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Market and Investment Insights

Signs of a Slowdown

November 2022 Commentary & Performance Review

Equities continued to rally through November, shedding the risk‐off dynamics that have presided over markets for most of 2022. Two macroeconomic factors were supporting the push higher: 1) signs that inflation in developed markets is peaking, and 2) anticipation of an economic reopening in China after prolonged COVID restrictions. Expectations have shifted for the path of central bank rate hikes, with most market participants now forecasting a ½ percent rate increase from both the Bank of Canada and the US Federal Reserve in December.

The Canadian dollar is setup to perform well against its G20 peers over the coming year. As a major exporter of oil and natural gas, the Canadian economy has and will continue to fare well with higher energy prices. Canada’s energy exports are mostly directed to the US where it is refined before either being consumed or distributed elsewhere. Given how intricately the Canadian and US economies are tied and considering the US typically performs better than others during a global recession due to its high domestic consumption, the Canadian dollar will benefit from these structural tailwinds in 2023 when compared to other developed, natural resource exporting countries like New Zealand, Norway, and Australia.

It may be best for travelers to delay airline ticket purchases until 2023. Airlines offset the volatility of jet fuel costs by using contracts that lock‐in a certain price. As inventories of jet fuel recover, this should help margins allowing for lower pricing. Analysts also expect consumers to tighten their belts next year as slowing growth and high inflation impact spending, resulting in lower demand for travel. Business travel will continue to operate remotely as companies look for ways to reduce costs. Airlines are also facing a mountain of debt accumulated during the pandemic, a mostly unionized workforce, and fleets that will require continued maintenance.

Payment processing companies like Visa, Mastercard, and American Express may be living on borrowed time. The three companies, whose operating and clients span the globe, have delivered strong earnings results so far this year. Payment volume is back to pre‐pandemic levels while credit card usage and balances are on the rise. Consumers continue to spend on travel and entertainment even in the midst of high inflation, a trend that is likely to continue into the end of the year. Over a longer time horizon, a slowing economy will weigh on results given how sensitive these stocks are to global conditions. Aggressive rate hikes from central banks and sticky inflation will curb spending while higher unemployment may result in defaults.

 

Portfolio Contributors

  • Shares of Granite REIT (GRT.UN) gained 14.8% after reporting stronger than expected earnings. Management increased future distributions by 3.2%.
  • iShares Global Clean Energy ETF (ICLN) climbed 12.0%, bringing shares to roughly where they were trading at the start of the year as focus shifts to renewable technology.

Portfolio Detractors

  • ARK Innovation ETF (ARKK) continued to grind lower following disappointing earnings and outlooks from some of the larger holdings in the portfolio.
  • TransAlta Renewables (RNW) traded down 1.8% after missing earnings estimates due to an outage at one of their wind farms.

All returns are for the reported month and in local‐currency.
All data sourced from SIACharts and FACTSET.

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Proxy funds used for benchmark indexes:

  • Canadian Universe Bond Index: iShares Canadian Universe Bond Index EFT (XBB.TO)
  • MSCI World Index (CAD): iShares MSCI World Index EFT (XWD.TO)