Canada
Both GDP and employment numbers continue to provide signs of strong upward momentum for the economy, as pandemic restrictions ease and Canadians spend more of their outsized savings amassed during the COVID-19 lockdowns. While 2022 has gotten off to a choppy start for markets, the strength in commodity prices and equities tied to them continues to be a bright spot for the Canadian equity market. Despite the geopolitical backdrop in Europe and the ever-clearer path of interest rate increases ahead, the housing market continues to hold up, while last year’s strong demand growth for goods should give way to the same for services, which are expected to drive economic growth this year.
United States
With its first hike in interest rates since 2018, the U.S. Federal Reserve Bank indicated that at least four more hikes are likely in 2022, all in an effort to control what has become extremely elevated price inflation. Russia’s attack on Ukraine in late February has made the investment backdrop even more complicated. The conflict in Ukraine presents a risk to U.S. stocks principally through its impact on the oil price (higher inflation) and, more specifically, the price of gasoline (lower consumer spending). Despite the challenges, markets largely stabilized by quarter’s end, and the outlook for the economy is still strong.
Europe
Inflation continues to rise across the region, increasing concerns that the growth might be threatened as central banks tighten monetary policy in response. However, Europe’s markets are particularly bountiful in large-cap defensive stocks, which offer direct exposure to the continent’s solid economic backdrop and some offset to the negative impact of rate hikes. Geopolitical risks have climbed dramatically in the past few weeks, and it may be that they overshadow fundamentals in the short term. However, European leading indicators remain robust, and GDP forecasts, while down slightly from a few months ago, are still above 4%.
Emerging Markets
Asian equities pulled back during the latest three-month period amid a wide divergence in performance among countries, with declines accelerating in late February after Russia’s invasion of Ukraine created concern that it would inhibit economic growth and lead to skyrocketing fuel prices. However, a weaker U.S. dollar is likely to lead to the outperformance of emerging-market equities in 2022, as they tend to rise when the U.S. dollar falls. China was the main contributor to the poor performance during 2021, notably as a stricter regulatory environment hit the large internet sector. Inflation has largely remained within central bank targets, allowing for more leeway in setting monetary policy than many developed nation economies.
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