Standard Life Canadian Equity Class

than what had been feared. Future issues yet
to be resolved include the cost of settling the
foreclosure lawsuits with the state attorney
generals. In June, JPMorgan Chase and Bank of
America have agreed to settle with the SEC on
this issue, though the state attorney generals’
lawsuit could be much more severe.
Japanese companies reported lower earnings due
to a strong yen, business disruptions and parts
shortages after the tsunami. Otherwise, corporate
earnings were surprisingly strong once again, and
guidance was positive. It is estimated that half
of the revenues generated by the large American
corporations come from overseas. Since the
onslaught of the recession, companies slashed
their costs to increase profitability. However,
the rise in raw material costs is expected to
squeeze margins. Companies continued to
spend their cash making acquisitions and
capital expenditures.
Concerns over sovereign debt default continued
to unsettle international markets. French and
German banks that are heavily exposed to Greek
debt have struck a deal with their respective
governments to rollover a certain amount of the
maturing debt they hold.
Fixed Income
Positive returns in the bond market were achieved
in the second quarter and year-to-date, erasing
the first quarter losses. As the economic data
pointed towards slower global economic growth
and the sovereign debt problems in Europe
resurfaced, a flight to quality ensued and yields
on government bonds fell. The yield on 10-year
U.S. Treasury Bonds fell by approximately
60 basis points since their February highs. A
resolution to lift the debt ceiling in the U.S.
before the August deadline has almost fallen
off the radar as the focus was on Greece and
Europe’s attempts to resolve the looming
sovereign debt problem. Meanwhile, several
emerging countries continued to raise interest
rates in an attempt to curb domestic inflation.
This commentary represents the opinion of Standard Life Investments Inc.
Long government bonds outperformed. Extremely
low rates and a limited appetite for risk kept
buyers on the sidelines for provincial bonds.
Spreads remained wide. The tone in the corporate
bond market remained sour, particularly for U.S.
financials. Demand was nevertheless strong for
good quality issues with long maturities.
The U.S. government’s quantitative easing
program – otherwise known as QE2 in which the
Treasury purchased bonds in the market – ended
at the end of June and there were no plans to go
into another easing program.
Outlook
We believe that this is a mid-cycle slowdown,
much like a year ago and we expect growth to
resume in the second half of this year. Headline
inflation will be peak in tandem with the price
of oil. In fact, it may have already peaked.
Lower energy prices and stimulative monetary
conditions in North America are starting to
translate in some auto and business loan activity.
Growth in China should resume as inflation
looks to be tamed, thus generating an increase
in demand for commodities. And finally, the
Japanese economy should recover due to the
reconstruction following last March’s earthquake
and tsunami.
The equity market pullback increased the
attractiveness of equities. Valuations are
reasonable. Equity markets should be sustained
by increasing worldwide demand, solid corporate
fundamentals and earnings growth, albeit at a
slower pace than in the last few quarters.
Interest rates are not expected to increase in the
forthcoming period as growth in the developed
economies is fragile and the sovereign debt
problem persists. Inflation is not an issue.
We expect bonds to trade within a range over
the next year. Credit bonds remain attractive
as yield spreads relative to government
bonds remain wide.
The Quarterly Review 07