The economic recovery from the downturn caused by the coronavirus pandemic continues and multiple macro risks persist. Inflation due to supply shortages as well as fiscal spending, government debt, more hawkish central banks, and an uncertain labour market are afflicting developed economies around the world. The risk of a sharp slowdown in the coming months has heightened. Concerns over recession are starting to outweigh those of inflation. In May, we pushed out our Inflation outlook and updated our current outlook to three months of Recession followed by nine months of Inflation for the U.S. economy.

The Chinese economy expanded 4.8% year over year in Q1 of 2022. March activity showed retail sales fell 3.5%.1 China’s annual inflation rate accelerated to 2.1% in April 2022 from 1.5% in March, the highest reading since last November.2 The Gross Domestic Product in the Euro Area expanded 5.1% in the first quarter of 2022.3 The economic outlook for the Euro Area is subdued as the war in Ukraine continues, exerting upward pressures on commodity prices. The annual inflation rate in the Euro Area rose to a record high of 7.5%.4 The unemployment rate in the Euro Area fell to a record low of 6.8% in March. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Germany (2.9% vs 3%) and Italy (8.3% vs 8.5%).5

The American economy contracted at an annualized 1.4% in the first three months of 2022, following 6.9% growth in Q4 2021. Gross private domestic investment slowed sharply (2.3% vs 36.7%).6 Annual inflation slowed to 8.3% in April from a 41-year high of 8.5%.7 The U.S. trade deficit widened sharply to a record high in March. Exports dropped 5.9%, while imports surged 17.7%. The trade deficit with China increased to $34 billion from $30.7 billion in February.8 Canada’s annual inflation rate rose to 6.7% in March, against the backdrop of sustained housing prices, substantial supply constraints, and geopolitical conflict that lifted prices for energy and agricultural markets.9 The unemployment rate in Canada fell to 5.2% in April.10 Canada posted a trade surplus in March, largely due to crude oil and bitumen, as the war in Ukraine lifted energy prices worldwide.11

U.S. equities continued to face obstacles in April, as poorly received earnings, especially from Big Tech, inflation fears, and looming Fed rate hikes were reflected in the markets. The S&P 500 posted a loss of 8.7%, logging its worst monthly performance since March 2020. The S&P MidCap 400 and S&P SmallCap 600 were down 7.1% and 7.8%, respectively. U.S. fixed income was weak across the board. The S&P/TSX Composite was down 4.9% in April. International equities also disappointed in April, with the S&P Developed Ex-U.S. BMI down 7% and the S&P Emerging BMI down 5%. The Netherlands and Germany weighed heavily on the S&P Europe 350, pulling the benchmark to a loss of 0.4% in April. U.K. equities bucked the trend, rising 0.9% and moving up to 6% year-to-date. Among S&P Europe 350 sectors, Consumer Staples took the top spot with a 5% gain, while Information Technology fell a full 7%. The S&P Pan Asia BMI extended its losses into April, plunging 6.4% and posting a fourth consecutive month of declines. Japan dragged the index down the most. Bonds moved in tandem with equities, with both local currency and USD-denominated debt edging lower across Asia, declining 4% and 3%, respectively.

In response to the inability of our optimizer to find a solution for our most conservative model in May, we updated our asset allocation, increasing cash to 10% in all models and reducing exposure to large-cap U.S. equities by the same amount. We continue to see U.S. earnings as strong, but inflation is beginning to hit consumption in many industries. The safe haven status of gold in times of uncertainty, including war and inflation, is central in our asset allocation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe will benefit Canada.

As the war in Ukraine and sanctions on Russia continue to push prices of commodities higher, high inflation readings and hawkish messaging from Central Banks have caused sovereign bond yields to continue their ascent. The current positively correlated bond and equity markets have created an investment environment where opportunities are rare and fluid. Our outlook reflects these developments. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP. April 18, 2022.

2 Trading Economics. China Inflation. May 11, 2022.

3 Trading Economics. Europe GDP Growth. May 17, 2022.

4 Trading Economics. Europe Inflation. April 29, 2022.

5 Trading Economics. Europe Unemployment Rate: Eurostat. May 3, 2022.

6 Trading Economics. U.S. GDP Growth. April 28, 2022.

7 Trading Economics. U.S. Inflation. May 1, 2022.

8 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. May 4, 2022.

