Inflation and the concomitant rise in interest rates were this year’s dominant macroeconomic themes.
Combined they hindered economic growth, and a worldwide slowdown has developed. Households suffer from falling real disposable income and consumer credit has risen above pre-COVID levels. Companies face higher costs and stagnating demand.
Inflation peaked back in June and began to fade thereafter, while long-term interest rates have been steady since then. 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 costs pressures.
Despite lower inflation readings, central banks continued to raise their respective overnight rates to slow down economies and weaken the labour market, to lower demand and reduce inflation. The Bank of Canada raised its overnight rate by 1 % this quarter and a cumulative 4% during 2022. The Federal Reserve and the European Central Bank have acted similarly.
The COVID pandemic has now receded in the background, and the Russia-Ukraine conflict is moving that way too.
Interest rates beyond the three-year maturity were unchanged in Canada and the United States in the quarter, but they moved up, however, for shorter maturities and yield curves inversions accentuated. The FTSE Canada Universe Bond Index (Q4: 0.1%, 2022: -11.7%) saw its yield to maturity rise by 0.2% this quarter, to reach 4.3%. The S&P/TSX Preferred Share Index (Q4: -3.2%, 2022: -18.0%) posted large losses.
After falling for three consecutive quarters, sentiment improved for equity markets this quarter and the benchmark’s equity indices all had positive returns. The MSCI EAFE (15.0%) lead the S&P/TSX Composite Index (6.0%) and the S&P 500 (5.3%). For the year, the returns were negative for the S&P/TSX Composite Index (-5.8%), losing the least, followed by the MSCI EAFE (-8.6%) and the S&P 500 (-13.0%).
The Triasima Balanced Income Fund had a 3.1% return this quarter, versus 4.3% for its benchmark. For the year, its return is -8.3%, versus -8.8% for its benchmark.
Asset allocation accounts for most of the underperformance in the quarter. The short-term reserve and preferred shares overweight positions, and international equities underweight, all detracted relative value. Security selection was largely neutral, apart from poor results from international equities.
With the interest rate uptrend dying off, the Fund’s bond duration (7.0 years) was increased to just below the FTSE Canada Universe Bond Index’s (7.3 years).
The Fund’s defensive asset mix stance was lowered through the decrease in fixed income asset classes (cash reserve, bonds, and preferred shares) from 48% to 43 %, just above benchmark weight (40%) while equities were conversely added to, from 52% to 57%.
Quality cyclical and growing companies, with significant dividends yields as always, were favoured for purchases while defensive securities with rising input costs or suffering from higher interest rates were sold.
The current income yield of the Fund increased by 0.3% and stands at 3.5%.
On the quantitative side, for equities only, valuation, profitability, profits growth, and expectations parameters are superior to the Fund’s equity benchmark. Revenue growth is worse.
The trend for the benchmark equities is still negative but is approaching a sideways status. The Value factor strongly outperformed, joined by the quality-oriented Profitability factor. Momentum, Growth and Dividend factors underperformed.
The heretofore deteriorating fundamental background to equities has nearly stabilized this quarter. Profitability expectations are falling but stable long-term interest rates are largely offsetting this. Nonetheless, the outlook is still poor in the short term.