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EAMG Market Commentary July 2023

July 17, 2023

Rates & Credit - The rates market was volatile in Q2 as investors focused on inflation, central bank interest rate decisions, and recession probabilities. Persistent strength in U.S. consumer spending and labour markets have surprised investors and prompted further interest rate tightening from central banks. In Canada, corporate bonds outperformed government bonds and the broader FTSE Canada Universe Index during the quarter, with a total return of 0.2%, versus a loss of 1.0% for government bonds and 0.7% for the overall Index. The corporate bond outperformance was driven by a broad risk-on tone to the market, most notably in April as the market recovered from the banking sector liquidity crisis that developed during March. That said, the market tone remained cautious, with the improved risk premium on corporate bonds tempered by lingering concerns around sticky inflation, high interest rates, and the potential for slower economic growth into the latter half of the year.

Dominance of U.S. Equities – U.S. equity markets posted another strong quarter with the S&P 500 returning 8.7%, outperforming Canada and other major international equity markets. The S&P/TSX Composite, returned 1.2% in CAD. Major developed economies from Europe, Australasia, and Far East (EAFE) returned 3.2% in local currency terms. The highly anticipated re-opening of the Chinese economy has failed to materialize with economic data indicating less strength than previously forecasted. Amid sluggish Chinese growth, closely interconnected economic partners such as the European Union, as well as commodity-driven markets like Canada, have all underperformed the U.S. on a relative basis.

U.S. Fundamentals – Earnings continued to contract versus prior year, albeit at a slower pace than forecasted. Forward earnings guidance improved quarter-over-quarter with corporate sentiment returning to neutral levels. Based on our analysis, we observed that 31% of major companies expect deteriorating financial performance, while 33% expect improved performance, with the remaining expecting no material change. Overall, major U.S. companies remain well capitalized with strong operating margins. However, company guidance indicates a prioritization of cost controls amid increased consumer indebtedness and concerns about the health of the consumer.

Artificial Intelligence (AI) Mania – Despite concerns that the U.S. economy is at a late stage in its economic cycle, that monetary tightening by central banks could go too far, and the fact that earnings contracted on a year-over-year basis, equity markets became more expensive during the quarter with price-to-earnings multiples expanding. This expansion was driven by investors crowding into AI focused technology companies, with the seven largest AI/technology themed companies averaging a 26% return while the other 493 members gained only 3%. Investors rewarded businesses with contributions to AI development (hardware and software components), as well as those with the ability to implement synergies from leveraging the technology. A crowded market surge is not uncommon at this point in the economic cycle, where positive economic surprises, in this instance, strong employment and consumer spending can lead to an upswelling in investor confidence.

U.S. Quant Factors – Using our investment framework, we currently favour exposures to large cash-rich companies with innovative product offerings, which we believe offer the strongest risk-adjusted returns in the current market environment. While the valuation of AI companies seems to defy traditional rationales, the momentum has continued to push the group higher. Consequently, the Quality factor (companies with higher return-on-equity, strong operating performance, and healthy leverage levels) participated in the AI trend and consistently outperformed throughout the quarter. The Low Volatility factor (stocks with lower sensitivity to broad market movement, and lower price volatility) underperformed through the quarter. While the Low Volatility factor typically performs well at this stage of the economic cycle, the fact that a small number of stocks were responsible for much of the market’s return hurt this factor. Lastly, the Momentum factor (stocks with a recent history of price appreciation) initially underperformed during the quarter before rebounding in June. This factor’s recent outperformance suggests that the market is becoming complacent and possibly signals that rotations within the market are slowing as current trends remain in favour.

Canadian Fundamentals – Top line revenue missed forecasts while bottom line earnings were consistent with expectations. Softer-than-expected results out of Canadian financials, as well as underwhelming results from the materials sector, dragged on the aggregate index performance. Earnings forecasts for the rest of the year have been revised downward with analyst expecting index aggregate earnings to detract 2% to 3%. Meanwhile, the Bank of Canada raised its overnight interest rate by 25 basis points, bringing it to 4.75% on the backdrop of robust economic data releases including Q1 GDP and April CPI.

