Data from Morningstar Canada indicate that equity funds suffered the worst of their now four-month-long slump in August, as weak economic data and an historic debt downgrade in the U.S. pushed world markets downward. All but one of the 23 Morningstar Canada Fund Indexes that track equity categories posted losses for the month, with 12 of them losing more than 5%. The index measuring European equity was the worst performer in August, losing 8% for the month.
“The tribulations in Europe started a few years ago with the peripheral countries of Iceland, Ireland and Greece. Now there is fear that troubles may be spreading to the core as Italy and Spain came under pressure, prompting the European Central Bank to step in and purchase the government bonds of these countries,” said Morningstar fund analyst Salman Ahmed.
Germany’s DAX stock index lost 19.2% for the month, while major indexes in France (CAC 40) and the U.K. (FTSE 100) fell 11.3% and 7.2%, respectively, when measured in local currencies. For Canadian fund investors, these losses were tempered by currency effects, with the Canadian dollar depreciating against both the euro (2.6%) and the pound sterling (1.4%).
On this side of the Atlantic, the S&P 500 Index lost 5.4% in August. “There was a sharp decline at the start of the month due to consistently poor economic news and an unprecedented downgrade of U.S. debt by rating agency Standard & Poor’s from the AAA to AA+. This prompted the Federal Reserve to commit to two years of low rates to try to help markets. Investors reacted positively to the news, but markets still ended this volatile month deep in negative territory,” said Ahmed. Canadian investors in this segment once again benefited from the weakening loonie, which dropped 2.5% against the U.S. dollar. The Morningstar U.S. Equity Fund Index closed the month with a 4.8% loss.
Among the major diversified foreign equity categories, the Morningstar Global Equity Fund Index lost 5.5%, while the indexes that measure the Asia Pacific Equity, Emerging Markets Equity and International Equity categories lost 5.2%, 6% and 7.4%, respectively.
Domestic equity funds generally outperformed their foreign counterparts, with the Morningstar Canadian Equity Fund Index posting a 1.9% loss for the month. This result reflected both a sharp drop in Canada’s energy sector and a significant gain in materials. The S&P/TSX sub-index that tracks the latter sector gained 5.1% for the month, boosted by solid performances from the major gold producers.