Whoever said, “May you live in interesting times,” must have been predicting the beginning of the third decade of the 21st century. Since the beginning of 2020, our lives have certainly been interesting, and this continued unabated into the first quarter of 2022. Some of the key issues that we’ll discuss in today’s recap are:
• The continued emergence of higher inflation,
• The Bank of Canada’s first interest rate hike in two years, with potential for more to come,
• The Russian invasion of Ukraine and its impact,
• The effect of these events and issues on the capital (investment) markets,
• What we see going forward, and
• How LGK Investments is approaching these issues.
As of February, inflation was sitting at a year over year increase of 5.7%i . This is the largest gain since August 1991 (+6%), and the second consecutive month that inflation exceeded 5%.
This inflation has been hard to miss, particularly in the prices of our homes, our food, and our gasoline. Some of these increases have been exacerbated due to the invasion of Ukraine, but there are other factors in play as well including post pandemic consumer demand and the deployment of high household savings accumulated over the last two years. Obviously, Canadians are spending a lot in the grocery store, but they are also going to movies, eating at restaurants, and traveling again as March-Break statistics have shown. ii
The Potential for Rising Interest Rates:
On March 2nd, in an effort to combat this growing inflation, the Bank of Canada increased its overnight rate to 0.50% from 0.25%, a level it has held since March 27th, 2020. Many experts predict another rate hike in April, possibly by as much as 0.50% with more to come throughout the remainder of the year.
This will serve to increase the cost of borrowing for all Canadians, and may cause challenges for those who have overleveraged, particularly if the rise in rates moves rapidly. Of note, as recently as March 3, 2020, this overnight rate of the Bank of Canada was as high at 1.75%, and there are several analysts in Canada that feel we may reach that rate again by the end of the year.
Since this article was written, the Bank of Canada has increased interest rates by another 0.50% on April 13th, 2022.
The Russian Invasion of Ukraine:
Beyond the human tragedy that this invasion has caused, it’s also causing significant economic impacts as well. The invasion has accelerated already increasing energy and food prices, as well as exacerbating challenges with disrupted supply chains (keeping prices high and stock of various items hard to find). The Ukraine (and Russia) are significant global exporters of wheat and corn. Ukraine is heavily involved in the automobile parts sector and the production of semiconductors, while Europe has historically relied on Russia to fill their energy needs. As the crisis continues, the rest of the world will look for ways to adapt. Canada has already indicated a military spending initiative in their most recent budget, and we also happen to be a capable supplier of food and energy.
The Canadian Equity markets remained positive through the first quarter, but that was unusual when compared to the rest of the world indexes which all experienced various levels of decline. The gains in Canada can largely be attributed to the energy and materials sector as commodity prices, particularly oil and gas became even more elevated following the Russian invasion. The decline in stocks outside of Canada, particularly in the information technology space (Amazon, Alphabet (Google), Meta (Facebook), Netflix, etc.) has been attributed to investor concern over inflation and the potential for rising interest rates.
Canada’s economy continues to improve as we get back to pre-pandemic levels of activity. The labor market in particular is performing very well. As of March, the unemployment rate had fallen to 5.3%, the lowest since 1976.iii Of course, this good news likely means there’s pressure on the Bank of Canada to continue with rate hikes, as previously discussed.
For investors, rate hikes will continue to put downward pressure on bond prices, but at the same time, the first quarter has already priced in a lot of what is expected from the Bank of Canada. The sell-off in US & Global equities tells us, to state the obvious, that stocks are cheaper than they were in December.
LGK Investment’s Approach
In terms of investing, it is always difficult to predict the future. Sell-offs in one aspect of the market, such as in the United States or in the fixed income market, can create rebalancing opportunities with areas of the market that have outperformed, such as Canadian Equities. In other words, a thoughtful rebalancing approach creates an opportunity to buy low and sell high without the need to predict the elusive and arguably unknowable future.
As we have said in the past, at LGK Investments we build diversified portfolios that are designed to weather many types of storms. We tend not to get too worried about short term events (or “noise” as we like to call it). As the markets shift, we are always looking for rebalancing opportunities to fine-tune client portfolios. This rebalancing will be executed by the various portfolio managers of each fund in a portfolio as well as our office looking for other required changes such as strategic geographical shifts.
Our goal is to focus on the needs of you, our clients, as it pertains to annual cash flows, savings levels, retirement dates and income needs. If your goals, needs or cash flow requirements shift, we will change your portfolio structure to accommodate this. As certain aspects of your portfolio perform differently, selling and buying opportunities respectively will present themselves.
If you’d like to discuss your portfolio, please call our office so that we can revisit your financial goals together.
Thank you for being our client.
Gary Koss & the LGK Investment Team