The environment has been more stable of late based on the view that the intense pressure on central banks to tighten monetary policy may be slowly waning as inflation shows signs of receding. Below, we discuss the Canadian investing experience this year, which hasn’t been great by any means, but has been moderately better than others.
It has undoubtedly been a challenging year for most global investors. The inflationary backdrop has resulted in elevated levels of volatility and an unusual experience where stocks and bonds around the world performed poorly at the same time. That’s in contrast to the normal relationship that has seen both asset classes perform positively, or at a minimum, offset each other to some extent when one has been weak. Moreover, many countries have seen their currencies fall relative to the U.S. dollar.
Canadian stocks and bonds have not been immune from the phenomenon explained above. They are both down. So too is the Canadian dollar. However, the magnitude of the declines has not been as large as elsewhere, and in some cases has been significantly less. For example, the Canadian dollar is down roughly 5% this year, less than the fall witnessed for other major currencies like the euro, British pound, and Japanese yen. Meanwhile, the Canadian Bond Universe Index is nearly 10% lower for the year, one of its worst years on record. But, other bond markets around the world have fared even worse. Lastly, and somewhat surprisingly, the Canadian equity market is barely lower for the year once dividends are taken into account. That makes it one of the better performing among global equity markets.
So why has Canada fared better? There are a few factors worth highlighting. First, the exposure to commodities, and in particular energy which has benefitted from relatively tight supply and demand dynamics, and the overall inflationary backdrop. The sector has driven much of the Canadian equity market returns through the year, while also contributing to the country’s economic growth. Secondly, dividends have played a much bigger role in overall equity returns year-to-date. And, generally speaking, Canadian equities have historically had higher dividend payouts than other markets, like the U.S. for example. Other factors benefitting the Canadian equity market have been its cheaper valuation, and the relatively low exposure to “growth” stocks, which have been particularly vulnerable. Lastly, the Bank of Canada has largely kept pace with the U.S. Federal Reserve with respect to interest rate increases. As a result, the interest rate differential, a key driver of currency movements, has not widened to the extent it has in other countries, helping to explain some of the resiliency of the loonie.
Some home-grown challenges do lie ahead for Canadian investors. More specifically, the country’s housing slowdown, high household leverage, and overall consumption which may increasingly come under pressure as higher interest rates work their way through the economy. But, some of the factors noted above that have benefitted Canadian investors this year – commodities, dividends, and inexpensive valuations – may continue to be tailwinds for portfolios going forward.
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