December 2021 Portfolio Management Team Update

Zaw Tun

December 22, 2021

Market & Economic Environment

Last month saw the major North American indices give back some of their October gains as Omicron cases began to spike across the globe, while inflation data pointed to the certainty of interest rate hikes from the U.S. Federal Reserve in 2022. The TSX Composite declined 1.8% in November, as some of the best-performing groups in 2021 pared part of their gains for the year, led by energy (-5.7%), real estate (-3.8%), industrials (-3.4%) and financials (-2.2%). The health care sector was the worst performer in the month with a 7.9% plunge, bringing its YTD decline to 15.3%.

The Dow Jones Industrial Average led U.S. indices lower with a 3.7% drop, while the S&P 500 fell 0.8% and the Nasdaq Composite was marginally higher with a 0.25% gain. With risk appetite waning, the Russell 2000 index of small-cap U.S. stocks tumbled 4.3% while the Russell 1000 index of large-cap stocks fell 1.5%; the Russell 1000 index is outperforming the Russell 2000 by a huge margin YTD, with a gain of 20.0% compared to 11.4%.

(Data Source: FactSet)

Our Strategy

The last Federal Open Market Committee (FOMC) meeting for the year saw the U.S. Fed dropping the word “transitory” completely when describing its views on inflation. The Fed also announced the possibility of three rate hikes (versus the market’s consensus for two increases) next year, and doubled the pace of its tapering program to $30 billion per month. While the number of rate hikes next year indicates a slightly more hawkish Fed than anticipated, we view the central bank’s pivot regarding its inflation outlook to be long overdue. Moreover, even if one believes that the current inflation numbers will come down as global supply chains and the labor market returns to normal, we anticipate near-term volatility to increase as the market evaluates the twin uncertainties of further COVID/Omicron developments and an end to easy monetary policy. To account for the heightened risk going into the first quarter, we will look to swap out some of our more volatile holdings in favor of large cap, stable names that generate strong cash flows regardless of underlying market conditions. We also continue to monitor our newly launched Platinum Growth Fund closely, to ensure that our selected managers generate strong performance with regards to their mandates and benchmarks.