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Mawer Investment Newsletter | 1Q 2016

Global economic weakness and deflationary forces were still at work in the first quarter of 2016. Volatility and uncertainty remained stubborn themes, with markets reacting to major central bank decisions and potential oil supply resolutions.

Global oil prices remained weak throughout the quarter, but rebounded from their lows. Oversupply continued to hamper price recovery, with the International Energy Agency (IEA) estimating that worldwide supply rose by 2.4% in 2015. OPEC showed no sign of cutting production by any meaningful amount, while the lifting of sanctions on Iran allows an additional supply to re-enter the market. Meanwhile, reports surfaced of strain within a number of oil-producing countries, including Russia, Venezuela and the Middle East.

The Canadian economy soldiered on, however, expanding 1.5% year over year in January with a surge of investor enthusiasm in defiance of more than a year of low oil prices and shrinking business investment. The 2016 Federal Budget was announced at the end of March, with the Liberal government expecting its two-phase infrastructure spending program to boost Canada’s GDP by 0.2% this year and 0.4% in 2017.

The theme of central bank intervention continued this quarter as a number of them implemented incrementally looser monetary policies which, in some cases, led to negative interest rates. Japan and Europe were among the most aggressive, expanding their quantitative easing programs and implementing even further negative deposit rates this quarter than they did last year. These actions followed persistently low inflation numbers and anemic growth, which continue to signal that the effectiveness of monetary policy may be nearing its end in some of these markets.

In China there remains overcapacity in a number of industries. While some economic releases at the end of the quarter were modestly positive, overall, the information we are getting out of the country is suggestive of difficult economic conditions. Many investors seem to concur that China’s near-term economic prospects look unwelcoming. Capital outflows have continued. During the quarter, China’s FX reserves fell, and ended the quarter at around $3.3 trillion, a significant decline from the $4 trillion of a year ago. According to Bloomberg News, Chinese companies have also canceled more than double the amount of bond offerings in March versus a year earlier--62 Chinese firms postponed or scrapped 44.8 billion ($7 billion) of planned notes last month.

In Europe, Italy reached an agreement with the European Commission on a rescue deal that will help domestic banks offload €200B of bad debt. These negotiations were small but important steps in helping to clean up some of Europe’s banks, many of which fall into what some are calling “zombie” banks–those that are insolvent but continue to operate through government support.

BREXIT grabbed headlines as the debate over whether Britain should leave the European Union gained traction as we move closer to the June 26th 2016 referendum. Support for BREXIT has climbed over the quarter, with roughly half the population supporting an exit according to recent polls. But at the time of this writing, telephone surveys indicated the “remain” side is leading. Many say it’s still too close to call. We expect volatility to remain elevated in relation to the referendum.

In the U.S., the Federal Reserve began to signal that it might take longer than previously anticipated to raise interest rates to more normalized levels. This shifting stance appears to be a result of unfavourable market conditions, weaker than expected overseas growth and an uncertain inflation outlook. The Fed highlighted that a strong US dollar was one of many reasons the U.S. may not have experienced as high inflation figures as would otherwise be anticipated.

Overall, this past quarter saw low inflation in the developed world, escalating private sector debt in emerging markets and weak business investment all around.

Source: Mawer



Dwight Jefferson, CIMA®
Senior Vice President
Portfolio Manager
Tel.: 604.640.0555 • Email

Tyler Steele, CFA
Senior Vice President
Portfolio Manager
Tel.: 604.640.0554 • Email

Paul Rietkerk, CIM, FMA
Portfolio Manager
Tel.: 604.640.0562 • Email

Neil Kumar
Portfolio Manager
Tel.: 604.640.0406 • Email

Wendy Lloyd
Tel.: 604.640.0556 • Email

Jessica Dewey
Tel.: 604.640.0405 • Email

Brenda Geib, BA
Tel.: 604.640.0559 • Email

Richardson GMP Limited
500 – 550 Burrard Street
Vancouver, BC V6C 2B5

Toll Free: 1.866.640.0400
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The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NB, NS, PEI and NL. Additional administrative support and policy management are provided by PPI Partners. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.