Public Equity Markets

Global equity markets were highly volatile in 2010-11, due in large part to the dichotomy between struggling economies in developed countries and inflation concerns stemming from strong growth in developing countries. With this uncertain backdrop, the difference between the best and worst performing equity markets was very pronounced. While equity markets in certain Asian countries such as Korea, Indonesia and Taiwan were generating returns in excess of 20%, southern European markets such as Greece, Italy and Spain were struggling with losses of 10% or more. Overall, ATRF’s global equity benchmark, the MSCI World Index, returned 5.0% for the fiscal year.

Many countries in Europe continue to operate under heavy deficits and contracting or anemically growing economies. The European Union in general is struggling with disparate economies and differing fiscal situations, yet are linked by a single monetary policy and currency. It is this “union” that forces them to share the burden of resolving the situation. More recently, there appears to be some progress on the commitment of all nations to at least assist in providing temporary financial aid to Greece, the greatest immediate concern. A longer-term solution will ultimately be needed but this coordination is a significant first step in the right direction to help avoid a contagion effect.

The United States has also struggled with its own debt woes along with an economy operating at sub-optimal levels. Unlike individual European countries, the U.S. has the ability to improve its global competitiveness through currency depreciation. Policy initiatives by the U.S. Federal Reserve during the year successfully managed U.S. yields lower and helped in depreciating the U.S. dollar by 11% on a trade-weighted basis. This helped exports and aided in improving profitability at U.S. corporations. Earnings growth for S&P 500 companies was greater than 22% in the year and was the primary reason for the 18.5% return for the U.S. equity market. With the weakness in the U.S. dollar, this return was somewhat diluted when translated into most other currencies, and was 8.5% in Canadian Dollars.

The Canadian market generated a strong return of 9.9% for the fiscal year despite the many challenges facing global economies. Relative to the rest of the world, Canadian financial institutions benefited from a stable local economy and from minimal exposure to the European financial sector and sovereign debt. With so many questions lingering regarding the stability of the European Union and in particular, the Euro, gold continued to hit new highs as investors looked to it as a store of value. Similarly, gold equities in the S&P/TSX Composite rose and at end of the year, gold and precious metals accounted for over 14% of the index.

With the deterioration of the economic outlook in the second half of the year, Canadian 10-year bond yields showed a significant decline, moving from 3.4% to 2.4%. With this backdrop, investor interest in high-yielding securities increased dramatically. Some of the best performing stocks in the S&P/TSX Composite were in the traditionally defensive sectors that typically have a higher dividend yield, such as telecommunications and utilities. With the outlook for interest rates to remain low for the foreseeable future, strong demand for dividend-paying securities will most likely continue.