August: Global equities: New highs

Highlights

• Global equities ended Q2 higher for an eighth straight quarter, the longest run since 1996-97. In June, for the first time since 2007, they reached a new record. At this point, equity valuations remain fairly close to their historical averages. The forward P/E ratio of the MSCI AC index assumes global earnings growth of 9.8% over the next 12 months. This target is attainable, but much depends on geopolitical developments in the Middle East.

• First-quarter U.S. GDP growth, first estimated by the Bureau of Economic Analysis at 0.1% annualized and downgraded to −1.0% in the second estimate, was revised down to
  −2.9% in the third estimate. That makes it the worst quarter since the recession. Profits were not spared: a decline of 2% year-over-year on a national-accounts basis, the worst in almost five year. In our view, the strength of some reports for Q2 so far means that a quick rebound of U.S. growth remains in the cards.

• While Q1 earnings were under pressure in the U.S., the Canadian story was dramatically different. Statistics Canada reports a jump in operating profits of 33.3% annualized in Q1,
  the best showing in three years. Somewhat more than a third of the increase came from oil and gas extraction. Most important, the contribution of manufacturing was even larger.

• Our asset mix is unchanged this month. Our recommendation to continue overweighting equities relative to fixed income is based on a combination of growth acceleration and very accommodative monetary policy in H2 2014. In light of better-than-expected earnings in
  Canada, we are raising our yearend target for the S&P/TSX to 15,700 (from 15,000) and our target for the S&P500 is also raised to 2,010 (from 1,930). In sector rotation, we are moving gold stocks from mark et weight to overweight this month. Current U.S. monetary policy and a tangible liquidity injection by the European Central Bank later this fall will improve the outlook for the price of bullion. Our decision to upgrade the gold sector is coming at the expense of consumer discretionary (downgraded to underweight). Elsewhere, we continue to favour energy over the more defensive sectors as we continue to assume a moderate rise in long-term interest rates.