Third Quarter 2015

For investors, the summer months have been plagued with increased volatility in global equity markets caused by macro environmental factors. The abating Greek fiscal crisis was followed by concerns over slowing growth in China, and deteriorating commodity prices for exporting countries such as Canada.

Increased market volatility has led to further negative performance. For the year to date, the U.S. market is down 6.4%, while Canada’s equity market has declined 7.9%. Performance in the emerging markets has been worse. Needless to say, 2015 has not been a good year for equity investors.

Slowing economic growth in the Asian markets in general and China in particular, have caused a rout in resource commodity prices such as the base metals and coal. Oil prices have also nosedived, due more to over-supply and the fact that the OPEC producers no longer act like a cartel. In fact, OPEC has not functioned as an effective cartel for years. The world is now benefitting from increased oil production driven mostly by technological innovation. These supplies will grow further once sanctions on Iranian exports are lifted in December.

Throughout this volatile and negative year, we have maintained a constant belief in the steadily recovering U.S. economy. While growth has not been dramatically strong, it has been enough to materially lower unemployment. This growth has not generated any inflationary pressures, however, allowing the Federal Reserve to maintain record low interest rates. In addition, European economies have begun to recover, giving us further cause for optimism. Finally, while growth in China is slowing, it is expected to remain in the 4% to 5% annual range. Importantly, employment levels in China remain strong, as the Chinese economy is shifting from a capital-intensive manufacturing orientation to one focused more on labour-intensive services, such as healthcare, retail and technology services.

Recovering economies in the U.S. and Europe, coupled with continued growth in China, will support increased revenues, earnings and cash flow from the better managed companies in the public markets. The challenge, however, for U.S. based multinational companies, is a stronger U.S. dollar does de-value revenue and earnings generated from international operations. While we are invested in several of these multinationals, we do recognize that this represents a “headwind” for the time being.

The good news is that none of the most important economies in the world are in recession, or even in danger of entering one. We make no prediction on whether this current level of equity market volatility will recede this quarter, or sometime in 2016. What we can do, however, is to manage your portfolio so that the best run companies are rewarded by the markets in the fullness of time.

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