Inflation: how we are addressing concerns

May 28, 2021

With lockdowns extended further here in Ontario, and various restrictions elsewhere in Canada and the U.S., it can be hard sometimes to reconcile the notion of an economy getting back to "normal" with life still feeling so far from it. We recognize this disconnect and wanted to highlight some areas of the market we are watching and how we are positioning your portfolio in the current environment.

As a backdrop, Canadian and U.S. growth data confirms that our respective economies are in recovery and that this recovery is gaining steam. For the rest of the world, the picture remains decidedly more mixed. China's economic growth is robust, while the unfolding crisis in India has forced many states and cities into lockdown. GDP data from Europe showed that the Euro-area economy has slipped into a double-dip recession in the first quarter of this year.

The speed and efficacy of vaccine rollouts have - no doubt - played a factor in this divergence in the recovery timeframes for these economies. We are watching this data very closely.

As it relates to your portfolio, we removed your European market exposure in February of 2020 as the health crisis was starting to unfold; we have yet to see a catalyst to re-enter into this market segment. In recent months, we have been adding exposure to Emerging Markets, which typically performs well when there are inflationary pressures (and everywhere we look these days, we see signs of inflation).

On the topic of inflation, we have reviewed each company in your portfolio to ensure that the business they operate will be able to pass along inflationary pressures to their clients - Ecolab, for example, announced this week that they will be increasing the price of many of the cleaning supply products in their portfolio. Ecolab's management team has a proven track record to know when to increase pricing to maintain shareholder earnings.

Looking ahead to the later part of 2021 and into 2022, we note that consumer savings have increased during the pandemic and we fully expect that strong consumer demand for goods and services will be one of the supporting factors of economic growth in the future. We see considerable pent-up demand from a consumer who is looking forward to be able to do the things they want to do. Additionally, we are focused on areas where we anticipate that we will see demand for the things that need to be done. As an example, you own Medtronic, a company that provides a full suite of medical devices, such as bone graft equipment for dental procedures and preventative replacement heart values. We foresee increasing demand for their products as delayed surgeries and treatments start to resume and backlogs are reduced in the coming years.

While the coordinated global effort from governments and central banks to support and stimulate the economy over the past year is being reflected in the markets, we are focused on areas where we see future growth. Manufacturing activity continues to strengthen as companies are able to obtain what they need to make products and to rebuild their inventories. Supply chain issues and unemployment numbers are declining, and the housing market remains strong. All indications show that we are in the early stages of a new cycle of economic growth. Our expectation is that we will continue to see the economy grow throughout 2021 and into 2022 and - despite our common feeling that life is yet to be "normal" - we continue to maintain a positive outlook for the equity markets.

As always, please reach out to me with any questions.