Canadian Quant Factors – The most notable dislocation in Canada was the convergence of the dividend yield of High-Dividend ETFs and Equal-Weight Bank ETFs. We believe that the drag from Canadian banks following the U.S. regional banking concerns in March resulted in a discount of the Quality factor as the performance of the group is sensitive to the movements of banks. While banks did recover around 35% of their SVB-induced underperformance, the nature of banking has attracted investor scrutiny given the view that we are in the late-stage of the economic cycle. That said, this environment is an attractive environment to add variants of the Quality factor, which would gain exposure to a rebounding industry that offers a similar dividend yield to the high dividend stocks.

Views From the Frontline

Rates – On an outright basis, bond yields across the curve continue to look attractive. Economic data remains strong however we are beginning to see the first signs of weakness in spending, jobs and inflation. Slower growth, a more balanced labour market, declining inflation, and tighter credit conditions will likely drive interest rates lower throughout 2023. Market participants remain focused on the extent of interest rate hikes and the duration of a pause required to bring inflation back to the 2% target. With inflation remaining more persistent than previously expected forecasts around the timing, pace and extent of the removal of monetary policy have been pushed into 2024.

Credit – The uncertain economic outlook and risks around slower economic growth later this year merit caution about corporate bonds and a bias towards higher-quality, shorter-dated credit where we think the risk / reward dynamic are more favourable. That said, the “soft-landing” narrative, now more pervasive in the market, could continue to provide support to risk assets, which we view as an opportunity to further pare down higher beta exposure.

Equities – Given the direction of the current economic and company fundamental data, we continue to favour high quality growth segments of the market with strong operating margins. As such, the late cycle conditions in the market reinforce our preference for large cap stocks over smaller, more U.S. domestically focused businesses. The U.S. Low Volatility factor’s underperformance is unlikely to reverse in the short term given the resilience of the U.S. economy. Furthermore, after a steep decline last quarter, we expect that cyclical value will find support in the near term, echoing the increased chance of slowing inflation without stalling economic growth. In Canada, equities are typically more cyclical in nature, which coupled with the potential for an earnings contraction, makes us view the Low Volatility factor as more likely to outperform. Like the U.S., we prefer Canadian high-quality companies to navigate through the late cycle environment. On the heels of poor Chinese economic data and underwhelming stimulus, we are maintaining our overweight to the U.S. relative to Canada and EAFE.

Downloadable Copy

ADVISOR USE ONLY
Any statements contained herein that are not based on historical fact are forward-looking statements. Any forward-looking statements represent the portfolio manager’s best judgment as of the present date as to what may occur in the future. However, forward-looking statements are subject to many risks, uncertainties and assumptions, and are based on the portfolio manager’s present opinions and views. For this reason, the actual outcome of the events or results predicted may differ materially from what is expressed. Furthermore, the portfolio manager’s views, opinions or assumptions may subsequently change based on previously unknown information, or for other reasons. Equitable Life of Canada® assumes no obligation to update any forward-looking information contained herein. The reader is cautioned to consider these and other factors carefully and not to place undue reliance on forward-looking statements. Investments may increase or decrease in value and are invested at the risk of the investor. Investment values change frequently, and past performance does not guarantee future results. Professional advice should be sought before an investor embarks on any investment strategy.
Posted July 27, 2023

EAMG Market Commentary October 2023

October 20, 2023

Rates & Credit - Interest rates increased steadily in Q3 against the backdrop of sticky inflation, strong economic growth, and a tight labour market. In Canada, corporate bonds outperformed government bonds and the broader FTSE Canada Universe Index during the quarter, with a loss of 2.2%, versus a loss of 4.4% for government bonds and a loss of 3.9% for the overall index. The outperformance was primarily driven by the fact that the corporate bond index is less sensitive to interest rates movements (as compared to the government index), all else being equal. The outperformance was also driven by an improvement in risk-appetite, with lower-rated BBBs slightly outperforming higher-rated A bonds. Industries with higher interest rate exposure such as infrastructure, energy, and communications underperformed those with less (notably financials and securitization), consistent with the overall shift in the yield curve.

