Please find below an executive summary of our latest Outlook 2022 webinar, which highlighted what we consider the key events that transpired in 2021, and our thoughts on moving forward in 2022. We have also included a link to the webinar recording for those of you that would rather tune in to the video than read this report. We hope you enjoy either form, or both, and thank you for your trust in 2021, and we look forward to working with you and your family in 2022.
For equity markets, 2021 was a very positive year while having some of the lowest volatility on recent record with only a single 5% market decline. We did not expect the same lack of volatility in 2022 and this is proving to materialize very early in the new year as the market digests several expected interest rate hikes, governments withdrawing stimulus, and inflationary pressures. However, we feel that the biggest risk facing equity markets in 2022 will be a policy mistake by the Fed of raising rates too far too fast or too slow, which seems to be what all central banks signaled last week, moving too slow. Either can surprise market participants and create uncertainty, and this will create volatility. The best antidote for this uncertainty is to always hold cash for your near-term needs and to invest your long-term capital for growth while fully expecting normal market pullbacks of 10% to 20%, or more, which should be considered as normal as breathing.
Earnings have been growing at a record clip and stock prices have behaved accordingly, what remains to be seen as we move more mid-cycle in this recovery is how earnings grow with less stimulus. We think it will be important to avoid cash and bonds for long-term money, to focus on earnings and dividend growth, and to be prudent and not chase performance, which should always be a principle of investing.
Real interest rates are still negative, meaning interest rates minus inflation are negative and the yield curve is still positively sloped, i.e. long rates are higher than short rates; historically this has been supportive of equity prices, yet valuations are not cheap. It will be critical for investors to manage their own personal behaviour as news items will always try to distract us from our long-term goals by focusing on today's story, and in particular anything negative that can grab our attention, while underestimating the long-term power of economic growth driven by human innovation and adaptation.
We suggest investors remain positive about long-term prospects and at the same time not be surprised by markets that could be choppy in 2022.
BROAD STRATEGY COMMENTS
Balanced Strategies: Income/ Income & Growth (IG)/ Moderate Growth (MG)/ Dynamic Growth (DynG))
The four balanced strategies we run all performed as we would have expected in last year’s environment. Income and IG are 50% equity so, as expected, their return was less than MG and DynG, which are 70% equity. Moving forward we are keeping our fixed income term to maturity short (one to five years), coupled with a small component of long-term high yield bonds as a correction hedge. We continue to rebalance these strategies on a systematic basis.
Canadian Dividend Income/ US Dividend Income
Both of these strategies own 15 to 16 stable large cap dividend payers that are not tied to cyclical industries like metals or oil and gas. Our focus for these mandates is to generate a dividend of around 3% and grow that dividend over time by 6% to 8% per year. This should drive stock price growth over time in a repeatable way, although performance for these mandates will lag in hot rising markets that are driven by cyclical sectors like oil and gas.
Dividend Growth (DivG)/ Active Growth (AG)
These two mandates are North American in scope with DivG being 50% Canadian dividend paying stocks while AG is 33% Canadian stocks with no dividend requirement. The balance of each strategy is invested in US equity. Both mandates performed as expected in a robust equity market, generating returns of mid 20%. We do not expect this as a long-term average return moving forward, but we continue to recommend these mandates for long-term capital.
This mandate was started in mid-2021, has a low turnover, and is invested in 20 globally dominant businesses, with about 50% invested outside of North America and 50% in the US. We continue to recommend this mandate as a way to diversify outside of Canada for long-term money.
We think it is critical to temper expectations as returns the last three years were better than average and are not repeatable on a long-term basis. This does not mean we should fear the future, only that we should continue, as always, to be prudent and not be surprised by market fluctuations.
We thank you for your trust.
Randy and Ian
Performance table: AMA Program, gross of fees. *Returns are annualized for periods longer than one year. **Returns are in USD. As of December 31, 2021.