ADVISOR MANAGED ACCOUNTS: Q1 COMMENTARY
After a strong finish to 2021 in the equity markets, the year 2022 has by comparison started with much uncertainty. Investors were already concerned with inflation, rising interest rates, an overheated housing market, and supply chain issues when the military action from Russia in the Ukraine became a reality. Clearly, the negative human and economic impacts will be greatest for Ukraine itself, then Russia, followed by eastern and central Europe. In North America, trade and financial links with Russia and Ukraine are much smaller, and much of the impact in North America will come as a biproduct of any slowing in European growth.
Our view is that between Canada and the US, the latter is likely more negatively affected. Canada’s greater industrial concentration in resources doesn’t make it necessarily a net winner, because global growth will still likely be slower, impacting other sectors, but it does leave the economy a bit less vulnerable to this type of global shock.
The Bank of Canada views upside risks to inflation in the near term, with some downside risks to growth as an offset, likely still leaving both the Bank of Canada and the Fed on their prior course, with rate hikes on the way this quarter; and in our view, 100 bps or more for this year as a whole, with more to come in 2023.
The Russian invasion of Ukraine will contribute to increased market volatility. The conflict may continue for a protracted period. The disruption of Russian Energy exports, as well as Ukrainian and Russian food exports, have caused increases in oil, gas, food and fertilizer prices in the short term. Oil prices have jumped to over $130/bbl (briefly) and Natural gas over $5 (briefly).
We note that historically, it is the period before military action that provides the worst return, where the following months often provide some relief.
There will always be reasons not to invest. The particular story is different each time – political uncertainty in North America and elsewhere, a stock market ‘flash crash’, Brexit, military action in Europe or the middle east, financial over-leverage, too much inflation, not enough inflation, rising interest rates etc. But through all this, strong companies continue to deliver their products to customers, and these strong companies are what we are investing in. They may deliver power, financial services, goods or services, but they find a way to meet consumer demand, grow their earnings, and as a result grow their stock price over time. We continue to advocate for equities providing a long-term return in excess of inflation as they are an important part in maintaining and growing your net worth over time.
portfolio actions
On Thursday February 17th, 2022, after the market close, the SIA Equity Action call moved from the “Green” positive zone to the “Yellow” neutral zone. On Thursday, February 18th we took defensive action in our discretionary Advisor Managed Accounts (AMA) and moved 10% from equities (stocks) to cash/fixed income. This brought our equity exposure down to 90% of model weight as required by our rules when the Equity Action Call is Yellow.
Due to deterioration on Global Markets strength, on March 8th we traded foreign positions in the growth and global models replacing ½ with cash effectively calling ‘orange’ on these markets and 80% invested. Canadian Dividend focused models remain 90% invested. By April, global markets had shown renewed strength, and we have moved back to 90% invested across all portfolios.
From a big picture Relative Strength ranking, Commodities, led by energy, sit at #1 displacing equities in the 2nd, 3rd and 5th positions. Canadian Equities have improved recently to the #2 spot displacing US Equities to #3. Cash occupies the 4th position. We are following the rules and are very cautious of leadership changes. Sector leadership is in Energy and Materials (Canada), followed by Utilities. Financials and Real Estate, which are recent sector leaders, have moderated.
Team Update
We continue to be at the office and have ramped up to full capacity. We are able to meet clients at the office with safety protocols, and continue to meet remotely, while processing documents by mail for those clients who require or prefer.
The Team comprises a total of 8 people–our biggest ever. As a bigger team, we’re able to better deliver on our full-service promise to you. It also helps us build up our Financial Planning, Client Service and Portfolio Management capabilities that are central to our business.
Associate Investment Advisor Courtney Lance is back from maternity leave bringing us back up to full strength with the additions of:
- Kenidy Welyk, Administrative Assistant, who joined our team as of first week of July – Welcome Kenidy!
- Daniel Kiesman, Client Associate, who joined our team after Labour Day – Welcome Daniel!
We thank you, our clients, for your continued trust and support. These last 2 years have certainly been challenging for everyone, but we have taken great pride in being able to provide you with solid financial advice throughout this time. We look forward to seeing you again soon!
