A Volatile Start to the Year

Just as we emerged from another wave of COVID-19 earlier in the year, the world outlook was thrown a new spanner in the form of Russia’s unprovoked invasion of Ukraine. Inflation was sitting at an uncomfortably high level even before Russia’s moves against its neighbour country. Adding to the complexity of the situation, soaring commodity prices (oil, wheat, nickel, etc.) continue adding to existing price pressures, and consequently risking delaying the return to a "normal" inflation level.

 

Beyond the economic, monetary, and geopolitical environment that led to the heightened volatility observed since the start of the year, it is worth noting that North American economies continue to show vigour. Canadian and U.S. labour markets are undeniably strong as employment continues to recover from COVID-related disruptions and wages are growing at a brisk pace.

 

The current global environment suggests a possibility of sustained market volatility, especially in regions exposed to the Russian economy. Geopolitical developments will therefore be determining factors behind market performance over the next few months.

 

Nevertheless, during turbulent periods like the one we are currently experiencing, it is important to remember that market downturns are commonplace.

 

Market Review as of May 6, 2022

 

Fixed Income

 

• Central banks suggesting the use of more “aggressive” stance to tame inflation coupled to a precarious geopolitical situation led to a rapid rise in interest rates in the first months of 2022. As a result, Canadian bond prices have retreated over the same period. The Canadian bond market (FTSE CA Universe) has posted a decline of 11.4% since the beginning of the year.

 

Equities

 

• Although the Canadian stock market (S&P/TSX) has once again outperformed the rest of the world, its losses in April now place the Canadian flagship index in negative territory, posting a 1.9% decline year-to-date. American equities (S&P 500)* pulled back significantly more over the same period, posting a decline of 13.1%, its worst year-to-date performance since World War II. After climbing at the end of March, international equities (MSCI EAFE)* retreated in April. Concerns about strict lockdown measures in China as well as the lack of positive developments from Ukraine weighed on global equities, but particularly on foreign equities. As a result, the MSCI EAFE* posted a 14.3% decline since the start of the year.

 

• Canada is well positioned to weather the impact of rising commodity prices. Its overweight in the energy and materials sectors proves to be a serious advantage in the current environment.

 

* The returns of the S&P 500 and MSCI EAFE are expressed in US currency.

* The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.

 

Currencies and Commodities

 

• The US greenback has appreciated against the loonie since January 2022. The CAD/USD pair rose 1.93% year to date, closing the first week of May at 1.2878$ Canadian for 1$ American.

 

• Oil prices rapidly rose during the first few months of the year, enjoying a strong geopolitical risk premium. WTI ($US/barrel)* prices  climbed 46% year-to-date, or 34.59$ above its December 31 level.

 

* West Texas Intermediate (WTI) Crude oil is the North American standard for oil pricing.

 

Investment Outlook

 

The current geopolitical crisis implies greater uncertainty regarding the outlook on the markets’ performances. While the beginning of a de-escalation of tensions is possible (and desirable), the Ukrainian conflict also raises fears of a major food crisis in certain regions of the world. Ukraine and Russia alone account for nearly 30% of the world's wheat production, and grain exports from these two countries has virtually stopped since the war began. Accordingly, geographic positioning will be of utmost importance for investors.

 

Overall, we remain optimistic about the return potential of equities as their growth outlook are still positive. Fixed income securities still face some downside risk, but nothing comparable to the last few months which has been one of the most challenging periods in their history. However, bonds’ return prospects are now much more balanced, which should allow the asset class to play its important defensive role in the event of a more pronounced economic slowdown.

 

Consequently, we maintain our preference for equities to the detriment of fixed-income securities. More specifically, we favour North American equities over foreign equities, due to their diversified properties, their underlying economies’ resilience, and their inherently less significant exposure to the Russian economy.

 

In the end, the fog of war is still thick, and uncertainty is high, which calls for some caution. Therefore, we remain on the lookout for any development that may have an impact on your portfolio in order to make adjustments if necessary.

 

We hope you have enjoyed this market review! If you wish to obtain more details regarding our outlook and our portfolio positioning, we will be happy to schedule a call at your convenience.

 

Sincerely,

 

Cathy, Sounda and Guillaume

514-871-3474