Capital markets were mixed in the second quarter of 2017 as energy weighed on the TSX and the strong Canadian dollar offset much of the gain in the US market.   Despite the strain from geo-political events, specifically North Korea's "sabre rattling", and a surprising U.K. election result, global economies appear to be gaining some traction and moving in a more synchronized fashion that hasn’t been seen for quite some time.

Corporate profits rebounded from levels a year earlier, and provided much needed support to elevated equity valuations although the continued weakness in oil prices was a surprise given production restraint by O.P.E.C. members.  Most importantly,  consumer and business confidence continued to rise, as did employment levels across most of the developed world - both of which should help to drive higher sales and earnings.  This improved economic environment is prompting central banks from Europe to Canada and the U.S. to signal a higher interest rate environment going forward.  This was unthinkable in Canada and Europe a few short months ago, and the 'about face' in Canada has contributed to a 5% rise in the Canadian dollar versus the US dollar.

Within the political arena, the surprising early election call by Prime Minister Theresa May of the U.K. in order to secure a more solid majority for the upcoming BREXIT negotiations backfired, which led to a minority Government with the resulting uncertainty.  Alternatively, in France, the newly elected President Macron has swept the Parliamentary elections and has the mandate to reform the second largest Eurozone economy in a more business oriented direction.   This is an especially positive signal against the disturbing trend towards nationalism and populism.

Economic conditions in Canada are strengthening across the country despite continued weakness in the oil sector.  As much as the housing bubble, specifically in Toronto and Vancouver, gets most of the attention, employment and consumer spending are recovering along with exports.  The major negative data point for the economy remains the elevated household debt levels, although to date the banks have not shown any trend towards weaker credit conditions.  This could be challenged by higher borrowing costs which is likely to cause the central bank to move slowly with its rate increases so as to strike a balance of cooling the housing market without shocking mortgage payments.

We remain cautious on the valuation of equity markets, although we are pleased to see corporate earnings move higher in a more stable economic environment.  It would seem, in the near term, that the biggest risk could very well lie in geopolitics with an unpredictable administration in the US, and the corresponding impact in sensitive conflicts such as North Korea, the Middle East and Russia/Europe.   We will take advantage of any opportunities as we seek out dislocations due to short term volatility.  As always, our job remains to control risk in these uncertain times, and to invest in companies with durable business models and sustainable competitive advantages.