Outlook

Headlines on trade issues and foreign investments in US companies holding sensitive technology dominated much of the headlines in the quarter. The impact has weighed on industrial, base metal and emerging market stocks due to the China/US trade “wars”.

With the trade rhetoric grabbing headlines, the portfolio’s small cap energy stocks rebounded almost 25% after a pullback in the first quarter. Despite the rally, the energy sector is still 40% below the peak in 2014. While oil prices were above $US 100/barrel at the peak, Canada energy company’s valuations are much lower as energy companies have significantly improved their balance sheets and are benefitting from a weak Canadian dollar.

The chart below shows how the combination of reduced supplies and stronger demand have removed the glut of global oil that led to the collapse in prices back in 2015. Rising U.S. shale oil production had grown the OECD inventories to record levels (dark blue line on chart), which led to the collapse in oil prices (light blue line) to under US$30 per barrel in early 2016. Since that time, we have seen shortfalls in production from key OPEC producers (which more than offset the gains in U.S. production). This has brought the global oil supply/demand into balance. Agreement among OPEC and key non-OPEC producers (Russia) to cut back supply by over 1.8 million barrels per day has helped to eliminate the surplus.

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