After a strong month of October, volatility roared back into equity markets in November and December. The S&P 500 delivered 9.4% in the 4th Quarter while the TSX delivered 6.91%.
Mega-cap companies have been the largest beneficiaries of easy monetary policy as they have soaked up most of the liquidity. Looking back at 2021, an analysis completed by Goldman Sachs shows that the majority of the growth on the S&P 500 was attributed to the 5 most popular technology companies: Apple, Google, Microsoft, Tesla, and Nvidia. As Price Earnings multiples expanded, we watched these companies become increasingly more expensive and fundamentally overvalued.
In Canada, it’s not difficult to look at the performance of the TSX in 2021 and understand where the growth came from. The iShares Capped TSX Energy index rose over 80% in 2021. With a post-COVID global economic recovery well underway, Oil demand has picked up considerably thus driving energy prices higher. Despite the recent spike, we have strategically avoided this sector. Hydrocarbon-based energy has been a losing investment for over 6 years. The sector faces continued pressure from international climate action as well as the rapid adoption of Electric Vehicles and renewable energy. While demand is increasing in the near term, we do not expect the trend to continue in the medium-long term.
Much anticipated announcements by Central Banks in Q4 confirmed that inflation continues to run high and the end of stimulus has arrived. Both the Bank of Canada and the US Federal Reserve Bank have stopped injecting money into the financial system, paving the way for a series of interest rate hikes in 2022. This policy shift may have a dampening effect on equity returns in 2022 and will most certainly spell trouble for Bond investors.
While this commentary is written with a backward-looking perspective, we would be remiss to not to acknowledge the state of markets currently. During the month of January markets turned sharply negative, led down by some of the very companies that led the market up in 2021. The NASDAQ fell as much as 19% on January 26th, barely escaping “Bear Market” territory. With earnings season now upon us, some of the largest companies in the marketplace have delivered weaker than expected results, driving their stock price down as much as 25% in the cases of Meta (Facebook) and Paypal. Investors are digesting the “tightening” language from Central Banks and trimming back on high growth positions.
We have taken advantage of these recent developments by looking for opportunities to deploy cash where stocks are oversold and have also increased the weighting of Canadian Banks in our portfolios.
Finally, our commitment to Private investments remains a unique strength in our approach. Private investing is not immune to risk, nor prevailing economic circumstances, however, it has demonstrated immunity to irrational investor behaviour which reduces volatility in portfolios. Harbourfront’s industry-leading Private investment pools continue to offset public volatility and deliver positive results for unitholders. In 2021, the Rockridge Private Debt pool returned 6.22% while public bond indexes (XCB & XBB) fell 1.8-2.8%. The Forsyth Private Real Estate portfolio returned 11.22% on the year, and the Laurier Private Equity pool delivered 17% in only 11 months.
-The Gilman Deters Team
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