The Market

Global stocks with the exception of Canadian markets ended the first quarter of 2022 in negative territory.  However, since our letter to clients on March 9, 2022, markets have rebounded from the 2022 lows.  The sustained rally in global equities from the COVID-19 lows in March 2020 has been put to the test with central banks becoming more hawkish towards inflation.  Market volatility has been compounded by the geopolitical uncertainty caused by the war in Ukraine, which has elevated commodity and oil prices to multi-year highs.  As a result of the S&P/TSX Composite’s higher concentration in resource companies, the Canadian market has outperformed.

The table below shows the market performance as of market close on March 31, 2022, in Canadian dollar terms:

Performance

Given the current market environment, we are holding higher than normal cash balances in accounts but we still remain overweight equities compared to the benchmarks.

The YouFirst Growth composite mildly trailed the FPX Growth benchmark due to our overweight position in select technology and global equities, and an underweight position in Canadian energy and commodity stocks. 

The YouFirst Conservative Growth composite outperformed the FPX Balanced benchmark due to our holdings of minimum rate-reset preferred shares and convertible debentures and minimal exposure to the fixed income (bond) market.  With global central bank action back in focus, the bond market continues to be under pressure and we expect total returns on investment grade bonds to continue to disappoint given the likelihood of accelerated interest rate hikes into 2023.

For portfolios weighted heavier towards global equities, our performance was impeded by the oil price infused Canadian dollar’s appreciation relative to the US dollar.

Where we have exposure to the energy and materials sector in Canada, our holdings had strong returns for the year with Tourmaline Oil (TOU) up 41%, Nutrien (NTR) up 36%, Suncor Energy (SU) up 30%, and Enbridge Pipelines (ENB) up 18%.  As a corollary to rising oil prices, convenience store operator Alimentation Couche-Tard (ATD) performed well, up 6%, given higher fuel margins and the relatively price-insensitive nature of its merchandise customers.

The table below compares the YouFirst portfolio composites with their respective FPX Benchmarks:

Portfolio Activity

To bring portfolios in line with target asset class allocations, we added units of Manulife (Mawer) Global Equity Class/Private Pool (MMF4606/MMF4027) and Mawer Global Small Cap (MAW150). 

In addition, we purchased shares in Alphabet Inc. (GOOGL:US), for growth-oriented investors as recent price weakness presented an attractive entry point in terms of valuation with respect to future growth prospects.  Although Alphabet’s 2022 revenue growth will likely moderate compared to 2021, the company is expected to produce strong advertising revenues and retains an enviable balance sheet.  

We bolstered our positions in defensive stocks in Canadian utility companies; Fortis Inc. (FTS), Northland Power (NPI), and Enbridge Pipelines (ENB) which all provide an attractive and stable dividend income with lower volatility than the overall market.

Given stratospheric energy and commodity prices, we trimmed our holdings of Tourmaline Oil (TOU) and Nutrien (NTR) to bring portfolios back to target security weightings and lock-in returns.  With these two securities we have withdrawn our original investment and now only hold the “house’s” money.

Finally, we added to minimum-rate reset preferred shares where the dividend yield was still attractive for clients’ underweight income; Pembina Pipeline 5.25% (PPL.PF.C), and Brookfield Renewable 5% (BEP.PR.M).  Minimum-rate reset preferred shares should outperform typical fixed income securities should interest rates continue to rise, however they do experience higher volatility than bonds since they are predominantly held by retail investors who tend to be more fickle.

Outlook

With the first quarter of 2022 wrapped up, let’s re-cap some of the larger macroeconomic themes that have affected sentiment towards risk assets in Q1 2022 and have set the global market stage for the remainder of the year:

• Continued impact of COVID-19 variants on growth: At the time of writing, it’s the Omicron BA.2 subvariant. Although economic activity is likely slowing and will face continued challenges including supply chain disruptions, overall, the global manufacturing environment remains in a resilient position based on the Purchasing Managers Indices (PMIs).  Alongside optimism bred by the current upturn in production, manufacturers also expect several headwinds (including disruptions caused by supply chain stresses and COVID) to lessen during the coming year.
• Inflationary fears affecting consumer demand: We believe that consumer prices (CPI) will trend lower from current levels near 7% but will likely remain elevated beyond the 3% target.  Inflation will continue to remain a concern throughout 2022, but we believe that the attention on inflation will soften by the latter half of the year when supply lines stabilize and higher interest rates dent consumer demand.
• Changes to monetary policy by global central banks: Investors are refocusing on central bank policy once again, even amidst the war in Ukraine. Since the start of the year, there has been a material shift in market expectations regarding the path of Fed rate hikes. The Fed is now expected to increase its overnight rate at least six more times in 2022, from the expectation of three to start the year.  The market has recognized that the Fed needs to understand the implications of the Russian-Ukraine conflict on oil prices and global economic activity and is likely to be more cautious now than what it may have been during its March FOMC meeting.
• Geopolitical Risk: As discussed in our recent letter to clients, market uncertainty due to the on-going war between Russia and Ukraine will continue to drive short-term volatility in capital markets. Without belabouring the point, there are two key messages investors should keep in mind:
  • Acts of war rarely have large or lasting impacts on markets.
  • Periods of heightened uncertainty are common during times of geopolitical tension

Of note, the US treasury yield curve inverted at the end of the first quarter, a situation where short term interest rates are higher than longer duration rates.  Given the planned increase in interest rates by the Fed in 2022-2023, as well as pessimism in the global economy’s near-term prospects exacerbated by the factors discussed above, a prolonged 2yr-10yr yield curve inversion has historically, and reliably predicted a recession (5 out of the last 6 recessions were predicated on an inverted yield curve although the time frames between inversion and a downturn have varied between months and years). 

Whilst we are hesitant to say that “this time is different”, given the above themes, investors should temper return expectations relative to 2021 performance.  The next phase of the post-COVID-19 recession recovery could be characterized as a normalization phase, where earnings growth will moderate and P/E multiples (valuations) will decrease accordingly.  A strong investment plan and well-constructed portfolio is designed to withstand periods of volatility.  Investors should be rewarded for ignoring the short term noise.

Doug Garner, P.Eng., CFA
President, Portfolio Manager

Jane Garner, BA, EPC
VP Operations and Client Experience

Simon Chun, P.Eng., CFA
Director, Associate Portfolio Manager