Triasima Canadian Equity Fund Commentary – Q2 2022

2022-07-15

The economy

COVID-19’s influence on economic activity has become largely immaterial by now. Notwithstanding, some impact was recently felt in China due to their zero-COVID policy shutdowns.

Inflation rose further in advanced countries to levels unexpected to most observers. A key reason for the elevated inflation is the rise in household wealth over the past two years and the consequent surge on spending for goods. Other causes include the tight labour market and lingering supply chain disruptions. 

Central bankers stayed the course too long with their easy monetary policies and must now catch up by aggressively raising short-term interest rates. Mid- and long-term rates also rose further in the quarter.

The war in Ukraine carries on, limiting supply and causing prices to rise for energy in Europe and for foodstuff at large.

Growth in most countries is slowing due to the inflation headwinds and declining real disposable income. Some advanced countries started showing signs of recession late this quarter.

The Canadian equity market

The S&P/TSX Composite Index lost 13.2% this quarter. 

Weakness was broad-based with every sector posting a negative return. The main causes are high inflation and rising interest rates leading to fear of falling profits. The fall in the market so far is only due to an earnings multiples compression, since earnings estimates for 2022 are still rising. 

The worst-performing sectors were Information Technology (-31%), due to higher rates reducing the elevated valuations of these growth stocks, and Healthcare (-50%) where the cannabis producers collapsed because of disappointing demand. The best-performing sectors were Energy (-2%) driven by high oil and natural gas prices, and the defensive securities in Utilities (-4%). 

The Fund

The Triasima Canadian Equity Fund fell 12.4% this quarter.

Sector allocation contributed positively to relative performance while security selection was neutral overall. The Information Technology and Health Care sectors underweights added value.  Security selection was positive in Energy but had a negative impact in Materials. 

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

Positive impact

Negative impact

Shopify Inc.*

Nuvei Corp.

Tourmaline Oil Corp.

Lithium Americas Corp.

Loblaw Cos Ltd

Enbridge Inc.*

Cenovus Energy Inc.

First Quantum Minerals Ltd

Imperial Oil Ltd

Finning International Inc.

*Shopify and Enbridge were underweighted in the fund.

The portfolio was tilted away from cyclical and towards defensive holdings this quarter. The Materials, Industrials, and Real Estate sectors were reduced, and Consumer Staples, Communications Services, and Utilities were added to. 

The Three-Pillar Approach™

On the quantitative side, the Fund now has a beta coefficient, risk, valuation, and profitability parameters in line with the market. Expectations parameters, and revenue and earnings growth are slightly better.

The Canadian equity market trend broke down in the second quarter. Defensive factors such as dividends, value, and profitability outperformed the more speculative growth, profits variability, and volatility factors.

The fundamental background to Canadian equities deteriorated further in the second quarter due to elevated inflation and rising interest rates. A slowing economy and lower expected corporate earnings point to poor outlooks in the short term and for 2022.

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