Standard Life Canadian Equity Class

Investment commentary
06 The Quarterly Review
Economics
The slowdown in the global economy that we had
expected has materialized in the second quarter.
Domestic demand in the U.S. was weak, as
high gasoline prices put a dent on discretionary
spending, acting as a tax on consumers. The
housing situation remains weak and more
foreclosures are expected. Payrolls and ISM data
softened. Small business confidence is eroding.
Corporate profit growth is slowing down and we
expect margins to peak. Canadian economic
growth is also following a similar path. Consumer
debt has grown, while the housing sector is
slowing and mortgage conditions were tightened.
Retail sales slowed down.
In Asia, Japan is still recovering from March’s
earthquake and tsunami. Power shortages curtail
production. The Chinese economy is clearly
moderating as a result of tight monetary policy
over the last few months. Inflation is expected to
peak. Property demand slowed. Other emerging
countries also adopted a tight monetary policy to
curb inflation.
In Europe, the housing and retail sectors have
not been spared either. Business surveys have
peaked or are falling sharply, in line with the
U.S. Moreover, fiscal retrenchment and debt
restructuring are putting a hamper on growth.
Markets have already priced in a default on
Greek debt and a higher risk of default in Ireland
and Portugal.
Equities
Major equity markets peaked in April and
subsequently retreated sharply as investors
became increasingly concerned about reduced
demand in the U.S. and other OECD countries
as well as potential slower growth in emerging
markets. The S&P 500 Index fell by more than 7%
from its peak before rebounding towards the end
of the quarter along with other equity markets.
As a result, stock markets posted mixed results
in the second quarter. The S&P/TSX Composite
Index lost 5.2% due to lower commodity prices
and stocks, while the S&P 500 Index was down
0.7% and the MSCI EAFE Index gained 1.1% in
Canadian dollars and on a total return basis. For
the first time since the recovery, the S&P 500
Index outperformed the TSX Composite Index.
Small-caps posted lower returns than large-caps.
Year-to-date, the S&P 500 Index gained 2.8%,
the MSCI EAFE Index is up 2.1% while the TSX
Composite Index is basically unchanged.
The quarter saw a rotation out of bonds into
equities. However, within equities, there was a
rotation out of cyclicals into defensive stocks.
Consumer staples, healthcare, telecoms and
utilities outperformed their respective indices,
posting positive returns. Commodities lost
ground in the quarter with the energy sector in
Canada and the U.S. among the worst performing
sectors. The materials sector underperformed as
most base metal prices were down in the quarter.
The price of oil and other commodities declined
after the announcement that 60 million barrels of
oil from strategic reserves would be released.
In Canada, the information technology sector was
by far the worst performer. Research in Motion
lost about half of its value after the company
announced poor earnings and a declining market
share in North America. Following allegations
that Sino-Forest inflated its assets and revenues,
the stock lost over 80% of its market value. Other
Chinese companies listed in Canada also suffered
huge losses as investors became distrustful
of these companies. The much-contested TMX
Group and LSEG (London Stock Exchange)
merger agreement was terminated due to lack of
investor support.
Financials in the U.S. continued to underperform
the S&P 500 Index due to continued regulatory
overhang on new capital requirements for large
global banks. By the end of the quarter, more
clarity emerged and things were a little better