Sub Advisor Insights—Markets Q1 2022

Cardinal Capital Management Inc.

Contributed by: Cardinal Capital Management Inc.

The first quarter of 2022 got off to a tumultuous start.  Financial markets were whipsawed as nervousness and uncertainty gripped the marketplace.  Continued rising inflation and the imminent timing of central banks withdrawing their accommodative policies provided an uneasy beginning to the new year.   Bond yields rose as expected, as an anticipated five plus rate hikes by the central banks (excluding the March and April increases) are forecasted over the year.  The Russian invasion of Ukraine overshadowed the positive outlook for the continued recovery in global economies and corporate earnings, while adding another degree of uncertainty to supply chain issues.  Commodity prices (especially energy, industrial metals, and agriculture) rallied causing concerns that higher inflation may be around longer than expected.   

The Canadian economy has proven to be resilient as the economy has continued to grow and  employment remains strong.  The unemployment level declined to 5.3% in March, the lowest level since comparable data became available in 1976. Consumers remain financially healthy with excess savings built up over the past two years.  While consumer consumption will be affected by higher inflation and reduced purchasing power, the strength of the resource sector, to some extent, could offset the impact of lower consumer consumption to the economy. 

During the quarter, many global equity markets experienced corrections with some reaching bear market territory.  Despite rallying off their lows, most global equity markets finished the quarter with negative returns.  By contrast, the Canadian market held firm and handily outperformed its global peers, thanks to robust returns in the resource sectors.  The S&P/TSX finished the quarter up 3.82%.   

With the central banks increasingly hawkish stance and the rising bond yields, stock valuations have been impacted especially high growth, high valuation stocks

Canso Investment Counsel Ltd.

Contributed by: Canso Investment Counsel Ltd.

Bond markets suffered their worst quarter in four decades as yields logged their biggest gains. The Canadian FTSE Universe Bond Index fell 7% during the first quarter and the FTSE Corporate Bond Index dropped 6.4% in the same period.  

The U.S. Federal Reserve raised overnight rates for the first time since 2018. The Fed acknowledged stubbornly elevated inflation caused by high energy prices and demand-supply imbalances related to the pandemic. The invasion of Ukraine by Russia rattled already stretched supply chains and is expected to create additional upward pressure on inflation. Strong job gains and a declining unemployment rate support the marketʼs bearish sentiment on yields. Fed guidance indicates several additional interest rate hikes this year, continuing into next year. Additionally, balance sheet reduction of holdings of Treasury securities, agency debt and agency mortgage-backed securities is expected to be formally announced at the May Fed meeting. 

The Bank of Canada raised the overnight rate to 0.5%. Economic growth is strong in Canada and household spending strengthened after lifting of public health restrictions. Housing market activity remains elevated resulting in higher house prices. Poor harvests and higher transportation costs are adding to pervasive price pressures. Bank of Canada guidance indicates further rate hikes to curb inflation. The Bank is considering when to begin its balance sheet reduction programme.

Cidel Asset Management Inc.

Contributed by: Cidel Asset Management Inc.

The Canadian equity market continued its positive trajectory in the first quarter of 2022 posting a 3.8% total return. While inflation and tightening monetary policy were headwinds, the war in Ukraine was a clear catalyst for strong returns in the Energy and Materials sectors. 

From a sector performance perspective, the quarter was all about extremes: the spectacularly positive performance of the commodity sectors and the spectacularly negative performance of the Technology sector. Leading the S&P/TSX was the cyclical Energy sector (up 29%) and Materials sector (up 20%). Russia’s invasion of the Ukraine prompted investors to add a geopolitical risk premium to the price of oil and natural gas on top of a current tight supply demand dynamic for energy. Oil (WTI) rose 33% and natural gas (NYMEX) rose 51%. The oil and gas exploration and production companies performed very well up 42%, even the pipeline companies did well, rising 18%. The Materials sector continued to perform well as demand for all types of commodities remained strong while short-term supply growth challenges remain. The result was strong performance of the CRB All Commodities Index up 27%. Within the Materials sector, the Chemicals subsector (including fertilizers) was up 36% and the Mining subsector was up 34%. 

At the other end of the performance spectrum, the worst performing sector was Technology, down 35.5%. Leading the sector lower was Shopify down 51.5%. At least part of the weak performance of Shopify came from investor concerns over the amount of capital allocated to potentially lower return fulfilment services. However, the sector suffered from a reality check on valuation prompted by the sharp rise in long-term interest rates (+97 basis increase in yield on the Government of Canada 10-year).  Rising interest rates clearly have a material negative effect on the discounted value of the cash flow of a company whose cash flows are further out in the future.  Investors marked down these equities accordingly. 

The 3.8% return on the S&P/TSX for the first quarter was supported by positive earnings estimate revisions of about 6.3% for the forward 12 months, but the forward price-to-earnings multiple contracted slightly from about 14.7x to 14.1x during the quarter as investors remain skeptical about the sustainability of higher near-term earnings in the resource sectors. 

Mawer Investment Management Ltd.

Contributed by: Mawer Investment Management Ltd.

Bond yields rose sharply as central banks turned increasingly hawkish toward inflation. This put pressure on equity valuations and was further compounded by the uncertainties caused by Russia’s war in Ukraine. Volatility spiked across major asset classes—bonds, commodities, equities—with many global equity indices entering correction territory during the period. Remarkably, by the end of the quarter, the MSCI ACWI had recovered above its pre-war level. Even so, most sectors and regions finished the quarter with negative returns, with the exception of those tilted toward commodities.