Quarterly Commentary as of December 31, 2022

In 2022, both equities and fixed income securities posted particularly disappointing returns compared to historical averages. The high inflationary environment forced central banks to quickly withdraw monetary stimulus and raise rates much faster than markets expected. The first part of the year was particularly damaging for bond market values. During our discussions and meetings, we mentioned that the worst reading for your portfolios was recorded around June 30, 2022. At that time, inflation was hovering around its highest level and central banks had not yet announced aggressive interest rate hikes.

However, since July 1st 2022, financial markets have gradually recovered and the various asset classes (equities, fixed income and currencies) have resumed their roles as diversifiers in portfolios. Stock prices have regained altitude and fixed income securities, driven by the move in interest rates, have stabilized as investors see an end to central banks’ rate hikes.

Performance at December 31st 2022

The results in CAD of the various indices for the quarter ending December 31st 2022: +6.0% for the Canadian S&P/TSX index, +5.4% for the US S&P500 index and +14.7% for the Europe-Asia-Far East index.

In fixed income, the benchmark FTSE TMX Canadian Bond Index posted a slightly positive return of +0.4%. The appreciation of the US dollar against the Canadian dollar had a negative impact of (-2.0%) on US strategies over the same period. Canadian dollar results for a balanced portfolio are around +3.8% for the last three months.

Balanced portfolio returns for the year 2022 are generally between (-7.0%) and (-9.0%) in CAD and we note that our defensive positioning has allowed us to outperform the benchmarks. Our strategies therefore declined less compared to the benchmark indices. Here are the comparisons:

The iShares balanced benchmark portfolio posted a negative return of (-11.1%) for 2022. This index is composed of 60% Canadian (TSX), American (S&P 500) & international (MSCI EAFE) equities. The respective CAD returns in 2022 were (-5.8%), (-12.2%) and (-10.8%), and as for the 40% fixed income portion (FTSE Universe Canadian Fixed Income), it generated a negative result of (-11.4%).

Note that a negative return is rare for a balanced portfolio. Since 1990, a balanced portfolio has recorded a negative return for a calendar year on only 6 occasions over 33 years. The year 2022 was the worst year since 2008. For the year 2023, investors may find some comfort based on the fact that successive years of negative returns are rather very rare.

 

Outlook 2023

Equities

Overall, we believe the current environment still warrants a slightly defensive approach to equities. In addition to Canada, the risk that the United States will enter a recession within a year is quite high. That said, investors should not assume that the scenario that occurred in 2022 will repeat itself in 2023. The market has already absorbed significant shocks, including steep rate hikes by central banks. We believe household spending, supported by a resilient job market, and corporate earnings will hold up relatively better than in previous downturns. Trying to time the market is a perilous exercise; missing the days when the market rises suddenly can affect long-term performance and be detrimental to achieving your objectives.

We will continue to focus on a strategy that emphasizes quality and sustainable dividends, and we attempt to minimize the impacts of company-specific risks that may materialize by building well-diversified portfolios.

Fixed income – rate hikes are winding down and interest rates are back to 2008-09 levels

In Canada, RBC economists expect the 0.25% rate increase on January 25, 2023 to be the final one. On the other hand, the Federal Reserve remains firm on its position for the moment, indicating rate hikes, in increments of 0.25%, scheduled for next February, March and May, for a total of 3 more rate increases expected in the United States.

 

 

Exceptionally, Canadian fixed income securities, like all other asset classes, posted disappointing returns in 2022. Usually, the income portion protects portfolios during periods of volatility. The high inflation environment forced the Bank of Canada to quickly withdraw monetary stimulus and raise rates at a faster pace than initially expected by the markets, sending bond yields soaring.

Although painful, this historic surge in bond yields has also meant that investors no longer have to assume such high risk to obtain acceptable returns. After several lean years, interest rates are back at 2008-2009 levels.

 

 

Here are some highlights from the monthly feature article written by our Investment Strategist and collaborator Jim Allworth in the Global Insight 2023 Outlook publication available online at groupesenay.com.

• Working-age populations are falling or slowing in most major economies, pointing to a prolonged stretch of slower GDP growth.

 

• Intense corporate competition and increasing protectionism are likely outcomes in a world where the economic pie is not growing as fast as it has been.

 

• Selecting for an ability to grow sales and earnings in a constrained world should be the prime focus of the equity investor.

Please contact us with any questions or comments.

We thank you for placing your trust in our team and we wish you a happy new year 2023!

Mathieu & Anthony

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © 2023 RBC Dominion Securities Inc. All rights reserved.