The Bank of Canada (BoC) continued its campaign of interest rate increases early in Q3 in response to stubborn inflation. The BoC hiked rates by 25 bps in July, before holding steady later in the quarter. The S&P/TSX Composite index, down 2.2%1 in the third quarter, experienced losses in nine of its 11 sectors. Stocks performed well at the beginning of the quarter, before slipping lower in August and then continuing to decline through September. While the global economy remained resilient, it became clear that the world’s major central banks were going to keep interest rates at relatively elevated levels for the foreseeable future, prompting a sell-off. Interest-rate-sensitive sectors sold off as bond yields continued to rise.
The S&P 500 pulled back, down 1.2%2 in CAD terms. Performance was broadly weak, with nine of 11 sectors down in the quarter. The U.S. economy continues to show solid performance, and inflation unexpectedly ticked higher. The S&P Manufacturing Purchasing Managers’ Index (PMI) has been below 50 since May, suggesting a softening economy. Growth for the world’s largest economy, the United States, has remained surprisingly resilient, a big reason for the ongoing economic strength is the consumer, who seems somewhat shielded from the risk of higher interest rates. With the labor market still growing and consumers somewhat sheltered from higher borrowing rates, the economy has continued to surprise most analysts with its strength. This does not mean that the consumer is entirely out of the woods, with interest rates on everything from car loans to credit cards having surged over the past 12-18 months. An overweight to U.S. equities might have been the only way to realistically outperform, even an investor who favored U.S. equities at the beginning of 2023 might not have performed anything like the U.S. benchmark index. Much depended on what kinds of American stocks were included in the portfolio and this year’s performance has greatly favored a select few mega-caps, primarily technology-based companies.
The largest 10 companies in the S&P 500 now account for 32%3 of the index’s total market capitalization, concentration risk is near all-time highs. Additionally, although headline inflation has eased, core inflation remains stubbornly high, which inhibits policy makers from easing. Although the AI theme has propped up U.S. equities, non-U.S. equities, broadly speaking, are inexpensive but their earnings will need to greatly improve for the valuation gap to narrow.
Economists have become more optimistic about the pace of global economic activity as the year has progressed. The main takeaway is that global recession risk has moderated, while growth remains stuck below the long-term average trend rate of 3.5%4 Subdued economic growth and moderating inflation has supported global bond prices, Higher yields keep fixed income attractive over a long-term horizon, with return potential from both income and capital appreciation. Centrals banks are easing off further tightening and shifting towards a higher for longer stance, yet with cyclical growth and inflation slowing next year the balance of risks points to the next material move in yields being to the downside. The downward pressure on global corporate profitability which began in the first quarter of 2022 appears to have dissipated over the past couple of quarters. This has helped to ease the cuts to the earnings outlook which featured for most of 2022 and 2023. While earnings growth is likely to remain soft for the remainder of 2023, it is expected to make a turn for the better next year. The global policy tightening cycle is in a late stage, but it is difficult to conclude that the tightening cycle has ended. As such, taking advantage of higher yields seems to make sense given the mature stage of this monetary tightening campaign. Alternatives are being held at an overweight position in our portfolios. Healthy exposure to a well-diversified basket of alternatives provides the portfolio with an independent return stream and lowers the portfolio’s overall exposure to traditional duration and equity risk.
As always, thank you for your continued trust in us.
Penmore Wealth Management iA Private Wealth
This information has been prepared by Roland Orban who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
4 Bank of Canada
Roland Orban, CIM, PFP, Investment Advisor
304-3301 Langstaff Rd, Concord, ON L4K0C5
T: 905-669-5577 Ext. 230 | TF: 1-866-229-2212 | F: 905-669-5738
email@example.com | http://www.iaprivatewealth.ca | penmorewealth.com