Fear of U.S. recession sends equity funds tumbling in January, Morningstar data show

    TORONTO, Feb. 4 /CNW/ - Fears that the United States may be entering a
recession that would negatively impact global markets caused a massive
sell-off of stocks around the world in January. As a result, virtually all
foreign and domestic equity fund categories suffered significant losses for
the month, according to preliminary performance data released today by
Morningstar Canada.
    The hardest-hit fund category, as measured by the Morningstar Canada Fund
Indices, was Science and Technology Equity, whose constituent funds invest
mainly in the United States. The fund index tracking that category lost
10.7% in January. The Standard & Poor's Information Technology Index dropped
12.5% when measured in U.S. dollars, but that loss was dampened by the
1.4% depreciation of the Canadian dollar versus its U.S. counterpart.
    "Most tech names have been struggling to stay ahead of consumer spending
and behaviour during the economic slowdown. Technology heavyweights such as
Apple, eBay, Google and Research in Motion fell 30%, 19%, 17% and 17%,
respectively, during the month as investors realised that the growth rates
priced into their lofty valuations weren't sustainable," said Bhavna Hinduja,
fund analyst with Morningstar Canada.
    Funds that invest in overseas equity markets were hit harder than those
that focus on Canada last month. The Morningstar Emerging Markets Equity Fund
Index, which produced the best return among all 42 Morningstar Canada Fund
Indices for 2007, had the second-worst return in January with a 10.5% loss. It
was closely followed by the Morningstar Asia Pacific ex-Japan Equity Fund
Index (second-best in 2007) and its 10.4% loss. Leading these fund indices
downward were poor performances in China, where the Shanghai Composite Index
and the Hong Kong Hang Seng lost 16% and 15.7%, respectively.
    "Chinese shares have weakened considerably in recent weeks, succumbing to
the latest wave of subprime turmoil and worries over an economic slowdown in
the U.S., which is China's largest trading partner," Hinduja said. "These same
fears have caused Asian markets to plummet across the board in the past month.
For instance, India's Sensex Index sank more than 11% when the market opened
on Jan. 22-resulting in a one-hour trading suspension-and dropped as much as
13% once trade resumed, only to trim its losses to 4.6% at the closing bell.
Similarly in Hong Kong, the Hang Seng slumped 12% that same day and had its
worst two-day fall since the aftermath of the 1997-98 Asian financial crisis,"
Hinduja said.
    The subprime situation in the U.S., combined with a well-publicized fraud
case, had a devastating effect on the financial services sector in Europe,
where heavyweights such as Switzerland's UBS, Germany's Deutsche Bank and
France's Société Générale experienced multi-billion-dollar write-downs. For
Canadian mutual fund investors, this translated into a loss of 8.9% for the
European Equity fund index. Closer to home, the Morningstar U.S. Equity Fund
Index lost 5.5% for the month-a slightly better result than the S&P 500 Index
(in U.S. dollars) which lost 6%. Meanwhile, the more geographically
diversified International Equity and Global Equity fund indices posted losses
of 8.2% and 6.1%, respectively.
    Here in Canada, the S&P/TSX Composite Index lost 4.7% in January, dragged
down by the poor performance of its two largest sectors-energy and financial
services-which together comprise more than half of the index. This resulted in
losses of 5.6% and 5% for the Canadian Equity and Canadian Focused Equity fund
indices, respectively. The losses were more severe among funds that target
smaller domestic companies; the Canadian Small/Mid Cap Equity fund index was
down 7% for the month, while Canadian Focused Small/Mid Cap Equity lost 7.5%.
(Funds in the "Focused" categories may hold up to half of their assets outside
of Canada, while the Canadian Equity and Canadian Small/Mid Cap Equity funds
must invest at least 90% in Canada.)
    Only six of the 42 Morningstar Canada Fund Indices had positive returns
for the month, with the only winning result for an equity category coming from
the Morningstar Precious Metals Equity Fund Index, which gained 6.1%. "The two
high-profile interest rate cuts by the Federal Reserve in the U.S.-an
unexpected 75-basis-point emergency reduction on Jan. 22 followed by an
additional 50 basis points on Jan. 27-provided markets with a clear signal
that the U.S. economy was suffering more than a mere slowdown. This raised
inflationary pressures and weakened the U.S. dollar even further, which caused
the spot price of gold to rise 11% in January, from US$835 per ounce to
US$925. Gold's strength was further supported by supply concerns from one of
the world's top miners, AngloGold Ashanti, which had to halt all of its South
African mining and gold recovery operations in response to the nation's power
shortages," Hinduja said.
    The second-best performing fund index was Global Fixed Income, which
gained 3.1% for the month, in large part due to the loonie's depreciation
against all major currencies including the euro (3%), the UK pound (1.7%) and
the Japanese yen (5.8%). In third place was Canadian Short Term Fixed income,
up 1.2%, followed by Canadian Fixed Income, up 0.5%. The worst-performing fund
index among the six bond-oriented categories was High Yield Fixed Income,
which lost 1.3%.
    For more on January fund performance, go to www.morningstar.ca.
    Morningstar Canada releases preliminary fund performance figures at the
beginning of each month, giving investors an early indication of how fund
categories fared during the previous month. The preliminary numbers are based
on the change in funds' net asset values per share during the month, and do
not necessarily include end-of-month income distributions such as dividends,
interest or capital gains. Final performance figures will be published on
www.morningstar.ca next week.

    About Morningstar Canada and Morningstar, Inc.

    Morningstar Canada is the Canadian subsidiary of Chicago-based
Morningstar, Inc., a leading provider of independent investment research. The
company offers an extensive line of Internet, software, and print-based
products and services for individuals, financial advisors and institutions.
Morningstar provides data on more than 260,000 investment offerings, including
stocks, mutual funds and similar vehicles. The company has operations in
18 countries and minority ownership positions in companies based in three
other countries.

For further information:

For further information: Bhavna Hinduja, Fund Analyst, Morningstar
Canada, (416) 484-7815, bhavna.hinduja@morningstar.com; Christian Charest,
Associate Editor, Morningstar Canada, (416) 484-7817,

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