9 Trading Economics. Canada Inflation. April 20, 2022.

10 Trading Economics. Canada Unemployment: Statistics Canada. May 6, 2022.

11 Trading Economics. Canada Trade. May 4, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. April 30, 2022. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The recent inflation surge is generating two challenges to the global expansion. The immediate one comes from a squeeze in household purchasing power, concentrated in Europe and low-income commodity importing nations. If growth stalls in the second half of the year, it will likely have negative repercussions for both growth and inflation. If growth proves resilient, then risks rise that the inflation surge passes through to price and wage setting, requiring tight monetary stances. In April, we updated our current outlook to three months of inflation followed by nine months of stagnation for the U.S. economy.

The Chinese economy expanded 4.8% year over year in Q1 of 2022.1 China policymakers are dealing with a significant weakening amid lockdowns to bring the Omicron wave under control. China’s surveyed urban unemployment increased to 5.8% in March 2022 from 5.5% in the previous month. The latest figure marked the highest jobless rate since May 2020, amid re-imposing COVID-19 restrictions following widespread outbreaks.2 The annual inflation rate in the Euro Area surged to an all-time high of 7.5% in March, compared to 5.9% in February, as the war in Ukraine and sanctions on Russia pushed fuel and natural gas prices to record high levels. Energy recorded the highest annual rate, with prices of other items, including food rising also.3 The unemployment rate in the Euro Area fell to a record low of 6.8% in February of 2022. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Spain, Italy, and France.4

The American economy expanded an annualized 6.9% annualized in the last three months of 2021.5 The U.S. unemployment rate declined to 3.6% in March from 3.8% in the previous month.6 The annual inflation rate in the U.S. accelerated to 8.5% in March of 2022, the highest since December of 1981. Energy prices increased 32%, as gasoline and fuel oil were impacted by Russia’s invasion of Ukraine. Food prices jumped 8.8%, the most since May 1981.7 The trade deficit in the U.S. remained near record levels of $89.18 billion in February, as imports continue to rise amid robust demand and rising oil prices. Imports were up 1.3%, on higher shipments of crude oil, other chemicals and petroleum products, fuel oil, and capital goods. Trade deficits were recorded with China, the EU, Mexico, and Canada. The goods gap with Russia widened to $2.1 from $1.6 billion.8

The unemployment rate in Canada fell to 5.3% in March from 5.5% in February. It was the lowest rate on record since comparable data became available in 1976, marking a robust recovery for the labor market from the Covid-19 pandemic.9 Canada posted a trade surplus in February, narrowing from an upwardly revised 13-year high surplus in the previous month. Imports rose by 3.9%, due to uncertainty about the future supply of metals from Russia. Exports rose by 2.8% to a record-high, led by sales of energy products (up 7.8%), largely due to soaring prices because of the war in Ukraine.10

The U.S. S&P Large Cap 500 faced a turbulent quarter, down 4.6%. Smaller caps underperformed, with the S&P MidCap 400 and S&P SmallCap 600 down 4.9% and 5.6% for the quarter, respectively.  An inverted yield curve signaled concerns of an impending recession. U.S. fixed income performance was weak across the board. Gains in commodities continued, driven by Energy’s outperformance. Canadian equities outperformed the U.S. in Q1, with the S&P/TSX Composite up 3.8%. Energy posted a 29% gain. The S&P Europe 350 rebounded from losses suffered in the first two months of the year, resulting in a negative 4.9% in the first quarter. Most sectors and countries represented in the benchmark declined in Q1 2022. Energy was the best performing sector, up 18%. The United Kingdom and Norway contributed positively to the region’s returns in the quarter, while German equities were the most negative. The S&P Pan Asia BMI posted three consecutive months of declines, down 6.2% for the quarter. Amongst local market gauges, the S&P China 500 sank 14.3% in the first three months of 2022.

We have maintained our asset allocation across all models in April. Last month’s move to reduce exposure to the 3-to-7-year U.S. Treasury bond and add to Gold and Canadian Equities has had a positive impact on the portfolio. We continue to rely on the safe haven status of gold in times of uncertainty, including war and inflation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe along with their higher prices will benefit Canada. We are monitoring large cap U.S. equity exposure.

The Russian-Ukraine conflict, surging inflation, and concerns about the Fed’s rate hike plan have led to the S&P 500’s worst quarter in two years. Real interest rates remain low and private sector balance sheets are healthy. Our outlook reflects these developments. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China GDP Growth. April 18, 2022.

