Overview
- TFSA top-ups
- Portfolio and Market Performance
- Big Banks’ Outlook
- Our Outlook Overseas
- Expectations for 2023-2024
Portfolio and Market Performance (in Canadian dollars)
December was a difficult month for the Conservative Equity Portfolio, which declined almost 10% on the month and brought the full-year return to -26.8%. On a longer-term basis, the conservative Equity Portfolio has averaged 7.25% over five years and 10.11% since inception in October 2015.
Our registered balanced dividend income strategy, The Diversified Income Portfolio returned -10.2% for the year. Its outperformance was mainly due to the strategic focus on dividends over growth. Over the last five years, the strategy has averaged 8.44%.
A look back at 2022
January 2022, U.S. markets were coming off a three-year historic high after averaging returns greater than 20% over the last three years. Interest rates were still ultra-low, with the first increase from the U.S. Federal Reserve Board (Fed) not coming until March. The world was beginning to re-open after two years of COVID lockdown. Here in Quebec, our government was starting to backtrack on a second round of lockdowns. China’s zero-COVID policy was still in place, but businesses were adapting, and Russia was moving a large number of troops around Ukraine borders, claiming military exercises.
On their own, none of these factors would have led to the market chaos we experienced last year, but the combination of all three escalating was simply too much for most markets to handle. Just as the Fed was starting its tightening cycle to extract liquidity and normalize interest rates, the war in Ukraine broke out, which disrupted the already tight commodity and energy markets, which in turn skewed the data for the Fed when looking at inflation numbers. Just think of how higher energy or wheat prices affect transportation and food costs. Then, to add fuel to the fire, we had China tightening its zero-COVID policy, which had two negative effects: worsening our already tight supply chain issues and slowing the world’s second-largest economy.
How did we invest through 2022?
At the end of 2021, we started to increase our exposure to defensive sectors. Our technology weightings had grown so much through the pandemic that we were overweight the entire tech sector.
As rates started to rise, we continued to trim or sell higher-risk names and consolidate into higher-quality names – companies we felt could weather the storm should the economy go through a rough patch. Think market leaders, high margin, low debt businesses. These were the large-cap businesses that investors could circle the wagons around during difficult times in the past, names like Google (NASDAQ: GOOGL), Metro (TSE: MRU), Johnson & Johnson (NYSE: JNJ) and Intact (TSE: IFC).
The combination of events affected almost every sector last year. As an investor, there were few places to hide.
Let’s look at major markets around the world for 2022:
- Long U.S. Government bonds, down 31%
- S. Consumer Discretionary stocks, down 38%
- 10 to 20-year U.S. government bonds, down 25%
- S. Financials, down 12%
- S. Investment-grade bonds, down 18%
- Global Real estate equities, down 26%
- Russell 2000, or U.S. small caps, down 20%
- European markets, down 16%
- Consumer staples, down 3%
- Shorter-term 3 to 7-year bonds, down 9%
- S&P 500, down 19%
- NASDAQ, down 33%
- Technology, down 28%
And most, if not all currencies were down relative to the U.S. dollar.
The only sectors that were not negative were:
- Energy stocks, up 59%
- Silver, up 4%
- Commodity index, up 21%
- Oil, up 7%
More markets went down in 2022 than in the financial crisis of 2008.
What made last year worse than 2008 was the poor performance of the bond markets. What was normally a safe haven during a storm turned out to be a dangerous place to be invested last year, along with almost every other sector or investment. There was literally nowhere to hide except oil stocks and U.S. cash. And even oil was an anomaly because of the Russian war in Ukraine.
Banks’ Outlook
What follows is a summary of what different institutions are issuing as their outlook for 2023. You will note that there has been some rather dramatic change in tone between December and now, which was highlighted by a recent Barron’s article.
For example, yesterday, J.P. Morgan CEO Jamie Dimon stated he shouldn’t have said last year that there was an ‘Economic Hurricane’ coming, but there were clouds for sure; he didn’t mean to predict widespread collapse and his bank is still hiring.
In his New York Times column this month, Nobel Prize-winning economist Paul Krugman said his worries about the outlook were overblown and that a soft landing is more likely than it seemed a few months ago.
In short, many people who had been previously warning of economic collapse are now in January changing their tune.
Royal Bank
Royal Bank’s main outlook is for a mild U.S. recession in 2023. They cite a weak consumer, with credit card debt increasing 20% over the last 18 months. Pull-forward of large purchases through 2020 and 2021 and then pent-up travel demand through 2022 will leave a weaker 2023.
Royal Bank sees higher interest rates in the first half of 2023, followed by lower interest rates in the second half of 2023. They believe rates will come down ahead of any recession. They cited that the recession was already priced into the market the last nine months of 2022 but that there will be more volatility in the year ahead. However, Royal Bank feels it’s likely that 2023 will be a positive year in the markets, with the second half of the year driving positive performance as the markets look past the recession.
In Canada, they see the housing market as the largest risk to the economy; however, they state that most of this has been priced into share prices and in particular, bank valuations, so it may not show up in the equity market.
J.P. Morgan
J.P. Morgan sees a sluggish global economy in 2023 but a growing one with no global recession. Their baseline case is, however, for a U.S. recession where the S&P 500 is negative in the first half of the year, followed by an asset recovery and rally pushing the index above 4,200 by year-end, which would give us a 11.6% return for the year.
