Inflation and the concomitant rise in interest rates were this year’s dominant macroeconomic themes.
They hindered economic growth, and a worldwide slowdown has developed. Households suffer from real disposable income falling and consumer credit has risen above pre-COVID levels. Consumer confidence levels are low. Companies face higher costs and stagnating demand.
In many countries, inflation peaked midyear 2022 and began to fade thereafter, while long-term interest rates have been steady since then in North America. The slowdown is the main reason. The easing of the pandemic disruptions is also helping: a more balanced labour market, normalizing supply chains, and less generous fiscal policies are easing the cost pressures.
Despite lower inflation readings, central banks in Europe, Canada and the United States have continued raising their respective overnight rates this quarter in order to slow down economic growth and weaken the strong labour market. The objective is to lower aggregate demand and reduce inflation.
The COVID pandemic has now receded in the background, and the Russia-Ukraine conflict is moving that way too.
The world equity market
The MSCI All Country World Equity Index (CAD)* (the Index or the benchmark) had a 7.6% return this quarter but lost 12.8% this year.
All sectors provided a good return this quarter apart from Consumer Discretionary (-3%) and Communication Services (0%). The first sector was dragged down by two pandemic beneficiaries, Amazon (-27%) and Tesla (-54%), and the second by Alphabet (-8%) and Meta Platform (-11%). The Information Technology sector (4%) was also a laggard. Outsized increases in IT spending by corporations during the pandemic are moderating.
Natural resources prices were firm due to a decline in the American currency. The Energy sector (+15%) benefited from this. In the Industrials sector (+15%), many companies grew or were able to pass on price increases to their customers.
*The Index is comprised of equity securities of large- and mid-cap companies from developed and emerging markets.
Lysander-Triasima All Country Equity Fund (the “Fund”)
Sales were predominantly from sectors hindered by high interest rates: Real Estate, Communications, and Utilities. The Fund remains more conservative and defensive than the index with a beta factor well below 1.0, a large overweight position in the defensive Health Care sector, and large underweights in the growth-oriented Technology and Communications Services sectors.
The Three-Pillar Approach™
On the quantitative side, the Fund’s portfolio has superior risk, expectations, and revenue and profits growth parameters than the benchmark. Valuation metrics are more expensive and profitability measures are lower.
The world equity trend is still negative but is approaching a sideways status. In a complete reversal from the third quarter, the Value factor strongly outperformed while the Momentum and Growth factors underperformed.
The heretofore deteriorating fundamental background to equities has eased somewhat. Profitability expectations are falling but recently stable long-term interest rates are largely offsetting this. Nonetheless, the outlook is still poor in the short term.