Equities Lose Traction – Global equity markets lost momentum last quarter with the TSX declining 2.2% while major developed economies from Europe, Australasia, and the Far East (EAFE) fell 1.3% in local currency terms. U.S. equity markets, while falling approximately 3.3%, were cushioned by a strong greenback, with the index declining only 1% in Canadian dollar terms. With inflation prints continuing to be stubbornly high and employment data remaining strong, central bankers emphasized their commitment to a higher-for-longer approach to monetary policy. The hawkish tones out of the Federal Reserve pushed bond yields higher and consequently, pressured equities lower. Furthermore, mixed economic data out of China rattled investor sentiment over the quarter as global growth forecasts came under scrutiny.

U.S. Fundamentals – Although U.S. earnings continue to contract on a year-over-year basis, companies surpassed expectations with investors remaining highly focused on signs of deteriorating operating margins. After bouncing off Q1 2022 lows, forward earnings guidance continues to improve on a quarterly basis. Based on our analysis, ~35% of major companies revised earnings forecasts higher (+2% versus Q2) while ~33% held expectations constant, with the balance expecting deteriorating financial performance. Overall, improved efficiencies through cost-cutting measures and stronger-than-expected pricing power have contributed to resilience in operating margins, and therefore renewed optimism about forecasted financial performance.

Equal Weight S&P 500 versus S&P 500 – Persistent crowding into mega-cap technology stocks – which has driven the majority of market returns year-to-date in the U.S. – slowed at the beginning of the summer before reaccelerating into quarter end. The persistence of this trend has resulted in the equal-weighted version of the S&P 500 index returning a mere 1.8% over the first three quarters of the year, markedly lower than the 13.1% return observed from the S&P 500. We continue to emphasize that a crowded market surge is not uncommon during late stages of the economic cycle, and we remain focused on delivering optimal risk-adjusted returns with quantitative factors.

U.S. Quant Factors – The quality-growth areas of the market continued to outperform last quarter with market participants seeking large cash-rich companies with innovative product offerings and stable operating margins. That said, the pricing power of these companies has weakened more recently with consumers having depleted pandemic-era savings and stimulus. As such, fundamentals are beginning to appear overvalued. Low volatility stocks (i.e. stocks with lower sensitivity to broad market movement and lower price volatility) performed in-line with the overall market for most of the summer before underperforming into quarter-end when crowding into big-tech returned. While top-line projections are forecasted to post stable growth, the basket’s relatively lower operating margins remain a headwind amid surging interest rates. Dividend growth companies, which include businesses with a lengthy and established history of increasing dividends, performed approximately in-line with the broader index over the quarter. With the market forecasting overly-negative fundamental performance, this factor is positioned as a contrarian opportunity in the market.

Canadian Fundamentals – Unlike those in the U.S., Canadian companies reported shrinking operating margins in general, pressuring equity pricing. Like in the U.S., Canadian corporate earnings were mostly consistent with expectations but continue to contract on a year-over-year basis. The energy sector benefitted from a ~30% increase in oil prices during the quarter, as OPEC’s restrictive oil production schedule pushed crude markets deeper into under-supplied territory. Those higher energy prices buoyed performance of stocks in the energy sector, one of only two sectors with positive performance during the quarter, helping partially offset softer-than-expected results out of the financials and communications sectors. Meanwhile, the Bank of Canada continued with its hawkish monetary policy by raising its overnight interest rate by another 25 basis points, bringing it to 5%. Their efforts to slow economic growth are beginning to cause some deterioration in fundamentals and, with one quarter remaining, analysts are expecting Canadian earnings to contract ~9% for the year.

Canadian Quant Factors – With central banks around the world continuing to hike interest rates and uncertainty surrounding China’s economic health, global growth prospects fluttered over the quarter. The cyclical nature of the Canadian market, and therefore its reliance on global partners, saw equity prices put under pressure by growth concerns. As a result, the quality bucket benefitted from defensive positioning by investors and thus resumed its climb in Canada. Investors continue to prefer mature, large businesses that are better positioned in a restrictive economic environment due to their more stable operating margins. The value factor – which was beaten down in Q2 – rebounded last quarter with supply-driven energy strength helping to propel energy stocks higher. Low volatility initially displayed similar performance to the TSX, but energy’s rapid surge into the end of summer pressured the group lower. Given higher risk-free rates, the dividend factor also underperformed over the quarter, with dividend yields becoming less attractive on risk adjusted basis.

