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Q1 2023 - Investment Update

It seems like every quarter there is something new to discuss. Some piece of financial news that grabs our attention and has people speculating about a roll on effect. The big news story this quarter was the collapse of Silicon Valley Bank. In a nutshell, the decision makers of this mid-sized US bank made a bad judgement call and invested the majority of the banks reserve assets into long term bonds that lost value as interest rates rose. A classic bank run starts with rumours of a potential insolvency that sends customers racing to the ATMs for cash. In this case, those customers weren’t the average American. They were companies with tens to hundreds
of millions of dollars on deposit, and they withdrew their money instantaneously. Almost overnight, SVB was gone and the FDIC was in control. So what does it all mean? Firstly, the banking system is fine. In Canada we are more strictly regulated, and a similar situation is near impossible. In the US, where they have over 5000 different banks, we may see a few more chinks in the armour. However, the major US banks are much better capitalized and will provide stability. Secondly, US banks are expected to tighten purse strings and restrict lending. How will bank tightening impact the overall economy? This is the “roll-on” effect that we
are yet to realize. For now, we wait and see.

As for stocks markets, most rallied in the 1st quarter of 2023 led by Big Tech. The S&P500 ended the quarter up 7.3% (in CAD), while the TSX Composite Index finished up 4.5%. With inflation expectations coming down, but not fast enough, the bond market has become a battle ground between those that think central banks will cut rates soon, and those that are ‘inflationist’ who believe we are in a new higher interest rate environment.

As central bank interest rate hikes are now starting to show up in the economy, we continue to remain defensive with our portfolio positioning. Stocks and bonds continue to be volatile, so until US inflation falls faster, we will take the US Federal Reserve at their word and expect another rate hike or two. This allows us to protect your capital in these uncertain times, patiently waiting to deploy cash into good companies with strong balance sheets when inflation and central bank policy becomes clearer.

In Q1 our private pools all experienced positive returns. The Forsyth Real Estate Portfolio grew .25% in March returning 1.12% in Q1. The Rockridge Private Debt Pool grew .55% in March returning 1.83% in Q1. The Laurier Private Equity Pool returned .81% in Q1. As the Tier 1 financial system pulls back on the reigns, we are finding excellent opportunities in private investments and look forward to reporting additional success next quarter.

In the meanwhile, we hope you’re enjoying some beautiful May weather.

-The Gilman Deters Team


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