Adaptive ETF Strategy Update
Within the equity segment of our Adaptive portfolios we utilize a Core/Satellite framework, whereby we allocate the majority of the portfolio to a Core component and the remainder to a Satellite component. The Core portion contains exposures to major market indexes for Canada, US and International equity markets whereas the Satellite has exposures to a select number of global markets segments that we have identified as having the ability to outperform the broad markets on a shorter-term basis.
At the start of the second quarter we allocated half of our Core portfolio to the US equity market, a third to international equities, and the remainder to Canadian equities. As the relative momentum across these markets shifted throughout the quarter, we lowered our International exposure and reallocated it to our Canadian exposure as the Canadian market has been much stronger so far this year.
The equity component of the Satellite portfolios within our Balanced accounts has held exclusively equity securities throughout the quarter, favouring equities over fixed income and commodities. Our Satellite portfolios have maintained strong exposure to the Information Technology sector both here in Canada as well as in the US throughout the quarter. Both of these sectors continue to exhibit very strong momentum and have significantly outperformed the broad equity market. The Utilities sectors in both Canada and the US have also exhibited strong momentum in the second quarter and as a result have been steady contributors to portfolio performance.
The Bottom Line
The slowdown in global economic activity has produced a reversal by some key central banks toward pausing or reducing interest rates. Despite this slowing growth, we continue to view the risk of a global recession this year as unlikely.
Trade tensions continue to experience periods of escalation without a lasting resolution. Trade actions continue to be the largest risk to the global economy and the threat of further battles will have the potential to unleash renewed volatility in financial markets.
We continue to expect that equity and fixed income markets will experience periods of volatility this year. This argues for some degree of caution, but will also add the potential for buying opportunities as the unfolding economic environment becomes clearer.