Sub Advisor Insights—Markets Q4 2022

Cardinal Capital Management Inc. 

Contributed by: Cardinal Capital Management Inc. 

Investors experienced an eventful fourth quarter in the financial markets. Sentiment swung back and forth between pessimism and optimism. The fourth quarter started where the third quarter left off with markets falling on worries of a global slowdown as inflation and interest rates rose.

After an encouraging inflation report brought hopes of peaking inflation and a slower pace of interest rate hikes, investor optimism spurred a dramatic market rebound. However, this upward movement ran out of steam at the end of the year, as markets grew concerned about aggressive rate hike projections from central banks in the face of continued inflation.

Despite the late quarter pullback, global markets recorded dramatic gains in the quarter. While the S&P/TSX Composite lagged many of its peers, it returned 5.98% in the quarter. The index performance was led by the Information Technology sector (+13%). There was broad-based strength across the remaining sectors except for Utilities (-7%) and Healthcare (-11%).

For the year ended December 31, the S&P/TSX Composite return was -5.84%. Although it was  a negative year, the S&P/TSX was an impressive outperformer versus many of its global peers.

Canso Investment Counsel Ltd. 

Contributed by: Canso Investment Counsel Ltd. 

2022 was a bruising year for bonds as yields climbed. Central bankers were burned by bets that 2021ʼs inflation surge would prove transitory. Instead, price pressures were exacerbated by Russiaʼs invasion of Ukraine, which sent oil and gas prices soaring in the early part of the year. When energy prices moderated during the latter part of the year, inflation stayed stubbornly high. In an attempt to bring inflation back down, the Federal Reserve executed its most aggressive interest rate increases since the 1980s. Tighter monetary policy led investors to flee the most popular bets across markets, from technology stocks to cryptocurrencies.

It takes time for the full effects of higher interest rates to filter through the economy, leaving investors wondering how the Fedʼs sequence of rate increases will eventually affect the behaviour of businesses and consumers. The Fed Chairman has signaled that their fight against inflation is not done, and the unemployment rate has remained at a historically low level. However, the markets are pricing in something entirely different. Bond traders are betting on the Fed pivoting from raising rates to cutting them later this year. Given the pace of monetary tightening, many economists suspect that a U.S. recession is imminent and will dent corporate earnings and erode the attractiveness of company bonds and shares.

With short-term bonds, money-market funds and other cash-like investments offering their highest yields in years, many investors are reluctant to bet on risky investments with uncertain payoffs. The negative sentiment in the bond market had a chilling effect on companies and banks. Companies that hoped to go public have scrapped their plans in large numbers. Banks that typically cash in on fees for advising on deals and initial public offerings are slashing bonuses. Retirees have seen their savings shrink and are now flocking into the increased yields and relative safety of GICs.

Cidel Asset Management Inc. 

Contributed by: Cidel Asset Management Inc. 

Despite the steady barrage of negative news headlines, the Canadian equity market brimmed with optimism in the fourth quarter of 2022, posting gains of 6.0%. Every narrative needs a hero, and in the fourth quarter, equity investors elevated central bankers to ‘hero’ status. Investors were almost giddy in their predictions in calling for a near terms ‘Fed Pivot’ (when the Federal Reserve reverses its existing monetary policy stance - in this case from tightening to loosening). Welcome to the wonderful world of equity investing where bad news - in this case the reason for the interest rate cut would likely be due to an economic slowdown or recession - becomes “good news”. “Good news” meaning the inflation dragon has been slain, businesses return to ‘normal’ growth and higher multiples/lower discount rates can once again be applied to equities. To keep the ‘glass-half-full’, equity investors are currently envisioning a world where the timing of the pivot is precise enough to slow down the corrosive effects of inflation and prevent a severe economic contraction. Maybe. In any case, the equity market lived up to its discounting machine label as investors ignored negative estimate revisions and pushed the market higher.

Sector performance was broadly good with 8 of 11 sectors beating the S&P/TSX Index. The best performing sector was Information Technology (+12.6%), followed by Energy (+8.9%) and Consumer Discretionary (+8.8%). Within the Information Technology sector, the large capitalization Shopify lead the way, up 26.4% in part due to strong consumer sales over the Black Friday-Cyber Monday weekend and a generally optimistic outlook for equities as noted above. The Energy sector performance was curious given oil prices (WTI) only rose 1% and natural gas prices declined 34% during the quarter. Within the Consumer Discretionary sector Restaurant Brands was up 20.2% during the quarter after appointing ex-Domino’s CEO as executive chairman.

The worst performing sectors were the tiny Healthcare sector (-10.9%), followed by Utilities (-7.4%) and the ballast of the Index - the Financials sector (+3.4%). With the Utilities sector there was a wide range of performances. The traditional steady utilities, like Hydro One (+8.2%) and Fortis (+4.3%), performed reasonably well. However, high growth and higher leveraged equites like Algonquin (-40%) performed poorly. Similar to the Utilities sector performance, the Financial sector saw a wide range of performances with Home Capital (+55.4%) benefitting from an offer to be acquired, and the strong performance of the insurance sub-sector (Trisura up 35.6% and Fairfax up 27.1%). However, this was offset by some of the bank performances like CIBC (-8.0%) where concerns over cost of U.S. legal troubles lingered.

The 6.0% total return on the S&P/TSX for the fourth quarter was due to an increase of the forward price-to-earnings multiple from 11.2x to 12.1x at the end of the quarter. This was offset by a modest decrease in forward earnings (-4.7%). Given only a modest bounce off the ten year low in the forward price-to-earnings multiple, investors remain skeptical about the sustainability of forward earnings estimates.

Mawer Investment Management Ltd. 

Contributed by: Mawer Investment Ltd. 

Equity markets attempted to add a bit of polish in the fourth quarter to an otherwise brutal year, the worst calendar year since 2008 for many global markets. In contrast, Canadian equities fared better during the year in part due to its resources-heavy market. It was a mixed picture for Canada’s economy, however, as ongoing inflationary pressures clashed with growing recessionary concerns. In Q4, markets were bolstered by signs that inflation may finally be peaking and the hope that central banks may not need to be as aggressive as feared in tightening monetary policy, potentially softening the negative impact on the global economy. The S&P/TSX Composite Index saw strong broad-based advances in every sector except Health Care and Utilities, although Canadian equities did lag their global peers.