../Morning Post
Posted November 3, 2009

Recovery Takes a Breather in October, Data Shows

TORONTO - After seven consecutive months of broadly based gains, Canadian investment funds that focus on equities posted negative returns in October, as the markets showed signs that the recovery may be winding down. Equity funds that target emerging markets and, more particularly, China, provided the only exceptions to this downward trend, according to preliminary performance data released today by Morningstar Canada.

Only nine of the 43 Morningstar Canada Fund Indices advanced during the month, including four indices that posted minimal gains of 0.1% or less. The Morningstar Greater China Equity Fund Index had the best return for the month with a 5.2% gain, following news that growth in China's gross domestic product was higher than expected in the third quarter. The only other equity fund index to post a positive result, Emerging Markets Equity, ranked fifth overall with a 0.4% return. The other winning fund indices all track money market or fixed-income categories.

"The broad decline in most equity categories suggests that investors may be exhibiting some skepticism about how much steam remains behind the equity rally we've witnessed for several months now," said Nick Dedes, fund analyst for Morningstar Canada. "Concerns about a pullback likely led to some profit-taking and coincided with investor interest returning to the fixed-income space. Notably, real return bonds were the second best performing category for the month, with the Morningstar Canadian Inflation-Protected Fixed Income Fund Index gaining 2.2%. This was despite the current deflationary environment, suggesting that concerns about rising prices going forward are once again top of mind for investors."

Among domestic equity funds, the index that tracks the Canadian Small/Mid Cap Equity category had the best return with a 0.3% loss, while the large-cap-oriented Canadian Focused Equity, Canadian Dividend & Income Equity, and Canadian Equity fund indices were near the bottom of the overall rankings with losses of 3.3%, 4.1%, and 4.2%, respectively. For these three categories-and for the benchmark S&P/TSX Composite Index, which lost 4%-this marks the first month of negative returns since February.

Foreign equity funds performed slightly better, with most fund indices losing between 1% and 2%. The Asia Pacific ex-Japan Equity category, which like the Emerging Markets category has significant exposure to China, lost 0.6%, while Asia Pacific Equity was down 1.2%. Among the larger fund categories, Global Equity, U.S. Equity and International Equity lost 1.3%, 1.4% and 1.5%, respectively.

While most stock markets around the world pulled back last month-with the exception of China-losses incurred by Canadian fund holders were less severe due to currency movements. "The Canadian dollar depreciated against all major currencies in October, following a period of relative strength against the U.S. dollar," Dedes said. "Bank of Canada Governor Mark Carney expressed concerns over the loonie's sharp ascent, stating that it represents a significant drag on growth that will more than fully offset recent favourable economic developments. He issued a reminder that despite maintaining its target overnight rate at 25 basis points, the Bank still has considerable flexibility with respect to monetary policy."

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