Markets, investing and what matters most: Quarter in review Q3, 2021

By Tyler Simms, CFA 25 October 2021 10 min read

Written by Tyler Simms, CFA, CFP® co-authored by Jason Maniotakis, CFA, CFP® and Travis Higgins, CFA, CFP® on behalf of Private Investment Counsel, which believes in a holistic investment counselling approach to helping high-net-worth clients.

"September tries its best to have us forget summer."

Bernard Williams

Following a terrific summer for both weather and market performance, September was much chillier from an investing perspective. Many stock markets posted their worst monthly returns since March 2020 as increased regulatory risk in China and concerns around the US debt ceiling triggered a pullback for the market.

Despite the decline in September, the third quarter brought positive returns across the majority of equity markets, while the Canadian bond market fell modestly during the period. Global growth appeared to slow as COVID-19 variants surged, and supply chain disruptions continued to persist. Concerns around inflation and the potential accelerated timeline for central bank tapering also caused a September drag on market performance and sentiment.

That said, so far in 2021, equity markets remain in strong positive territory, supported by a continuing trend of economic recovery from the depths of the pandemic. Overall, expectations are for the global economy to continue to grow, albeit at a slower pace than we’ve seen the past 18 months. While there remain risks to the trajectory of this recovery, we remain positioned for long-term resilience in our portfolios to protect capital first, while continuing to be opportunistic when market disruptions occur.


What’s with September?

September lived up to its reputation as the worst-performing month for stock markets, with Canadian and global stocks tumbling -2.2% and -3.6% respectively for the month. From a historical perspective, Yardeni Research reports the US stock market (S&P 500 index) has averaged a loss of -1.0% for September, far worse than the next worst month, May (-0.1%) between 1928-2021.

So why do stock markets tend to struggle in September as compared with other months? The “September effect” as it is often referred to, is a market anomaly and unrelated to any particular market event or fundamental factor. Some have speculated that the negative effect on markets is attributable to seasonal behavioral bias as investors change their portfolios at the end of summer. Another theory suggests lighter trading volumes occur in the summer months from traders taking vacation and once they return to work, there is increased selling activity and therefore downward pressure on stock prices.

Ultimately, there’s no sensible reason to alter your investment strategy due to a quirk in the calendar. While the market has had a propensity to decline in the month of September, there are inevitable peaks and valleys throughout the year; that’s simply part of the long-term investor’s journey.


Headlines that mattered this quarter:

  • Strong global economic growth continues, but has slowed
    • According to the Conference Board of Canada, real gross domestic product (GDP) is expected to grow 5.1% in 2021, a reduction from its previous forecast in July (6.7% growth). The board's forecast for 2022 was held at 4.4%.
    • Similarly, the US Conference Board revised its global growth forecast down slightly from 5.2% to 5.1% in September. For context, from 2011 to 2019, global GDP growth averaged 2.9% per annum.
    • With household balance sheets in good shape, consumer spending is expected to be a key driver of growth through the end of 2021.This will be tempered by persisting bottlenecks in global supply chains, which make it difficult for businesses to keep up with demand.

  • Inflation: transitory or not?
    • The term ‘transitory’ trended in the news this quarter, as inflation rates rose in the second half of this year after an extended period of low price increases. The headline inflation number now exceeds 3% in the Eurozone, 4% in Canada, and 5% in the US.
    • Central banks continue to keep a close eye on price gains. Instead of being a short-term phenomenon as initially thought, it appears these transitory pressures may persist longer than expected.

  • China: regulatory restrictions and the story of Evergrande
    • China launched a regulatory crackdown on a broad range of industries, with key sectors facing heightened uncertainty. The technology sector was a particular target and companies now face greater restrictions on market access and listing restrictions, among other challenges.
    • It was reported that China Evergrande Group, one of China’s largest property developers and home builders, is at risk of defaulting on its debt. Construction has been an important driver behind China’s growth, and Evergrande’s debt crisis could prompt a slowdown in the sector, and in turn a slowdown of economic growth for the country. The company is taking steps to stabilize its debt positions and it is widely believed that the state would intervene to prevent any broader economic fallout in the event of default.
    • China’s overall stock market is down about 17% year to date in stark contrast to global stocks having gained close to 15%.
    • Overall, China is about 15-20% of global GDP and represents roughly 4% of global stock markets.

  • COVID-19 Delta variant
    • The spread of the highly-contagious Delta variant remains a notable risk to the outlook for the global economy, as cases have spiked globally in a fourth wave of the COVID-19 pandemic.
    • Thus far, the economic impact of the Delta variant has been limited as compared with earlier waves, although there is evidence it has hindered manufacturing and shipping activity around the world.

Chart of the quarter

One surprising positive effect of the global pandemic recovery has been the surge in Canadian household net worth. In September, Statistics Canada reported a 23% increase in household assets in the five quarters since the onset of the pandemic. Important drivers include a jump in housing prices and an appreciation of investment holdings. Economists coin this the “wealth effect,” the premise that consumers tend to spend more when household finances are in good order. Consumer spending is a significant component of economic growth, so household net worth is a variable closely watched by investors.

The wealth effect in Canada

The household assets and debt to total assets ratio (1990 to June 30, 2021) show an unprecedented positive wealth effect during the pandemic.

Source: NBF Economics and Strategy (data from Statistics Canada)

Inside the portfolio

During the quarter, all of our portfolio strategies—the CompassTM Portfolios and ATBIS Pools series O—enjoyed positive returns, with growth-oriented portfolios outperforming more conservative portfolios, driven by higher stock versus bond returns.

Compass Portfolios and ATBIS Pools returns, series O
Q3, 2021

Source: ATB Investment Management Inc. 

