Triasima Canadian Equity Fund Commentary – Q1 2023

The economy

The gradual slowdown carried on during the first quarter with higher interest rates further permeating economies worldwide. Macroeconomic data deteriorated. For instance, in the United States, PMI™ levels are now below 50 for both service and manufacturing industries, indicating a contraction. The consensus forecasts a recession over the coming months. 

The key offset to the impact of high interest rates is the strong labour market. Wages are rising while inflation slows downs, buttressing real disposable income, and propping up consumer confidence. Spending is also supported by a general rise in consumer credit. 

Inflation peaked back in the summer of 2022 and has been fading since. Central banks, however, have stayed the course and increased their respective overnight rates. They are assuming it will take time to fully depress and keep inflation low. 

The same inflation is buoying nominal revenues for corporations. But sales volumes are mainly stagnant while unit labour costs, and other input costs, are rising. The result is declining profit margins and falling earnings expectations in 2023 for equity indices. 

Due to higher rates, a banking crisis erupted in the United States over issues of funding stability and asset-liability mismatch. 

The Canadian equity market

The S&P/TSX Composite Index had a 4.6% return this quarter, after a poor 2022. 

Interest rates fell beyond the one-year maturity and interest-sensitive sectors led the way, including Utilities (7%) and Information Technology (27%). Gold stocks (11%) benefited from a weaker U.S. dollar, lower interest rates, and a flight to safety following some regional bank failures in the United States. 

The worst-performing sector was Energy (-2%) due to a drop in oil prices. 

The Fund

The Triasima Canadian Equity Fund had a 2.9% return this quarter.

Sector allocation was neutral to relative performance while security selection detracted relative value across most sectors. Energy, Technology and Utilities fared the worst. The underperformance is largely the outcome of the aggressive nature of the first quarter rally.

The following table presents the top and bottom contributors to the relative performance: 

*Securities not held in the fund.

The fund has further pared its exposure to the Energy sector and added growth securities in the Consumer Discretionary and Information Technology sectors. Recent purchases also include more stable securities in the Utilities and Real Estate sectors.

The Three-Pillar Approach™

On the quantitative side, the Fund has higher revenue and profits growth, and superior expectations and profitability parameters than the benchmark. Risk and valuation metrics are slightly worse.

The Canadian equity seesawed this quarter and its trend is now sideways. The speculative Beta and Volatility factors strongly outperformed, and so did Growth due to falling interest rates. The Momentum factor, always overweight by Triasima, enormously underperformed.

The fundamental background to Canadian equities is stable. Profitability expectations are dropping but falling long-term interest rates and the return of low inflation are offsetting this. The outlook appears average for the remainder of 2023.