Exceeding Expectations (Lee)

Of the major global market indices, the Dow is currently the only one broad market that is recognized by our Global Index TrendSpotter Model to be showing a positive trend. Trending markets are where the majority of returns are made for most investors. Moreover, the inverted head-and-shoulders seen in the Dow several weeks ago tends to indicate a bottom reversal as seen by its sharp appreciation coming out of the pattern.

In a market where volatility shocks have become a common theme and a greater divergence exists between the performance of equity markets around the globe, tactical asset allocation will increasingly drive portfolio alpha. Surprisingly, U.S. equities have emerged as the front-runner this year, delivering strong returns and attracting global fund flows. Although we continue to believe the long-term emerging market growth story, earnings surprises and further dividend increases from U.S. companies will continue to drive sentiment for the Dow Jones Industrial Average higher. Currency-hedged solutions delivering pure exposure to the underlying without USD/CAD volatility will mitigate the negative impacts of the declining U.S. dollar, leaving investors with only equity market returns.

Footnotes

1 In a survey conducted by the World Economic Forum, Canada was ranked the first in having the “world’s most sound banking system.” This survey was released in the wake of the 2008 financial crisis after Canadian banks displayed a strong resilience

2 Carry-trade: A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. The carry trade can also be applied to non- currency assets as investors can borrow funds in low interest rate countries to invest in non-currency investments that may be more volatile. When these assets sell off, investors are forced to liquidate assets to pay back loans.

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