Interest rates rose moderately through September, pushing the FTSE Canadian Bond Universe index (benchmark) return to -0.5% for the quarter. The fixed income component within the Compass Portfolios and ATBIS Fixed Income Pool has higher credit exposure and shorter duration compared to the benchmark. This led to better performance relative to the benchmark and kept absolute performance in positive territory. At the end of the quarter, yield and duration for the fixed-income portion of our strategy holdings were approximately 3% and five years respectively, compared to 1.8% and eight years for the benchmark.

The Canadian stocks managed by our sub-advisors outperformed in the third quarter versus the benchmark (S&P/TSX Composite). Materials (e.g. gold and metals) and information technology sectors in particular, are Canadian sectors where the Compass Portfolios are underweight; both sectors had negative quarters while the S&P/TSX Composite ended the quarter slightly positive. Financials make up a large weight in Canadian markets where they have performed very well, and are a big reason why Canadian equities have outperformed US and international equities year to date.

In our US equity mandate, the small-cap portion outpaced the large-cap benchmark (S&P 500) year to date, and the currency hedge added modest positive performance for the year. Together these offset the slight underperformance from the Mawer US equity strategy. As a result, the US equity segment of the Compass Portfolios is in line with the benchmark, year to date.

Finally, our international equity mandate underperformed the benchmark (MSCI EAFE net TR CDN$) in the third quarter, largely due to a small exposure to China. Both Tencent and Alibaba were negatively impacted by mounting regulatory risks. Better relative performance from financial and industrial stock selection offset most of the negative China exposure. Year to date, the international equity mandate remains up roughly 5% overall.

Major market returns
Q3, 2021

Source: ATB Investment Management inc.

How we are positioned

As we approach the end of 2021, three risks remain top of mind for investors: higher interest rates, persisting inflation, and the impact of the COVID-19 Delta variant. With long-term resilience in mind, our portfolio managers position investments portfolios in the following ways:

  • From an overall portfolio perspective, we maintain a slight overweight to equities over fixed income, with the belief that stocks present better value for investors in the current low-interest rate environment.
  • For equities, our underlying sub-advisors focus their investments in high-quality businesses—with strong market position and pricing power, manageable debt levels, exceptional leadership teams, that trade at an attractive valuation. These are the tenets of companies with the best chance to absorb the impact of unexpected inflation and rising interest rates.
  • For fixed income, risk management is especially important in the current environment as rising interest rates and inflation can cause a significant drag on future expected returns.
    • Our fixed-income portfolios maintain a shorter duration profile, resulting in lower sensitivity to interest rate changes as compared with the bond universe in Canada (FTSE Canada Universe Bond index). Short-duration fixed-income strategies help to mitigate the negative effects that interest rate increases have on bond prices.
    • By holding proportionately more corporate bonds to government issues, our clients are better rewarded in this low-but-rising interest-rate environment.

Sub-advisor spotlight

Each quarter we highlight what’s “under the hood” of our investment portfolios and focus on one of our sub-advisors. Each sub-advisor hired to manage our clients’ investment assets is chosen based on a number of factors, including a disciplined investment process, strong internal governance, and an experienced and proven track record, particularly during periods of market decline.


BMO Asset Management

Firm profile:

BMO Asset Management (BMO AM) is an asset management firm and wholly-owned subsidiary of the Bank of Montreal, and the Canadian arm of BMO Global Asset Management (BMO GAM). BMO AM is headquartered in Toronto, Ont. with over 20 offices in 14 countries as part of the BMO GAM business. BMO AM manages 118 exchange-traded funds (ETFs) with net assets under management in excess of $60 billion for their Canadian ETF business.


Indexing or “passive investing” is an investment strategy in which a fund—ETF or mutual fund—replicates the holdings of an underlying reference index. The strategy attempts to generate returns similar to a broad index in a cost-effective way. Typically a hands-off approach in passive investing helps to eliminate many of the biases and challenges associated with a stock picking strategy, especially in certain segments of the market that are harder to outperform.

Active vs. passive:

Active management is an investment strategy in which a portfolio manager selects individual stocks or bonds in different weights than how they appear in the index. Done well, active management can help to provide downside protection, and prevent an investment from declining in lockstep with the index. In return, active managers tend to charge a higher fee for their expertise, as compared to an indexed strategy. If an index faces headwinds, then a passive ETF will inherently face that same pressure and follow the index down in price. An active manager will use rigorous security and industry analysis with the aim of building a more resilient portfolio.

Why we blend active and passive management:

Since the inception of the Compass Portfolios, ATBIM has blended active and passive management together. While ATBIM’s active managers will not always outperform an index when the markets are moving up, they do show a fairly consistent ability to mitigate downside risk. Our objective is to create an overall portfolio that is cost effective, has less volatility than an index, and that provides a smoother ride for investors.

ATBIM’s passive investment strategy:

ATBIM uses BMO AM for a few specific areas of the portfolio. We include the BMO S&P TSX Cap Comp Index ETF, the BMO S&P 500 ETF, the BMO US Mid-Cap Index ETF and the BMO MSCI EAFE Index ETF in all but our most conservative investment strategy. These four products add broad market exposure to supplement our active managers, while keeping costs lower for investors.

What are we reading and listening to?

While inflation has recently caught the attention of investors, it’s a factor we are always thinking about in order to ensure our investment solutions can cushion the impact of price increases. ATBIM takes a deep dive in the article, Questions on inflation? ATBIM has you covered.

Respected investment manager Steadyhand answers the perpetual investor question, Is it time to raise cash?

What we are….not reading? How the global supply chain has disrupted book supplies at a time when interest in reading is way up.

In case you missed it:

One way we help clients ignore the noise is to reflect on the principles of investing and the investment philosophy we at ATBIM adhere to. We believe investor success is the result of solid portfolio construction and smart investor behaviours.

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