April 2022 Portfolio Management Team Update

Elvis Picardo

April 28, 2022

April 2022 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Portfolio Manager, iA Private Wealth
April 22, 2022

Market & Economic Environment
Stock indices posted unexpected gains in March to pare part of the declines from the preceding two months in a tumultuous quarter.

The TSX Composite’s 3.6% advance in March resulted in an overall gain of 3.1% for the quarter. The energy group was the best-performing sector in Q1 with a 27.4% gain as crude oil surged 25%. The materials sector ranked second with a 19.7% increase, led by Nutrien and metal miners. Defensive groups such as communications services (+7.7%), consumer staples (+5.0%) and utilities (+4.0%) outperformed the broad index. The technology sector led laggards with a 35.5% decline that was paced by Shopify’s record 51.5% plunge in the quarter, while a retreat in cannabis-related companies resulted in an 8.7% drop for the health care sector.

In the U.S., the S&P 500’s 11% surge in the second half of March led to a 3.6% advance for the month, trimming its Q1 decline to 4.9%. The Dow Jones Industrial Average gained 2.3% in March for an overall drop of 4.6% in Q1, while the Nasdaq Composite’s 3.4% increase in the month pared its quarterly decline to 9.1%. Large-cap stocks outperformed small caps by a factor of three in March, with the Russell 1000 up 3.4% compared with a gain of 1.08% for the Russell 2000, for Q1 declines of 5.5% and 7.8% respectively.

Elsewhere, major European bourses were little changed in March but posted significant drops nevertheless in Q1 due to the Russia-Ukraine war. Russia’s RTS index plunged 36% in Q1 as economic sanctions threatened to cripple the economy, while shutdowns in parts of China triggered by a resurgence of Covid-19 cases led to a 10.6% decline in the Shanghai index.

(Data Source: FactSet)

Our Strategy
Despite the mounting human and economic toll of the Russia-Ukraine war, investor sentiment continues to be influenced primarily by central banks’ monetary policy actions. On April 13, the Bank of Canada increased its benchmark interest rate by 50 basis points, the first hike of this magnitude in over two decades. The Federal Reserve, which had raised the federal funds rate by 25 basis points in March for the first time since 2018, has signaled a potential 50 basis point hike in May, with rate increases expected at all six of its remaining meetings this year.

Although central banks had repeatedly dismissed inflationary pressures last year as a transitory phenomenon, recent data suggest that inflation may be getting entrenched, with upward price pressures exacerbated by soaring food and energy costs due to the Russia-Ukraine war. The Federal Reserve and Bank of Canada have significantly ratcheted up their hawkish rhetoric in recent weeks, perhaps in a belated attempt to dispel the growing belief that they may be well behind the curve in terms of countering inflation. Consequently, 10-year bond yields are now threatening to breach the 3% level in both Canada and the U.S.; the 10-year GoC bond yield has gained 45 basis points over the past month and is currently at 2.86%, while the 10-year U.S. Treasury is up 52 basis points to 2.90%.

As a result of heightened economic and geopolitical uncertainty, the International Monetary Fund trimmed its global growth forecasts by 0.2 percentage points to 3.6% in 2022 and 2023, from an estimated 6.1% in 2021. Corporate earnings estimates remain robust at present, with earnings growth for the TSX forecast to surge 17% this year before moderating to 5% next year, while the S&P 500 is forecast to post 10% earnings growth this year and next (FactSet estimates). However, given the increase in input costs across the board, corporate profit margins may come under pressure, which could lead to lowered earnings estimates over the course of the year.

While April has seen a resumption of market volatility, the TSX continues to benefit from its substantial weight in energy and commodities, having beaten the S&P 500 by 8 percentage points in Q1 for its widest margin of outperformance in 13 years. Luft Financial client portfolios are heavily tilted towards the North American economy, based on the view of the Portfolio Management Team (PMT) that it should outperform this year given the situation in Europe and diminished appeal of emerging markets including China. The PMT had rebalanced all client portfolios in the first week of March to take advantage of the 10% dip in the S&P 500 and deploy client contributions to registered accounts. While the PMT is comfortable with its current asset allocation and portfolio positioning, it continues to monitor market conditions closely in this challenging environment and will adjust portfolios as dictated by market conditions.

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