October 2022 Portfolio Management Team Update

Elvis Picardo

October 28, 2022

October 2022 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
October 25, 2022

Market Review and Economic Environment
Global equities plunged in September on escalating concerns about a recession arising from central banks’ attempts to quell inflation through rapid interest rate hikes. The Federal Reserve raised its benchmark interest rate by 75 basis points for its third consecutive meeting on September 21, following increases of a similar magnitude by the Bank of Canada and European Central Bank earlier in the month. 

The TSX Composite fell 4.6% in September, as the materials group was the only sector to gain in the month. Rising bond yields took a toll on the utilities group, which fell 9.7%, while the energy group slumped 9.2% as crude oil prices plunged 11% for the second successive month. Overall, the TSX fell 2.2% in Q3, as declines by the communication services, real estate, health care and energy sectors, offset gains by industrials, materials, and the consumer groups. 

U.S. indices fared much worse than the TSX in September, with the S&P 500 plunging 9.3% to end the quarter at its lowest level in two years. The index fell 5.3% in Q3, recording losses for three straight quarters for the first time since 2009. The Nasdaq Composite plummeted 10.5% in September for a Q3 loss of 4.1%, while the Dow Jones fell 8.8% in the month for a decline of 6.7% in Q3. Major bourses in Europe and Asia also fell in September to cap a dismal third quarter.

 (Data Source: FactSet). 

Our Strategy
Household wealth destruction so far in 2022 is the biggest since the financial crisis of 2008, with many major indices having registered declines in line with the S&P 500’s -24.8% YTD (as of September 30), and housing prices in full retreat across the world. The indiscriminate selloff is giving rise to selective buying opportunities in sectors such as technology for well-capitalized investors with a long-term horizon. 

The IMF said in its recent World Economic Outlook report that global economic activity is experiencing a broad-based slowdown that is sharper than expected. As a result of the cost-of-living crisis caused by inflation at a multi-decade high, and tightening financial conditions, combined with Russia’s invasion of Ukraine and the lingering pandemic, global growth is forecast to slow from 6.0% in 2021 to 3.2% this year and 2.7% in 2023. 

At the present time, equity markets have rebounded from the lows reached in the first half of October, as third-quarter earnings reported by companies so far have been quite strong. However, the seasonal rally that is generally a feature of the fourth quarter may be tempered this year by potential tax-loss selling as well as the outlook for inflation and interest rates going into next year. 

The Portfolio Management Team (PMT) intends to use seasonal market strength to fortify client portfolios. Based on the rising odds of a recession in North America, the PMT continues to boost the defensive tilt and overall quality of client portfolios. 

In September, in our larger Perennial portfolios, we sold the Financial Select Sector SPDR ETF (XLF) and used the proceeds to buy the iShares 20+ year Treasury ETF (TLT), as well as shares of European consumer giant Unilever. We have also boosted the proportion of US dollar-denominated securities over the past couple months, which has benefited client portfolios as the Canadian dollar slumped 6% versus the USD in Q3.  The PMT will be undertaking its bi-annual Asset Allocation Review in the first week of November and expects to make some additional changes to portfolios to mitigate downside risk in 2023. 

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.