October 2023 Commentary & Performance Review

U.S. Treasuries rebounded after the 10-year yield crossed 5%, raising concerns about the economy’s resilience to high-interest rates. In Canada, the equivalent 10-year Government bond crossed above 4%, the highest since 2007. Despite prior predictions of 2023 as the “year of the bond,” higher yields are impacting borrowing costs globally. Rising borrowing costs might contribute to the inflation control efforts of central banks, potentially acting as a de facto tightening of monetary policy.

In the third quarter, Berkshire Hathaway reported a substantial 40.6% increase in operating earnings, boosted by its diverse range of businesses. Although the company reported profits from Geico, a key part of Berkshire’s insurance segment, it also recorded a significant investment loss, primarily from its Apple stake. Warren Buffett’s conglomerate continued to build its cash reserves, reporting a record US$157.2 billion in cash, indicating a lack of appealing investment opportunities.

Investors anticipate an end to the decline in Corporate America’s profits, with expectations of a rebound in S&P 500 companies’ earnings despite a fragile economy and high-interest rates. Consumer spending is under pressure, affecting both low and high-end retailers. Inflation and interest rates are driving up corporate costs, yet analysts show cautious optimism, with a slight upward revision in profit growth estimates. The impact of global trends, including China’s economic recovery and the popularity of weight-loss drugs, adds to the complexity of the earnings landscape. Europe’s exposure to China’s market makes its performance particularly crucial in the upcoming earnings reports.

The commercial real estate lending sector is facing a significant downturn, with historically low levels of lending due to rising interest rates and recession fears. Banks and other lenders have become increasingly cautious, leading to a decline in loan volumes and a 53% drop in U.S. commercial property purchases in the third quarter. The credit crunch is affecting various sectors, including offices, apartments, and warehouses. Construction starts are projected to fall by 17% this year, the largest annual decline since 2009. Financing difficulties have led to widespread project delays and cancellations, indicating a broad impact on the commercial real estate market.

A group of Russian private investors has filed a class-action lawsuit against the Bank of Russia, challenging its handling of stock exchange operations on February 24, 2022, the day Russia launched its full-scale invasion of Ukraine. The plaintiffs are contesting the central bank’s decisions to halt and later resume trading, which occurred during a dramatic market collapse where the Moscow Exchange index plummeted by over 33 percent. This legal action coincides with significant economic pressures on Russia, including international sanctions, exclusion from the SWIFT banking system, and restrictions on its energy exports, which have severely impacted the Russian ruble.

Portfolio Contributors

• After beating earnings estimates and announcing a dividend increase, Microsoft (MSFT) finished the month with a gain of 12.6%.
• Tourmaline Oil (TOU) recovered 10.3% during the month, while disclosing a $1.5 billion acquisition and a special dividend.

Portfolio Detractors

• Shares of United Parcel Service (UPS) fell 7.1% after missing revenue targets by $300 million.
• Granite REIT (GRT.UN) ended the month down 3.3%, as high-interest rates continued to put pressure on their operating margins.

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

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)