Q1 2017 Quarterly Review

Q1 2017 Quarterly Review: Trump Bump

The markets carried over the feeling of exuberance from the end of the year into Q1. US investors remained confident in the Trump administration’s ability to put campaign promises into
action, sending economic sentiment climbing higher. Investors took the US Fed rate hike and comments from the voting committee in stride. Globally, economic data continued to improve
which supported gains in developed markets and outperformance in emerging markets. The demand for risk assets remained robust with equities outperforming fixed income by a significant
margin.

Domestic Equities

U.S. stocks outperformed other developed economies during the first quarter. Confidence in the new regime in Washington along with a slew of business-friendly campaign rhetoric sent the
market to new highs. All major large-cap indices were up during Q1: the S&P 500 returned 5.53%, the Dow returned 4.56% and the NASDAQ 9.82%. Small-cap underperformed with the
Russell 2000 gaining 2.12%. Many sectors benefitted from this rally, with tech taking the top spot at a 12.6% increase. Consumer discretionary and healthcare were the next best-performing
sectors. The worst performing sectors were energy and telecom. There were many small downside bumps during the quarter, but overall, these issues did not affect market confidence. The
resilience of the bull market can be seen in the VIX which ended the quarter at historically low volatility levels.

Foreign Equities

Notable improvements in economic measures and weaker currencies supported healthy returns for Eurozone equities. Inflation and manufacturing data, both major indicators, highlighted
positive gains in the area. Additionally, the lack of volatility surrounding the Dutch elections raised the demand for risk-on assets. The MSCI EMU returned 8.31%. The European Central Bank
upgraded its outlook for the rest of the year but kept its policies unchanged. The UK markets charged ahead despite the pending Brexit. Strong consumer spending and tailwinds from a
weaker sterling supported cyclical sector outperformance. The Bank of England upgraded its outlook for the rest of the year but made no changes its accommodative policies. The FTSE 100
returned 3.75%. The Japanese market lost its end of the year momentum during Q1 ending slightly down for the quarter in USD terms. The slowdown was related to a stronger yen which
negatively affected forward earnings projections. Export companies led the Nikkei while financials lagged. The Nikkei 225 returned -1.04%. In China, a stabilizing currency and unexpectedly
strong economic data improved investor sentiments. Additionally, risk assets have benefitted from the government’s push to limit capital outflows and over-investment in the property market.
Emerging markets (EM) as a whole were supported by a weaker US dollar, improving developed market economic data, and inaction from Washington related to trade policies. The MSCI EM
index returned 8.31%. Russia was a notable exception to EM performance. Weaker energy prices and complications in the government’s relationship with the US were the biggest headwinds.
The MSCI Russia lost 4.61%.

Fixed Income

Fixed income generated positive returns during the quarter but lagged equities. US bonds were hurt by the US Fed and historically low rates in other developed economies. In March, the Fed
voted to raise interest rates by 0.25%. The yield curve has also become flatter, leading many analysts to adjust their end of year outlooks. The Barclays Aggregate Bond Index had a small
gain of 0.82% in Q1. Demand for foreign developed bonds remained relatively high. Investors sought safety from potential Brexit fallout and upcoming European elections. The Barclays
Global Agg Ex-US returned 2.48%. Emerging market bonds had a very favorable quarter. EM bond prices surged due to a weak dollar, decreases in concern about Trump’s protectionist
rhetoric, and a demand for yield. The total return for the Bloomberg Barclays Emerging Markets USD Aggregate Bond Index was an impressive 3.3% and the local currency index returned
7.46%.

Alternative Investments

The HFRI Fund Weighted Composite Index was positive for all three months of Q1 finishing the quarter with 2.3% returns. Hedge funds benefitted from trading around events such as the US
Fed rate hike and swings in assets influenced by the “Trump trade”. Equity hedged strategies posted the highest subclass returns, while Macro strategies posted the worst returns.
Commodities as a whole declined during Q1. Energy was the weakest performing sub-class with oil, natural gas, and coal all declining more than -7%. Oil prices struggled to gain positive
momentum following from OPEC production cuts. US crude production and inventory levels continued to outpace expectations putting further downside pressure on prices. Metals generated
the best returns. Industrial metals increased because of higher demand from China. Precious metals also posted strong returns driven by a continuation of low-interest rates globally and
insecurities stemming from inflation and political uncertainty. Real estate held onto gains as investors’ rate expectations were tempered and demand for higher-yielding REITs remained
strong. The Dow Jones US Real Estate index returned 3.22% during Q1.

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