Understanding Risk
| INDEX | YTD | 2 year | 4 year |
|---|---|---|---|
|
S&P/TSX Composite |
-8.98% |
13.57% |
7.06% |
|
S&P 500 (CDN$) |
-17.5% |
12.59% |
10.94% |
|
NASDAQ (CDN$) |
-25.4% |
7.41% |
14.91% |
|
MSCI World (CDN$) |
-15.7% |
9.60% |
7.68% |
|
FTSE CAN Universe
Bond |
-12.6% |
-7.10% |
-0.21% |
The pullbacks above are some of the larger pullbacks historically and challenge us as investors to keep our eye on the time horizon. The two-year and four-year return averages on the equites remain quite healthy, even with the above YTD numbers
melting down the average. Bonds have not been on our list for multiple years, and the returns above support that avoidance.
As investors, we have behavioural biases. When markets are upward bound, we acknowledge that time in the market is essential, and that downturns and volatility will occur. It is often challenging to maintain this understanding. The returns illustrated above support the time in the market requirement.
Recession or Not?
One of the most debated topics in the headlines today, as evidenced at my recent
conference, and there is a wide range of opinion. My takeaway is that the leading
indicators currently do not support a recession being called this year. This tended to be the consensus of the presenters analyzing on leading indicators. Intuition based
presenters were all in the camp that a recession is absolute.
I believe that a recession is unlikely this year as supported by the forward indicators.
The reality is that these indicators are trending towards a call for a recession and that a recession beginning next year is probable. The eventuality is dependent on the ability of central bankers to combat the global issue of inflation with aggressive rate hikes. It will take until deep into this fall to measure the true effectiveness of rate increases.
Russia/Ukraine Conflict – Watch China
As this crisis nears its 5th month, the changing global patterns need to be evaluated over and above the humanitarian losses. I have a keen eye on China and how it is taking advantage of deeply discounted commodity prices in Russia. China2
is buying Russian energy products at a record quantity of crude oil, purchasing $7.47 billion since Feb 24, being approximately double their amount of a year ago.
China’s Zero-COVID Policy and their purchasing levels on commodities and food are strategic. China is likely to be the largest benefactor to this conflict, which will create greater political dominance in the world and further lead to increasing political tension with the US, particularly in the race for technology leadership.
What to do in Your Portfolio
What is important in our view, is that we remain and act as owners of the businesses we invest in. Our investor-based discipline keeps us invested in great businesses. Our investor focus needs to be on the next five to ten years. If we hyper-focus on daily news, we will experience unnecessary stress and potentially create an improper response. We need to be prepared to be WRONG in the next three to six months, as there is absolutely no ability to predict the short-term future with the uncertainty of the items discussed above. It is imperative in my view to remain engaged as an investor. I am convinced that our investment philosophy of owning great businesses that grow their dividends is a core essential. I expect that we will see many of our companies that we monitor daily, give us a dividend raise in the next twelve months. We continue to focus on mission critical businesses. By example, the utility companies we own still need to supply hydro services to residential and commercial properties, and we as consumers need to pay their bill. The same logic applies to rails, banks, pipelines, technology, healthcare etc. Remember, the market does not equal the economy and the economy does not equal the market. The market has already priced in the probability of a recession, and therefore a confirmation of being in a recession should it occur, shall not be a surprise and shock the market. Expect markets to be more volatile for the next few months as we determine the effects of Inflation, rising Interest Rates, supply chain logistics and the Russia/Ukraine conflict. I believe policy makers are implementing vital strategies against the backdrop of these uncertainties. At the same time, I encourage clients to plan their cashflow needs for the next year or two. We have been very strategic in this regard and have positioned funds out of the markets to protect those anticipated withdrawals. For clients needing more certainty and less stress, this cashflow requirement could be pushed out to two or three years of anticipation. 3
Should you or your family have any uncertainty about the market, please setup a
discussion with me. You may be planning to start to withdraw within a few years and we can assist with some guidance to yourself and or family members if necessary. These are unprecedented times for basic needs with inflation. We need to take care of our families and keep our communities strong….and to reiterate; THIS SHALL PASS.
President, RBA
- [1] Evolve ETF’s – Bloomberg as at 07/08/2022
- [2] Bloomberg Russia Overtakes Saudi Arabia as China’s Top Oil Supplier By Xiao Zibang, June 20, 2022
- [3] Todd Campbell’s Memo to Clients; Market-Based Stress Receding, June 16,2020