Views From the Frontline

Rates – Both nominal and real – rose sharply in Q3 to levels not seen since the Great Financial Crisis of 2008. A healthy labour market, strong consumer spending, persistent inflation and excess supply concerns drove the interest rate increase. Although the economy is starting to witness a deceleration in consumer spending and tighter credit conditions, central banks remain committed to maintaining a higher policy rate for longer to bring inflation back to the 2% target.

Credit – The risk premium for corporate bonds (versus government bonds) has been range-
bound over the past quarter as investors’ evaluations of a variety of scenarios have evolved: soft-landing versus a recession, geopolitical uncertainty, further central bank increases, among other things. On the balance, we do not think the current risk premium adequately compensates for downside risk, and as such, we remain cautious on corporate bonds and have a bias towards higher-quality, shorter-dated credit where we view the risk / reward dynamic as being more favourable.

Equities – Geographically, we began the quarter with a preference for U.S. equities relative to Canada and EAFE. In-line with our expectations, U.S. stocks outperformed the two regions in Canadian dollar terms. That said, weakness in the Euro versus the Canadian dollar was a headwind for our EAFE exposure. With earnings yield – which is the percentage of earnings relative to price – becoming less attractive compared to risk-free rates in the U.S., and the greenback strength becoming overstretched from a technical perspective, we have pared back our overweight U.S. position. Moreover, with Chinese officials focusing efforts on the introduction of new stimulus packages, we believe that more cyclical markets like Canada and EAFE will retrace some of their losses in the near term. Within the U.S., we entered Q3 with a constructive view on high quality growth segments of the market that provide strong operating margins during the current late economic cycle conditions. The factor moved in-line with our expectations, as highlighted in the “U.S. Quant Factor” section, and we are tactically decreasing our exposure amid stretched fundamentals. In Canada, we continue to prefer high-quality companies due to their strong fundamentals, with the group currently displaying momentum versus the broader TSX. Tactically, we are participating in the oil supply shock through the value factor.

Downloadable Copy

Mark Warywoda, CFA VP, Public Portfolio Management	Ian Whiteside, CFA, MBA AVP, Public Portfolio Management	Johanna Shaw, CFA Director, Portfolio Management	Jin Li Director, Equity Portfolio Management
Mohamed Bouhadi, CFA Senior Analyst, Rates	Tyler Farrow Analyst, Equity	Andrew Vermeer Analyst, Credit	Elizabeth Ayodele Analyst, Credit

ADVISOR USE ONLY

Any statements contained herein that are not based on historical fact are forward-looking statements. Any forward-looking statements represent the portfolio manager’s best judgment as of the present date as to what may occur in the future. However, forward-looking statements are subject to many risks, uncertainties, and assumptions, and are based on the portfolio manager’s present opinions and views. For this reason, the actual outcome of the events or results predicted may differ materially from what is expressed. Furthermore, the portfolio manager’s views, opinions or assumptions may subsequently change based on previously unknown information, or for other reasons. Equitable Life of Canada® assumes no obligation to update any forward-looking information contained herein. The reader is cautioned to consider these and other factors carefully and not to place undue reliance on forward-looking statements. Investments may increase or decrease in value and are invested at the risk of the investor. Investment values change frequently, and past performance does not guarantee future results. Professional advice should be sought before an investor embarks on any investment strategy.

Posted November 3, 2023

[pdf] S&R Supply Order Form
What’s new in EZtransact We’re excited to introduce the latest enhancement for EZtransact™, our digital self-serve tool. EZtransact now allows you to help clients:

• Easily make segregated fund withdrawals. This functionality is available for all account types, and for the First Home Savings Account, it also eliminates the need to submit additional CRA paper forms.

• Transfer from one fund to another fund digitally, within the same policy and same sales charge options.

These enhancements make it easier than ever to do business with Equitable^®. They will help reduce your time spent on paperwork, allowing to you focus on more value-add time and services for clients.

Check out EZtransact. Stay tuned for more exciting digital enhancements coming soon!

If you have any questions, please contact your Director, Investment Sales. 

