"In Like a Lion, Out Like a Lamb"

 

Markets are kicking off March with more of what we felt in February; stronger economic growth accompanied by stronger inflation and a higher for longer rate regime. In the post-pandemic era, it is difficult to determine what trends will endure and what will quickly fade. So, one hopes that the uptick in inflation that we have recently seen may prove to be just a temporary uptick. Interestingly, despite all the consternation, stocks remain stuck in the index range that we have seen since last May.

 

February has been a month when the reflation trade has taken a pause. The weight of big gains in January are at least partly to blame. It is interesting to note that two of the cornerstones of the global growth reacceleration trade are also still in place: China's reopening and Europe's winter that wasn't. But the third leg of the global growth stool; a US economy soft landing has taken a more complicated turn with an uptick in inflation, some hawkish comments from central banks, and a move up in rates.

 

This is an environment where security selection can add value given the overall outlook for risky assets isn’t robust. Hence, value investing appears to have a leg up on growth, which has dominated in recent years. Value investing seeks out laggards which have potential to rebound. European equities fit that bill given they feature cheaper valuations and improved fundamentals. Valuations in Europe have been at a discount relative to the US and Canada for a long time. If things progress well for global economic growth and interest rates remain stable, one should expect Europe to continue to outperform. It is important to appreciate that European equity markets are very global in their exposure (around 60% of the overall market is comprised of sales outside of Europe). We are working to add exposure to a few “Best of Breed” European equities to our portfolio solutions.