesia and India are now poised to become the next wave of winners. Vietnam is one of the world’s fastest growing economies as it opens its doors to the world and boasts several advantages over its neighbours in Asia. Indonesia is well equipped to undertake some of China’s manufacturing capacity with 42% of the population under the age of 25. The government has recently announced it will open up new sectors of the economy to foreign investment and introduce labour reforms.

Amid slowing economic growth, India has recently reduced corporate tax rates dramatically. It has also introduced even lower tax rates for new manufacturing companies that could potentially attract foreign investment looking to diversify their supply chains away from China. As one of the largest and fastest growing markets, and with favourable demographics, India is attempting to incorporate disruptive technology to drive productivity and deflation.

Brazil’s economic recovery has been slower than expected. Inflation has remained under control which has allowed the central bank to reduce interest rates to record lows. As well, the government has implemented social security reform which should help improve economic activity and can significantly reduce the deficit. A major privatization plan has also been announced, while tax and other structural reforms are being contemplated.

As a whole, Emerging Markets gained 18.9% for the year and a resounding 11.9% in the fourth quarter (all figures in U.S. dollar terms). Emerging European stocks lead the way climbing 33.6% for the year and 13.3% on the last quarter. Emerging Asian stocks were the next best generating 19.7% in the year and 12.6% in the quarter. Emerging Latin American stocks were the weakest region gaining only 17.9% in 2019 and 10.6% in the fourth quarter.

For the past 30 years, Emerging Markets have provided return enhancement and risk diversification opportunities for global equity investors. Emerging Markets offer superior economic growth and low correlation across asset classes which has provided diversification benefits and created opportunities for enhanced performance. An amicable settlement in the U.S. / China trade dispute would make a compelling case for emerging market investment to accelerate.


The global economy is facing immense challenges that could spill over into Canada. The biggest risks are trade wars breaking out more heatedly between the U.S. and China, or between the U.S. and Europe, that would put another dent into the global marketplace. After a disappointing 2018 when housing prices and sales declined, 2019 has seen a rebound in the housing markets. Not only did sales numbers stabilize and resume an upward climb, but prices also demonstrated some strength. Residential investment increased at its fastest pace since 2012.

As we move into 2020, those involved in the Canadian real estate industry are wondering whether things will continue to improve in the year ahead or if there is trouble on the horizon. The good news is that most forecasts are calling for a continued recovery in 2020. This is supported by strong immigration numbers that are likely to maintain a sustained demand for housing in Canada’s most populous housing markets. Newcomers to Canada are expected to purchase 20% of the new house build over the next five years. Since the Bank of Canada is unlikely to increase interest rates this year the pressure on mortgage financing will be subdued. The federal government’s efforts to help new homebuyers with shared equity mortgages and a possible re-evaluation of the stress test are also positive signs. However, as always in real estate, there are plenty of unknowns that could disrupt that positive picture.

Property values in the U.S. remain well supported. The U.S. population is aging and will continue to age in the coming decades which will drive demand for alternative property types such as senior housing and medical office properties. As well, aging millennials will drive retail sales and future demand for retail real estate. Consumers hit their peak spending between the ages of 35 and 54 when they are reaching their best earnings potential and are starting to form families, both of which support higher expenditures. Also supporting the real estate market is the very conservative bank lending standards currently in place.

Internationally, European real estate values have oscillated upwards over the last few years. Interest in European residential properties has increased significantly since 2007. This has been largely driven by the sector’s strong supply/demand dynamics. There is a lack of modern product, as well as a growing institutional investor base that is searching for diversification, security of income, yield stability and rental appreciation in a global economy short of healthy risk adjusted return possibilities.

Real estate, like most other asset classes around the world, had a very good year in terms of overall performance. The Canadian real estate market was up 22.8% for 2019, although it did come under selling pressure in the fourth quarter falling 0.8% (all figures are in Canadian dollar terms). Internationally, real estate performance was not quite as good, but was still very impressive. For the year, it was up 18.3% and similarly to the Canadian market fell 0.7% in the last quarter of the year.

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