Date posted: July 11, 2024
Exciting update: External transfer now available on EZtransact! We are thrilled to announce a new feature that will make your work easier and more efficient.

What’s new this quarter?
The External Transfer function was introduced to Equitable’s EZtransact^® on May 14.

Benefits of this enhancement:
This feature is part of our strategic plan to help make transactions smoother for you. It was already available in EZcomplete^®, and now it’s on EZtransact too. This means you won’t have to search for information about the relinquishing institution anymore. You can submit requests with ease.

External Transfer Functionality:

• You can digitally request a transfer of funds from other institutions to Equitable.
• Information about the relinquishing institution will be available on EZtransact, so you don’t have to search for it.
• Both full and partial transfer requests are available.
• It’s available for registration types that don’t need the RC720/RC721 form and for individual accounts.
If you have any questions, reach out to your Director, Investment Sales.

When we work together, success is mutual.

Date posted: July 3, 2025
Changes to Pivotal Select NL-CB and NL-CB5 sales charge options On December 7, 2024, Equitable will make changes to the commission chargeback schedule for Pivotal Select™ NL-CB and NL-CB5. These changes aim to provide a more consistent approach to applying chargebacks.

Schedule before December 7, 2024:

Questions? Please contact your Director, Investment Sales.

Date posted: November 27, 2024
This year’s RSP contribution deadline is February 29, 2024 The RSP deadline is fast approaching and here are some important things to remember.

Issuing a New Policy with EZcomplete^®
All online applications must be digitally signed and submitted and have a date stamp no later than February 29, 2024.

Issuing a New Policy using Paper Application
For contributions to qualify for the first 60 days, all paperwork must be completed and signed by February 29, 2024. Equitable^® must receive all paperwork by March 8, 2024.

Deposits to an Existing Policy
Advisors can set up a one-time or recurring deposit or edit an existing pre-authorized debit already in place using EZtransact™. Online deposits must be made and have a date stamp by February 29, 2024, to qualify for a 2023 tax receipt.

Clients can make online deposits to Equitable through their financial institution’s online banking service. Online deposits must be made and have a date stamp by February 29, 2024, to qualify for a 2023 tax receipt.

Clients can also make a new deposit to an existing policy by cheque. The cheque must be dated and signed by February 29, 2024. Equitable must receive the cheque no later than March 8, 2024.

If online banking is being used to fund the policy – either topping up an existing policy or opening a new policy – the online banking transaction must be completed by February 29, 2024, to receive a 2023 tax receipt.

Please note that cheques and other paperwork cannot be backdated. They must be completed and signed by February 29, 2024, to qualify for a 2023 tax receipt.

If you haven’t already done so, consider EZcomplete and EZtransact our easy and fast online application and deposit tools to make life easier this RSP season.

For more information, please contact your Regional Investment Sales Manager.

^®or ™ denotes a trademark of The Equitable Life Insurance Company of Canada.

Posted February 14, 2024
Take advantage of our online services today!
Why tax refunds aren't always good It’s important for advisors to help clients understand their finances. Many people think getting a tax refund is good, but that's not always true. Here are some reasons why.

1. Overpaying Taxes
A refund on a tax return means the client paid too much in taxes during the year. This is like giving the government an interest-free loan. Instead, clients could use that money each month for savings or investments.

2. Missed Investment Chances
When clients overpay taxes, they miss chances to invest that money. It could have been earning interest or growing in value instead of sitting with the government.

3. Poor Financial Planning
A big tax refund can show poor financial planning. It's better if clients break even, meaning they don't owe much and don't get a big return. This shows their tax withholdings are accurate.

4. False Sense of Security
A large tax refund can make clients feel falsely secure. They might spend it quickly instead of saving or investing it wisely.

5. Financial Hardship
Overpaying taxes can make it hard for clients to manage their money during the year. They might struggle with monthly expenses or saving for emergencies.

Advisors should teach clients about the downsides of tax refunds. By adjusting their withholdings, clients can manage their money better and take advantage of investment opportunities. Aim for a balanced tax situation to improve financial health.

Help clients make the most of their investment opportunities this tax season. For more information, contact your Director, Investment Sales.

Date posted: March 20, 2025