Oil rose sharply in April, helping the Canadian Dollar rise to levels not seen in almost a year. Canadian stocks were also helped by oil prices, particularly the S&P/TSX Venture index which had its best month ever.
April 2016 Market Performance
All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.
| Other Market Data | Month-end Value | Return for April |
Return for 2016 |
| Oil Price (USD) | $45.92 | +19.77% | +20.52% |
| Gold Price (USD) | $1,290.50 | +4.44% | +21.72% |
| US 3 month T-bill | +0.22% | +0.01% | +0.06% |
| US 10 year Bond | +1.83% | +0.05% | -0.44% |
| USD/CAD FX rate | 1.2548 | -3.38% | -9.34% |
| EUR/CAD FX rate | 1.4368 | -2.77% | -4.40% |
| CBOE Volatility Index (VIX) | 15.70 | +12.54% | -13.78% |
*Absolute change in yield, not the return from holding the security.
The Canadian stock market indexes had a strong month, driven primarily by the soaring price of oil, and to a lesser extent, gold. With oil up almost 20% it’s no surprise that the S&P/TSX Small Cap and Venture indexes were up 12.3% and 16.1%, respectively. For Small Cap that was its best month in 7 years and for the Venture that was its best month ever. Gains in the US, Europe, and Asia were mostly in the +/-1% range in their home currency. The Canadian markets are also well ahead of their global counterparts so far in 2016. In fact, the Canadian markets are among the few that are actually in positive territory for the year.
The corporate bond markets continued their rally in April, with lower rated bonds (aka junk bonds) posting gains of +4% to +8% for the month. Investment grade bonds were flat to negative in April, and the broad FTSE/TMX Universe Bond Index was down -0.1%.
The big story of the month was the rise in commodity prices and their effect on the Canadian Dollar. Oil was up nearly 20% in April and remains firmly over US$40 per barrel. Precious metals also had a strong month, led by silver (+17%) and platinum (+12%). Gold was a relative laggard at +4%. The broad Bloomberg Commodity Index was up +8.5% for April.
The strength in commodity prices pushed the Canadian Dollar up to 1.2548 to the US dollar, a level not seen in almost a year. Against the Euro it also strengthened, closing the month at 1.4368.
Market Commentary
The Canadian Dollar (or ‘CAD’) had another solid month, gaining +3.4% against the US Dollar (or ‘USD’). Since the start of the year CAD has gained +9.3% vs the USD, making it the 3rd best performing currency so far in 2016 behind the Japanese Yen and Brazilian Real. Even more impressive is the 13.8% gain since the Canadian Dollar bottomed at 1.4559 on January 19.
This rise in the Canadian Dollar has taken many people by surprise, including us at ModernAdvisor. The unpredictability of currency markets is one of the main reasons that investors should consider hedging their currency risk, unless you want to take the risk in pursuit of additional gains.
When we designed our low-cost investment portfolios in the fall of 2015, the Canadian Dollar was bouncing around between 1.30 and 1.33 to the USD. At that time we decided that hedging the foreign currency risk was prudent since we believed that CAD was not likely to drop much further given its past history with the US Dollar.
As we began investing our first portfolios, mostly our own and friends and family money, the Canadian Dollar started dropping as the decline in oil prices accelerated beyond what many expected. Had we been invested in the unhedged versions of the ETFs, we would have picked up some additional return as the value of the foreign investments would have risen when converted back to CAD.
Of course in March and April we were quite happy to be hedged as the Canadian Dollar rose, protecting the local currency gains from the quick swing in the currency. Here’s an example of how swings in foreign currency can affect your returns.
If as a Canadian you were directly invested in the S&P500 your return so far this year would have been -8.88%. But if you were an American invested in the same index your return would have been +1.74%. The return for the Canadian is the local currency return (+1.74%) plus the change in the foreign exchange rate (-10.62%). When you hedge, you are basically cancelling out that foreign exchange rate change part of the equation. Cancelling out the negative changes is great, but in most cases by hedging you are also cancelling out the positives. Since most people are more concerned with negative returns, they are willing to make that trade off. There is a way to just cancel out the negatives by using put options, but most ETFs are designed to track the local currency returns of the index so they use currency forwards or futures.
The above chart is a good reason why most of our portfolios are up so far in 2016. While our highest risk portfolios have more than half of their investments outside of Canada, by using the currency hedged versions of the ETFs, we were able to avoid or at least greatly reduce the effect of the rising Canadian Dollar on our portfolios.
April Economic Indicator Recap
Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.
Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.
A Closer Look at the Canadian Economy
Canada’s unemployment rate declined to 7.1% in March as 40,600 jobs were added, most of which were full time jobs. This was well ahead of expectations of 10,000 new jobs.
Building permit activity rose +15.5% in February, after declining -10% in January. Housing starts remained above 200,000 in March, but declined -6.8% from February. Housing prices were up +0.2% nationally in February. As you would expect, Vancouver (+0.8%) and Toronto (+0.4%) made up for declines in other cities (Calgary -0.5%).
Inflation was +0.6% in March, the strongest monthly report in over a year. On an annual basis, the inflation rate slipped slightly to +1.3%, and remains under the Bank of Canada’s target rate of +2%. Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +2.1% for the last year. Retail sales rose +0.4% in February and were up +5.6% for the year.
After a surprisingly strong GDP report for January, February came in negative at -0.1%. Manufacturing, mining, oil & gas extraction, and the utilities sectors all contracted, while the retail sector showed strength. With inflation remaining low and excess capacity remaining in the economy, the Bank of Canada left interest rates unchanged at +0.5%.
*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics
