Triasima Canadian Equity Fund Commentary – Q3 2022

2022-10-15

The economy

Elevated inflation is the dominant macroeconomic theme currently. It is the result of former easy monetary policies, a tight labour market and lingering pandemic disruptions to supply chains.

Central bankers have become steadfast in their desire to quell high inflation levels and are increasing overnight interest rates. Short and mid-term rates have risen alongside, and yield curves have become inverted in Canada and the United States.

Economic growth is hindered by this high inflation and the rising rates. Households suffer from falling real disposable income while companies face higher costs and diminishing demand. They are now demonstrating prudence in their forward guidance. The economic slowdown has spread out and many countries probably are already in recession.

The tight labour market is beginning to lead to higher unit labour costs. The positive employment situation lags economic conditions, however, and may soon begin to reverse. Key signs include routine layoffs and hire freezes. The continued rise in the labour participation rate in the United States point to households having depleted their pandemic savings. 

The Russia-Ukraine conflict carries on. Its main effects are heightened geopolitical uncertainty and high energy costs in Europe. Meanwhile, the COVID pandemic has receded in the background, with a residual impact on some services industries.

The Canadian equity market

The S&P/TSX Composite Index lost 1.4% this quarter.

Sector returns were clustered, ranging from negative single digits for the interest-sensitive sectors to low positive single digits for the consumer and industrial sectors, the latter being driven by the more defensive securities within them.

The Information Technology, Communication Services, Utilities, and Real Estate sectors, all of them interest-sensitive, had an average decline of 5.8%.

The Fund

The Triasima Canadian Equity Fund had a -0.6% return this quarter.

Sector allocation was slightly detrimental to relative performance. The negative contribution was diffused across eight out of eleven sectors. Security selection contributed positively and was especially strong in the Energy sector.

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

  Positive impact

  Negative impact

TC Energy Corporation*

Canadian Pacific Railway Ltd.

Tourmaline Oil Corp.

SSR Mining Inc.

Cameco Corp.

Suncor Energy Inc.

Element Fleet Mgmt Corp.

Rogers Communications Inc

Waste Connections Inc.

Cenovus Energy Inc.

*Securities not held in the fund.

Last quarter’s Fund rotation away from cyclical and towards defensive holdings continued this quarter. Companies with more stable operations were added to in the Industrial and the two Consumer sectors, while more cyclical securities were removed from the Materials and Financials sectors. The Fund now has a large underweight in the Financials sector.

The Three-Pillar Approach™

On the quantitative side, the Fund has better revenue growth, profits growth, and expectations parameters than the benchmark. The beta coefficient is slightly lower. Other parameters, such as risk, valuation, and profitability, are in line. 

The Canadian equity market seesawed, up then down, in the third quarter, but its longer-term trend remains negative. The quality-oriented profitability factor outperformed. Underperforming factors were value and profits variability due to slowing economic growth, and dividend because of rising interest rates. 

The fundamental background to Canadian equities deteriorated further in the third quarter. Elevated inflation and higher rates are leading to downward revisions to expected corporate profits. The outlook is still poor in the short term.
 

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