Group Charron Gagnon
Investment Advisors
All news
Last quarter of 2021
Hi everyone,
First of all, we would like to wish you a happy and healthy new year.
The last quarter of the year was marked by significant volatility, mainly due to a new variant threatening global economic growth, an already fragile healthcare system, a change in tone by the central banks, a very high inflation rate and an uncertain geopolitical environment. However, growth in corporate earnings and strong household spending (and financial health) boosted the stock indexes.
CANADA
The Canadian economy performed very well in the last quarter of the year, mainly thanks to the energy and materials sectors. The 59% rise in the price of a barrel of oil in 2021 (from $48.42 per barrel as at December 31, 2020 to $75.45 per barrel as at December 31, 2021) and material price increases helped Canadian equities end the year on a sharp upswing. Our economy also recovered from the pandemic shock of 2020. Although Canada's employment rate didn't return to its pre-pandemic level, it had climbed to 6% by the end of November. Wage growth and the household savings rate also rose, which bodes well for the coming months. The loonie also appreciated against other major global currencies, which negatively impacted returns. The Canadian dollar ended the year at $0.79 compared to the greenback, representing an annual jump of 0.66%.
The markets are all waiting for the Bank of Canada's next step with its monetary policy, as it hinted at an initial key rate hike in the first quarter of 2022 and an end to its quantitative easing (bond purchases) program. In other words, monetary policy is expected to tighten in the coming months. In fact, Desjardins Group anticipates two key rate hikes in 2022, the first one in April and the second one in the fall, which would bring the key rate to 0.75% by the end of the year. This new outlook is due to the extremely high inflation and strong consumer spending. Measures must be taken to regulate the economy.
Although the stock market posted excellent returns in 2021, that wasn't necessarily the case for fixed-income securities. In fact, a rise in bond yields resulted in negative returns for this asset class. The yield on 10-year bonds surged 109% in 2021, reaching 1.42% by the end of December.**
*Data from Market-Q.
**Data from the Bank of Canada: https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/
UNITED STATES
Despite the uncertainties of the last quarter, the S&P 500, which comprises the 500 largest US companies, ended the quarter with a gain of 10.68 points. Unlike in 2020, when tech companies really stood out, all sectors contributed to the performance over the last 12 months. Corporate earnings exceeded analysts' expectations, contributing to the growth in US equities last quarter. As was the case for the Canadian economy, the US economy performed better than in the previous year. The jobless rate stood at 3.9% in December, close to its pre-pandemic rate. Overall, US families are in good financial health. In fact, the savings rate and consumer spending are at record highs. Supply chain issues, labour shortages and high inflation are all factors that will need to be taken into consideration in the coming months.
Jerome Powell, Chair of the Federal Reserve (Fed), has also changed his tone in the last few months. Due to the high inflation, robust household spending and strong growth in corporate earnings, US monetary policy is expected to tighten. Bond purchases should taper off by spring 2022, and 3 key rate hikes are anticipated in the coming year. Desjardins Group is also forecasting these 3 increases, at a pace of one increase per quarter starting in June. This would bring the key rate to 1% by the end of the year. Of course, pandemic developments, the arrival of a new variant, a decrease in consumer spending or any other curve ball could interfere with current forecasts.
We should point out that a gradual increase in interest rates isn't necessarily bad for the economy and can sometimes help regulate it. Some sectors, such as financial services or materials, can fare well in these conditions However, this isn't true for growth stocks, such as those in the technology sector.
In the political realm, President Biden has still been unable to convince all the members of his party to vote for his infrastructure plan. It will be interesting to see how this issue evolves in the coming weeks. In other noteworthy news, Apple was the first company to achieve a market capitalization of US$3 trillion!
Lastly, we will certainly be keeping a close eye on inflation, which will play a central role in decisions regarding US monetary policy. Every possible measure will be used to curb price increases. Most economists agree that inflation should stabilize in the second half of the year, while remaining above historical averages.
INTERNATIONAL AND EMERGING MARKET EQUITIES
International equities posted a more modest performance than North American equities. As the Omicron variant has taken a heavier toll on Europe, several restrictions have been implemented for families.
The Bank of England was the first major central bank to raise its key rate due to rising inflation, which is at about 6%.* Geopolitical conflicts have also been making headlines in recent months. We will continue to monitor tensions between Russia and Ukraine, as well as trade between the United States and China. While we don't expect these issues to have a negative impact on the long-term economic growth outlook, the fact remains that strained trade relations could generate uncertainty and volatility in the short term.
Evergrande, a Chinese company, has been garnering attention in recent months due to its impact on investor confidence in Chana's real estate market and the obligation to intervene that a company of its size imposed on the government in the event of its default. In addition, tax reforms targeting Chinese tech firms have led to a downturn in Asian stock markets. The Chinese government is still adhering to a zero-COVID policy, which means that it reserves the right to impose a lockdown on specific regions and businesses as soon as a case of COVID19 is detected.* Valuations remain favourable for this asset class. However, given the strong volatility and high level of risk associated with these companies, we're maintaining an underweighting in this sector in our portfolios.
What can we expect in 2022?
There will certainly be some volatility. The change in tone of the central banks, pandemic developments, the pace of rolling out the third dose of vaccine, labour and supply chain issues, geopolitical tensions and inflation are all factors that can hamper economic growth. On the other hand, the strong growth in earnings, the falling unemployment rate, the accumulation of household savings and strong consumer spending are favourable factors that must be taken into account. We can expect a positive year, albeit not an easy one.
We will need to carefully manage our expectations for future returns. Although we've had strong returns over the past three years, we have to be realistic in our approach. The assumed rate of return for income projections is currently 4% or less for more conservative portfolios. Maintaining our target asset mix, risk tolerance and sound diversification is still the best way to achieve our objectives with peace of mind.
We encourage you to read the article in Finance et Investissement (in French), which discusses expectations regarding rates of return.
To read the article, click here: https://www.finance-investissement.com/nouvelles/actualites/les-investisseurs-devraient-temperer-leurs-attentes/
Feel free to contact us to discuss specific topics in more detail.
Lastly, we'd like to take this opportunity to wish our mentor, Luc Charron, a happy retirement!
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