Goldman Sachs
Goldman Sachs’ chief economist has said they expect that inflation will be reversed in 2023 while avoiding a U.S. recession, citing that the initial steps to bring down inflation have been successful towards the end of 2022, which is the reason for their change in tune. They see a strong jobs market driving 1% growth amid a weak housing market.
Globally, early this month, Goldman reversed their view of a European recession as well, saying they now see flat-to-positive growth in the European Union, citing two main factors: first, a historically warm winter that has pushed down energy prices, and second, China reopening sooner than expected.
Credit Suisse
Credit Suisse sees slow global growth in 2023. They are calling for further market volatility in equity markets even if they do end the year positive. They see inflation tapering and economies remaining fundamentally intact; however, they did state they also see fiscal challenges ahead for governments from years of overspending and higher borrowing costs driving tax increases to finance spending…in particular, measures to support cost-of-living issues would drive further taxation.
On global trade, they felt that this would continue to decline as repatriation of strategic sectors would continue. This is fairly obvious when we talk about the energy sector, but perhaps less obvious in other sectors.
On the investment side, they reiterated the importance of balance sheets and low debt levels of companies owned, along with companies with pricing power.
Our Outlook Overseas
China
One of the biggest unknowns in 2023 will be China. The reopening of China is already causing people to reverse course on global recession talk and go back to the drawing board on global GDP forecasts.
Since China reversed their zero-COVID policy in October, the Chinese market has seen a dramatic rally. The iShares China ETF is up 50% since October 31. We were fairly accurate with our prediction of a policy reversal after the National Congress, which is exactly how it played out. With China being the world’s second-largest economy and the largest market in several sectors, including autos, their reopening is probably the brightest spot in the global economy in 2023 as China’s tightening had a very negative effect on both markets and inflation in 2022.
China is more difficult to monitor as raw data is less transparent than in North America.
China could be a major surprise for people in 2023. We are already seeing a significant spike in copper prices, which bodes very positive as China has always been the biggest driver of copper prices.
Europe
We had discussed on previous calls that Europe looked like it could be headed for an energy crisis that could cause a recession. In short, much of their energy was being supplied via Russian natural gas, which Russia had been trying to cut off ahead of the winter for leverage.
Germany, which is Europe’s richest and most industrious country, relies heavily on this natural gas to power their factories and make products.
What did we get? Europe is seeing its warmest winter in history. How warm? Average temperatures for December were 10°C to 20°C higher than historical averages. For example, in Denmark on New Year’s Day, the temperature was 13°C; in Poland, 19°C, the warmest on record.
These high temperatures have kept European energy reserves full and driven natural gas prices to the floor, dropping close to 50% over the last 30 days. It looks like Europe is going to avoid an energy crisis through this winter; their energy prices are normalizing.
This also puts Russia on very weak strategic footing. The winter is not over but things seem to be improving in Europe.
Expectations for 2023-2024
Making market predictions is near impossible, and we do our best to stay away from making short-term market predictions, but we found it interesting when looking at different market returns over the last few decades that generally, after a year of a big market sell-off, the following year the same market reversed in almost the same fashion.
Take 2008. NASDAQ was down 42%, then up 53% the following year. S&P 500 was down 38%, then up 24% the following year. Oil was down 56%, then up 19% the following year.
All this is to say that most investments that got hit hard during the last bear market recovered the following year despite the uncertainty around the economy. And today, our economy and labour markets are in much better shape than in 2009.
So, here’s what we think will happen based on where we are today.
Rates will come down by next year. It takes time to see the effects of higher interest rates. The housing sector, which represents over 20% of our economy, will be the largest casualty. Construction costs are already coming down. But it will take time for housing inventories to build as sales drop. One factor we are paying close attention to is how much the consumer is being affected by higher interest rates.
Employment is strong and in effect a double-edged sword. The Fed wants wage inflation to come down, i.e., higher unemployment. But economists are predicting that the high employment will save our economy from a deep recession. Our prediction is that the labour market will remain tight as inflation continues to come down.
We also feel that China’s change in stance on COVID protocol could have a huge positive effect on global trade and the economy.
To sum up, 2022 has been a difficult time for all investors; however, we believe that our focus on quality and good fundamentals will pay off over time.
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We hope everyone makes it to the end of the month still sticking to their resolutions. Be well and talk soon.
Simon & Michael
Simon Hale, CIM®, CSWP, FCSI®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Michael Hale, CIM®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Hale Investment Group
1250 René-Lévesque Blvd. West, Suite 4200
Montreal, QC H3B 4W8
Tel: 514 819-0045
Returns for the Conservative Equity Portfolio, Diversified Income Portfolio and Focused Total Return Portfolio represent the returns of model portfolios only and do not represent the returns of any client. Individual account performance may differ materially from the representative performance history, due to factors including but not limited to an account’s size, the length of time the strategy has been held, the timing and amount of deposits and withdrawals, the timing and amount of dividends and other income, trade execution timing and pricing, foreign exchange rates, and fees and other costs. This is not an official statement from Wellington-Altus Private Wealth (“WAPW”). WAPW cannot verify the accuracy of these performance numbers. Please refer to your official WAPW statement for your specific performance numbers.
