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Our Thoughts: End of Q1/US Banks in Focus (+ Rogers/Shaw and Federal Budget)
We have had a stubborn winter but the first signs of a change of season have arrived with local ski hills closing. We also passed the first quarter of 2023 and contrary to worries back in 2022 the first quarter results are generally positive YTD. This likely reflects a bit too much pessimism priced into the markets last year as worries about inflation and rising rates peaked. As well, with the recent turmoil witnessed in the US banking sector appearing to be contained, the past few weeks have seen a relief rally in both bond and equity markets. That should leave investors feeling more confident around the stability of the banking system. Nevertheless, it is reasonable to assume credit challenges still lie ahead, as they often do through economic cycles. We discuss more below.
The measures taken by the U.S. Federal Reserve a few weeks ago in response to signs of stress facing some of the U.S. regional banks have proven successful so far. More specifically, the central bank created a liquidity facility that allows commercial banks to exchange eligible securities (valued at par) for up to one year in exchange for U.S. dollars. This addressed one of the key challenges that some regional banks were dealing with as they were having to sell investments at a loss to meet client withdrawals. The facility has seen meaningful use to date. Encouragingly however, the total amount of funds U.S. banks have had to borrow from all of the Fed’s facilities has recently declined, suggesting deposit outflows from banks may be steadying. Overall, signs of stability have helped equity markets recover.
A note about the outlook for loans and credit: as economic cycles come and go, so too do credit losses as some consumers and businesses inevitably have a harder time repaying their debts. The banks continue to prepare by setting aside capital to absorb future losses. Overall, the industry is well capitalized, both in Canada and the U.S. Nevertheless, any turn in the credit cycle is likely to be accompanied by the typical bouts of market volatility and weakness as investors try to gage the gravity of the situation. For this reason, we continue to remain patient with our expectations and lean on the income producing parts of our portfolios.
Rogers/Shaw Deal Closes: No action required at this time for holders of Rogers or Shaw. Shaw Class B shareholders will receive cash consideration for their shares after April 7th, 2023. Our office will touch base with non-discretionary clients at that time to discuss options for reinvestment. Statement from Rogers available here.
Federal Budget Day 2023: In case you missed our email last week we wanted to link again to the Portfolio Advisory Group article on the Liberal government’s latest budget. The key items that may be of interest: changes to Alternative Minimum Tax (AMT) calculation, clarification of the definition of a qualifying Intergenerational Business Transfer, and Clean Energy tax credits. The budget also included various measures to support low-income Canadians (grocery rebate, expansion of dental coverage, etc.). For more details, please refer to the 2023 Federal Budget article.
By the numbers (March): The TSX was down 0.2% and the S&P 500 was up 3.7% (up 2.7% in Canadian dollars). The Europe, Australia & Far East index (EAFE) was up 0.9%, while the Emerging Markets index was up 1.7%. The tech-heavy NASDAQ was up 5.7% in Canadian dollars. The Canadian bond universe was up 2.2%.
Other Interesting Listening/Reading
- Disruptors (Season 5) - A dynamic ~30 min RBC podcast co-hosted by John Stackhouse and Trinh Theresa Do about reimagining Canada’s economy in a time of unprecedented change.
- To check out our Global Insight Monthly for March find the link here.
Regards,
Mark, Peter, Sarah, Corinne and Nathalie
Gallivan Wealth Management