Good morning,

I hope you are all well and that this is the beginning of the end of the various Covid-19 measures. Optimistically this will be a glimpse of a more pleasant spring than in recent months.

In the case of financial markets, it is exactly the opposite. That is to say that after a wonderful 2021, 2022 already promises to be more difficult. We are officially in market correction territory in the U.S. with stock markets down by 10% or more.

Several star names are currently down by 20% and that is not to say the least. Meta (Facebook), Netflix, 3M, etc. In Canada, the indices are doing a little better being propelled by oil. However, our newest flagship, Shopify, is down by 50% in just a few months.

The reasons given by the experts are numerous; Inflation, the Fed and the hike in their policy rate, the Russia / Ukraine conflict, the slowdown in earnings growth. All good reasons to worry.

Take inflation. She's back after years of being forgotten. In the United States, the latest official figure mentioned is 7.5%. Following the debate on whether it was transitional or not and that it would fade on its own, several experts now believe that it is absolutely necessary to intervene. Therefore, raising interest rates is the only logical thing to do. Let's not forget that inflation reduces our long-term purchasing power. For example, at 2% inflation, our purchasing power is reduced by 50% in 35 years. At 5%, it is in 14 years that our purchasing power is cut in two. Accordingly, it is normal for central banks to be concerned about this.

The rise in interest rates, a direct consequence of inflation, has (will?) have an impact on the multiple that we give to our investments. This impact is often greater than you may predict. Take a company that makes $1MM in profit. If you give it a multiple of 24 times their profits (the P/E), the company is therefore worth $24MM. However, if investors only give the company a multiple of 18 times profits, then the company is worth $18MM or 25% less. This is why shrinking price/earning multiples is such an important topic to consider.

The Russia and Ukraine conflict is also a hot topic in the news. For good reason, a war at the gates of Europe brings us back to a terrifying time. Already this conflict has caused too many deaths and upset the lives of honest citizens who have nothing to do with these geopolitical issues. Moreover, Russia is the main exporter of natural gas (40% of the total) and oil (25% of the total) to Europe. Together, Russia and Ukraine account for almost 25% of world wheat exports. Two other important countries are affected by this conflict. For Turkey (84MM population) and Egypt (102MM population), Russia and Ukraine account for 70% of their wheat imports. The food security of these two countries is therefore threatened and so is their political power. It is a crisis with negative fallout on a global scale.

Finally, the slowdown in growth for certain prominent companies, such as Meta, Shopify, Honeywell and Peloton. Any breach of investor expectations is punished by a significant drop in the share price on the stock market.

Faced with these different threats, what do we do? I would advise you, very little.

From 2019 to 2021, we had three very good years in the stock market. Yes, things got tough between February 15, 2020 and April 1, 2020, but in the end the results were good.

First, a pullback is normal and healthy. This is an opportunity for financial markets to reassess the health of companies. This is also a good time for every investor to reassess their true risk tolerance. Investing new money now is certainly more difficult for some of you than it was last month. By the way, remember that the last 3 months of 2018 had also been very negative. We know how that ended.

Second, the best way to deal with inflation and rising interest rates is growth. Take inflation. Indeed, it eats away at your purchasing power. If your income remains stable but the prices associated with your cost of living increase, you will be poorer. Simple. But if your income increases at about the same rate, your purchasing power will continue. And if your income is growing faster than inflation, you get richer. This is therefore THE problem with fixed income (bonds, GICs, etc.). The interest paid is fixed. However the dividend income you receive from equity is not fixed. It can go up and since my early days, as an equity strategy, I have placed a lot of emphasis on dividend growth. Take two stocks that have been in our core portfolios since 2002, TD Bank and Honeywell.

In 2002, TD paid 56 cents in dividends per share. In 2022, it should pay at least $3.16 per share, or 464% increase.

In the case of Honeywell, in 2002 it paid 71 cents in dividends per share. In 2022, it should pay at least $3.92 per share, or 452% increase.

According to the Bank of Canada, inflation during the same period was cumulatively 48.87%, so +/- 9 times less.

As I said, growth is the best remedy against inflation in the long term.

Ditto for the multiples granted by investors and the multiple granted by investors is never scientific. Sometimes they are too optimistic and sometimes too pessimistic. But with growing earnings, the multiple paid becomes less important. In our example, if the multiple paid remains at 18 times but the profits are now $2MM, the company will then be worth $36MM, or 50% more than when it was $1MM but with a multiple of 24 times.

So whether inflation, interest rates or multiples (P/E) are your current concern, time and patience will come to your rescue. Let the companies in your portfolio and the growth of their results be your main financial tool (not the only one, but the main one).

Third, what then of slowing economic growth and corporate earnings in our portfolio? Again, not much. Insofar as we have done our homework (therefore no tips from our brother-in-law) and we have kept our focus on quality companies (therefore no flash in the pan or fashion of the moment), growth over a period 5 to 7 years will be there. It will probably slow down at times, but it will be there eventually, as TD and Honeywell's dividend growth demonstrates.

Finally, the crisis between Russia and Ukraine?

As I said above, it is incredibly sad. However from a strictly stock market point of view, history tends to show that there will not be much impact. Looking at geopolitically significant military events since 1939, only three (out of fifteen) have resulted in a negative stock market twelve months later. In fact, during the most recent event (9/11) we were already in a recession in the United States, which explains the stock market results much more than the terrorist attack and the American response (the other two are the beginning of the World War II with the invasion of Poland by Germany in 1939 and the Suez Crisis in 1956).

Consequently, this conflict will certainly complicate the macro-economic decisions of many countries (energy and food inflation) and harm, to some extent, the results of certain companies doing business in Russia and Ukraine. But the widespread impact on global equity markets is likely to be, all things considered, short-lived (Caution. Short-lived in months, not necessarily days).

One of the stocks we hold that has the most exposure to Russia is Total, the major French oil company. It is in our Global Income portfolio. Their current dividend represents 4.4%. For them, Russia is an important source of income. Yet, a simple increase in the price of barrels of oil by $5 would allow them to completely absorb Russia's contribution to their results. However, a war that would result in cutting Russia off from the world market (and therefore a loss for Total) would have the probable effect of increasing the price of oil (positive for Total). This is one example among many others that illustrates the effects and counter-effects (knows and unknowns).

Conclusion?

Our instruction manual provides the following points:

1. Look 5-7 years ahead. Ignore the noise of short-term events as much as possible.
2. Many people will claim to be able to pivot between different types of investments and asset classes at the right time. This is not our case.
3. Keep the focus on quality company titles. They have certain common characteristics. Revenue growth, profit margins, return on equity and cash flow are consistently better than their competitors. Even better if they pay and grow their dividends.
4. Keep the focus on quality bonds. Don't forget the liquidity risk.
5. Review your financial plan.
6. If you are not retired, keep 3 to 6 months of current expenses in cash. The rest of your cash should be invested to grow.
7. If you are retired, when and how are the two questions to ask yourself. The answer should be simple.

In closing, many of you have referred members of your family, friends and colleagues to us over the past few months. It is the best possible compliment for me and the whole team. Thank you for your confidence and know that we assign great importance to your financial well-being.