Market and economic commentary
April 2023

Equity and fixed-income markets both achieved positive returns in April. International markets were the leading region for equities, followed by Canada and the US. As a result, all Compass and ATBIS pool funds saw positive performance for the month. In its April rate decision, the Bank of Canada continued to hold the overnight rate at 4.5% with the expectation that economic growth will remain weak for the rest of the year, and inflation will
continue to ease to around 3% by the summer.

Below are index total returns in Canadian dollar terms for April, and year to date respectively:

^{Source: Bloomberg}

The month started off with a jolt thanks to OPEC announcing a surprise oil production cut of around 1.2 million barrels a day in an effort to stabilize oil prices, having hit a 15-month low of just over $66 mid-March. The surprise cut sent oil prices up, rising to just over $83 by mid-April. The surprise cut drew criticism from the US, with US Treasury Secretary Janet Yellen calling it an “unconstructive act.” While energy prices came off their mid-April highs, the cut adds additional uncertainty to the inflation outlook, as oil is a key input in economic growth and subsequent inflation. Energy stocks in Canada and the US responded favourably to the news, initially outperforming other sectors within their respective indices, but paring back their gains as oil prices fell back to late-March levels by the end of April. 

As the US Federal Reserve (Fed) did not meet in April, the focus was on the Bank of Canada (BoC), which decided  to hold the overnight rate at 4.5% as expected by markets. While headline inflation is still well above the BoC’s (midpoint) target of 2%, the latest data showed inflation fell to an annual rate of 4.3% for March (versus 5.2% for February). The BoC expects inflation to continue to decline to 2% by the end of 2024 amid a weaker growth outlook for the rest of 2023 and into 2024. South of the border, March Consumer Price Index (CPI) figures were in line with expectations, however, core Personal Consumption Expenditures (PCE)—the Fed’s preferred measure of inflation—came in a little higher than anticipated. These numbers pave the way for an additional 0.25% hike in May. While Fed board members have expressed their discomfort with the current level of inflation, higher core PCE numbers may have cemented the prospect.

Although bond yields were only slightly lower on a month-over-month basis, fixed-income markets were relatively volatile, seeing yields swing more than 30 basis points (as measured by the Canada 10 year bond) during the month. As a result, returns on the bond index varied by around 2% swinging from positive to negative, but gaining ground by month end. Narrowing credit spreads pushed corporate bonds to outperform the index, however, high-yield bonds underperformed likely due to their shorter overall duration, despite slightly narrower spreads. The credit-heavy fixed-income holdings within the funds benefitted from the narrowing spreads, but the fund’s short duration likely limited those benefits, as the holdings performed in line with the overall index. 

Equities across all major markets were positive on an absolute basis for both the Compass and ATBIS pools, as well as the major indices. The international holdings within the funds ended the month in line with the benchmark, with the small-cap mandate offsetting some picks within the funds’ industrial names. US equities within the funds saw outperformance from the large-cap holdings thanks to an overweight in financials and avoiding poorly performing consumer discretionary names such as Tesla, which fell more than 20% over the month. This was offset by the small- and mid-cap allocations both underperforming their large-cap counterparts, resulting in the US holdings slightly lagging the benchmark overall. Canadian equities were the biggest detractor from performance, underperforming the benchmark by approximately 1.4%. A combination of small-cap names underperforming their large-cap counterparts, compounded by an underweight in both materials and communication services (the best-performing sectors for the month) primarily contributed to the funds’ holdings coming in behind the benchmark for April.