In July, we continued with our global Stagnation Outlook for the twelve-month forward period. According to the International Monetary Fund (IMF), the World Economic Outlook continues as expected with global output projected to grow by 3.5% in 2017 and 3.6% in 2018.1 At the country level, growth projections are lower for the United States, assuming fiscal policy will be less expansionary than anticipated. Japan, China and the euro area have seen some solid momentum, revising growth upward. Expectations for fiscal support in China have also supported an upward growth revision. Inflation remains generally below targets in advanced economies and has been declining in many emerging economies including Brazil, India and Russia.
Several advanced economies face excess capacity and slowing potential growth from aging populations, weak investment, and slow productivity growth. Projected global growth rates for 2017–18 are below pre-crisis averages, particularly for most advanced economies and commodity-exporting emerging and developing economies. Policy setting should remain consistent with weak core inflation expectations and muted wage pressures.
Long-term bond yields in advanced economies rebounded in late June and early July after declining since March. The U.S. Federal Reserve raised short-term interest rates in June, but markets still expect monetary policy to normalize gradually. Between March and the end of June, the U.S. dollar depreciated around 3.5% in real terms while the euro strengthened by a similar amount on increased confidence.
Canadian GDP has been outpacing other G7 countries in 2017, with full-time employment rebounding sharply and macro momentum remaining positive. The Bank of Canada raised interest rates in July and WTI stabilized around US$45/bbl. The Canadian Dollar has risen to US$0.80, a 10% rebound from its low in May of US$0.73.2 It appears that Canadian sentiment has improved in response to a shift toward hawkish policy.
U.S. equities posted positive returns in June with the S&P 500 up 0.6%, S&P MidCap 400 up 1.6% and S&P SmallCap 600 3.0%. Canadian equities continued to decline in June as macroeconomic fears, an overly dovish Bank of Canada, and sliding oil prices prompted investors to exit. Global equity markets were mixed in June with the MSCI EAFE Free returning -0.8% and MSCI Emerging Markets gaining 1.6%.
The S&P Europe 350 posted a loss of 2.5%, its biggest monthly decline since the U.K. voted to leave the European Union. The S&P United Kingdom Index dropped 2.5% for the month, contributing significantly to the losses in the broader index as the U.K. represents about a quarter of the S&P Europe 350. Mixed messages coming from both Mark Carney and Mario Draghi resulted in a bond sell off. Commodities ended June in negative territory, with the S&P GSCI down 2%.
In July, we reviewed our current asset allocation across all models and concluded that the current asset allocations remained the most optimal. U.S. Equity exposure for all models remains in mid and large caps with exposure to Canada and Europe making up the balance along with exposure to Australia in the Tactical Growth and Aggressive Growth Models. We continue to hold a 10% exposure across all models in the 20+ U.S. Treasury Bond as we anticipate the Fed move to start reducing the balance sheet. This reduction represents policy tightening and is expected to flatten the yield curve and bring down 10+ year yields, driving up the long end of the curve.
We will continue to monitor the data for growth signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
Data Source: Bloomberg
 IMF. World Economic Outlook Update. July 2017.
 Capital Economics. Canada Economics Weekly. July 28, 2017.