In recent weeks, we have seen significant movement in global markets — equities, bonds, commodities, and currencies alike, all experiencing heightened volatility, primarily due to a notable shift in expectations for U.S. interest rates, driven by fresh inflation data. Inflation, which had been moderating for much of the past year, is now picking up again in certain areas. This persistent inflation poses a challenge for U.S. central bankers, who earlier this year were optimistic about cutting rates. The narrative has shifted however, with many officials now advocating for patience before any rate adjustments.

As a result, market expectations have pivoted from anticipating up to seven U.S. rate cuts to now expecting only three or four. This adjustment has led to rising bond yields (and falling prices), while stock markets have also trended downwards, albeit in a relatively stable manner, as investors come to terms with the likelihood of sustained higher rates impacting growth and corporate earnings.

Furthermore, the U.S. dollar has strengthened against most major currencies, including the Canadian dollar. Our belief is that the Bank of Canada might start cutting rates by summer, while the U.S. might delay any action until later in the year, at the earliest. As a result, we anticipate the Canadian dollar will stay towards the lower end of its historical range throughout 2024.

We are not overly surprised by the reality that interest rates will remain “higher for longer,” nor do we believe they will drastically change the investment landscape. Our strategy remains anchored in a few key beliefs. First, the increase in bond yields enhances their return potential, making them a more attractive component of your portfolio. Second, we see the companies that you own holding up well, even with interest rates in the 4% to 5% range. More broadly, with the cost cutting measures taken in 2022 and early 2023, corporate profitability is poised to increase as economic activity reaccelerates.

Earlier this month, we met with Bruce Flatt, CEO of Brookfield, and former Bank of Canada Governor Mark Carney, who is now working with Brookfield. Our position as one of Brookfield's largest shareholders in Ottawa granted us this opportunity. One insight from the meeting was Brookfield's role as a facilitator in the transition to decarbonization. Bruce spoke about the transition that was taking place and their ability to capitalize on this transition, which he anticipates will benefit shareholders. A simple yet profound comment was that they do not need to take a position on the best solution (solar, wind, hydro electric grid expansion), since they all have merit – they can simply allocate capital into the best areas, participating in the multi-decade investment opportunity that is underway. With significant capital at their disposal, they are set to engage in this area through numerous business opportunities for the foreseeable future.