Commentary for February:

Beyond the geopolitical risks stemming from Russia, markets are still paying close attention to inflation, the progress of economic recovery out of the pandemic, and anticipated central bank moves over the coming months. The headline that has dominated the news over the past two years—the COVID-19 pandemic—has receded into the background as the number of cases has fallen sharply since mid-January and more restrictions are lifted.

While COVID-related uncertainty fell, the concern over higher inflation continued. The US Consumer Price Index (CPI) increased by 7.5% over the 12-month period ending in January, the largest annual increase since February 1982. Tangible goods such as car prices, along with energy continues to be an outsized driver of overall levels. The story throughout much of the second half of 2021 that this rise in inflation was transitory, or driven by pandemic-related sectors, has gradually shifted, as we see more evidence that these price increases are more broad-based. For example, the core CPI, which excludes the more volatile food and energy components, rose by 6% over the 12 months ending January.

In Canada, inflation was also elevated, with the CPI increasing by 6.1% for the 12 months ending January, driven by energy, food and shelter. The CPI, excluding food and energy, rose by 3.5% over the same 12-month period, which is still above the longer-term 2% target for the Bank of Canada (BoC).

This continued trend of higher inflation has led to expectations that central banks like the US Federal Reserve and the BoC are likely to amplify their rate hikes, both in frequency and potentially magnitude (ie: more than the typical 0.25% seen in recent cycles). The first hikes from both banks are expected in March, with the Bank of Canada meeting on March 2, and the Federal Reserve meeting on March 16. The market, as of the end of February, is expecting both to announce a 0.25% increase in rates.

For the Compass^TM Portfolios and ATBIS Pools, fixed income performed in line with the overall benchmark down about 1%. Shorter duration helped on a relative basis as rates rose through the first half of the month, compared with the longer duration broad Canadian fixed-income market. The Russian invasion, and lead up to it, caused enough uncertainty to widen credit spreads through the latter half of the month. Credit spreads, while wider, have only moved about 20 basis points on investment grade bonds—a subdued move compared to something like COVID-19 where spreads moved out 150 basis points within the span of a month. 

Equities were a bit of a mixed bag over the month, as the Canadian and US mandates were more or less in-line with their respective benchmarks, whereas the international portion of the funds saw some weakness versus the overall index from stock selection. Within Canadian equities, materials and energy were the main drivers of performance during February. Rising energy and commodity prices towards the end of the month gave way to outperformance in the type of lower-quality companies that the funds typically avoid.