Our last commentary touched on the dramatic drop in global markets that occurred in January, as investors began to digest the removal of monetary stimulus from the system by central banks. After a brief reprieve from the indiscriminate selling in January, the picture again turned negative as Russia’s impending invasion of Ukraine become ever more apparent. When all was said and done it was one of the poorest starts to a year for global stocks as the S&P500 fell 5.7% in CAD in Q1 (after being down approximately 13.0% from peak to trough). Alternatively, Commodities, Oil & Gas, and Canadian banks rallied during the quarter allowing the more resource and cyclically focused TSX Composite to end with a 3.8% gain. Meanwhile, Fixed Income investors continue to be punished for investing in “safety”. While inflationary pressures continued to reduce the purchasing power of a dollar, the Canadian Universe Bond Index (XBB) fell more than 7.0%.
On the broader subject of the economy, inflation touched 5.7% in February. We have all felt this not only at the gas pump, but in housing, food prices and most raw materials which have pushed up costs on everything from vehicles to home renovation projects. Governments and Central Banks flooded the economy with monetary stimulus during COVID and are now struggling to curb a level of inflation which hasn’t been seen in
Canada since 1991. The March 2nd interest rate hike is considered to be the first of many, as the Bank of Canada will now likely embark on a path of rate hikes even more rapid than we saw in 2017/2018 (pictured below). Although housing activity is already slowing across the country, it is yet to be seen how increased costs will affect Canadians’ willingness to resume travelling this summer in a Post-COVID world. Eventually,
high commodity prices in conjunction with higher interest rates should hit consumer spending and likely result in a recession 12 to 18 months down the road.
In consideration of all of the above, our portfolio management team was very active in Q1. We deployed excess cash where available into some of our harder hit companies, as well as taking positions in the TSX60, US Oil, and reducing our exposure to the US Dollar. Although final performance numbers from our private investment pools were not available at the time of writing this commentary, we anticipate that all three were net positive contributors during the quarter.
-The Gilman Deters Team
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