On June 30, 2011, the S&P/TSX composite index sat proudly atop the G7 in terms of performance with a 10-year average annual return that outdistanced the S&P 500 by almost 5 per cent a year. Then things started falling apart.
During the third quarter of 2011, the Canadian dollar peaked against the greenback, and the Continuous Commodity Index and West Texas intermediate both tried and failed to regain the earlier year highs and began a slide that continues to this day. In short, all of the major investment themes that had been driving Canadian equity market outperformance stopped working.
The chart below shows how dramatic the shift in asset performance has been. The bars depict the average annual returns for the 10 years ending June, 2011, for a wide variety of asset classes and the annualized returns since that point. From left to right, the assets are ranked by performance in the 2001 to 2011 period.
The most dramatic – and for Canadian investors, painful – 180 degree turns occurred in crude prices, emerging market equities and industrial metals. The oil price climbed 14 per cent every year in the decade before 2011, but has plummeted at a negative 16-per-cent annualized pace since then. The MSCI Emerging Markets Index had the same incredible growth path as crude, but is now dropping at a 5-per-cent annual rate. The Bloomberg Industrial Metals Index replaced an 11.5-per-cent annual appreciation with a 12.4-per-cent decline.
The U.S. dollar and the S&P 500 have been the primary beneficiaries of the big switch in performance. The U.S. trade weighted dollar declined by 7.3 per cent from 2001 to 2011, and is now soaring at a 6.7-per-cent yearly pace. The S&P 500, with a crisis-limited 10-year average annual return of less than 1 per cent in the previous period, is now leading the world's major markets with a 12.2-per-cent growth rate.
The past is the past and to assess the sustainability of the current global market leadership, the key question is: What caused the shift in 2011? The most likely culprit is declining global economic growth expectations, particularly in Europe.
Euro zone gross domestic product was reported at 3.56 per cent for the first quarter of 2011. Two quarters later, GDP growth had fallen significantly, almost in half, to 1.3 per cent. For global GDP growth, the third quarter of 2011 was a high water mark and investors likely could already see trouble on the horizon. World GDP was 3.6 per cent in the third quarter, but steadily weakened until the final quarter of 2012 saw only 1.3-per-cent growth.
The resource sectors that drove the Canadian market higher are unlikely to outperform without a recovery in global economic growth. Global GDP recovered somewhat from the 2012 lows with a 2.4-per-cent mark for the fourth quarter of 2014.
Expectations for 2015, however, have been steadily revised lower. In mid-August, the consensus economist forecast for the global economy was 3.05 per cent. Now, a 2.7-per-cent expansion is expected.
The current strong U.S. dollar and weak commodity price market environment are likely to persist as long as global growth remains weak.
Follow Scott Barlow on Twitter @SBarlow_ROB.