2 Trading Economics. China Unemployment. April 18, 2022.

3 Trading Economics. Europe Inflation. April 1, 2022.

4 Trading Economics. Europe Unemployment Rate: Eurostat. March 31, 2022.

5 Trading Economics. U.S. GDP Growth. March 30, 2022.

6 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. April 1, 2022.

7 Trading Economics. U.S. Inflation. April 12, 2022.

8 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. April 5, 2022.

9 Trading Economics. Canada Unemployment: Statistics Canada. April 8, 2022.

10 Trading Economics. Canada Trade Surplus. April 5, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

 

 

We have lowered our 2022 global GDP growth outlook following the invasion of Ukraine by Russia, one month ago. A commodity supply shock has pushed up CPI inflation expectations and contributed to a shift in our expectations regarding the timing and size central bank rate hikes. Our outlook focuses on the reflationary consequences of strong underlying demand and rapidly tightening supply as well as the commodity and financial market response to the Russian invasion of Ukraine. Against the backdrop, in March, we maintained our current outlook of three months of inflation followed by nine months of growth for the U.S. economy.

The Chinese economy faces elevated risks due to their somewhat less effective vaccines and the zero-tolerance policy on Covid infections. China’s annual inflation rate stood at 0.9% in February 2022.1 China’s surveyed urban unemployment was at 5.5% in February, up from 5.3% in January.2 GDP in the Euro Area expanded 4.6% year-on-year in the fourth quarter of 2021.3 The annual inflation rate in the Euro Area rose to a record high of 5.9% in February from 5.1% in January.4 Russian energy became a pressure point in the war in Ukraine, with the U.S. banning oil and gas imports, the U.K. banning oil imports, and the European Commission aiming to cut gas imports by two-thirds.

Given the combination of an aggressively tight labor market and significantly above-target inflation, the Fed has waited much longer to start raising rates than at any point over the last 30 years. The U.S. unemployment rate edged down to 3.8% in February from 4% in the previous month, a new pandemic low.5 Annual inflation rate in the U.S. accelerated to 7.9% in February, the highest since January of 1982.6 The U.S. trade deficit widened to a record high of $89.7 billion in January from an upwardly revised $82 billion in the previous month. It reflects an increase in the goods deficit of $7.1 billion to $108.9 billion, as soaring energy costs pushed imports to a record high while the services surplus narrowed by $0.6 billion to $19.2 billion.7 The Canadian economy grew by 1.6% in the fourth quarter of 2021, the most in 4 quarters and following a 1.3% expansion in the third quarter.8 Canada’s annual inflation rate quickened to 5.7% in February, the highest since August of 1991.9 The unemployment rate in Canada fell to 5.5% in February from 6.5% in January. It was the lowest jobless rate since January of 2020, officially reaching pre-pandemic levels after 25 months.10 Canada posted a trade surplus of CAD $2.62 billion in January of 2022, compared with a downwardly revised deficit of CAD $1.58 billion in December. It was the widest trade surplus since September of 2008.11

The Federal Reserve is now challenged to balance increasing inflation expectations with the risk of a slowdown caused by the war in Europe, approving a 1/4 percentage point increase in the primary credit rate to 0.5%, effective March 17, 2022. Over 99% of S&P 500 companies have reported fourth-quarter earnings with earnings per share growth of 32%. First-quarter estimates are much lower at 5%. U.S. equities faced a challenging February, with the S&P 500 declining 3.0%. Smaller caps outperformed, with the S&P MidCap 400 and S&P SmallCap 600 up 1.1% and 1.4%, respectively. Energy continued its position as the best-performing sector in the S&P 500, up 7.1%, and was the only sector to post a gain.  Canadian equities were flat in February, with the S&P/TSX Composite up 0.3%. The S&P Europe 350 extended its January losses in February with another 3.0% decline, leaving it down 5.9% year-to-date.  The U.K. was up 0.8% in February. The S&P Pan Asia BMI declined 0.9%, weighed down by the S&P China 500, down 1.7%. Australia and New Zealand helped with gains.

We adjusted our Asset Allocation across all models in March. We reduced exposure to the 3-to-7-year U.S. Treasury bond by 15% and added 5% to the current gold exposure and 10% to Canada equities. We continue to rely on the safe haven status of gold in times of uncertainty, including war and inflation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe along with their higher prices will benefit Canada. We are monitoring large cap U.S. equity exposure. U.S. fiscal spending that will fund local governments supports our exposure to short-term treasuries and municipal bonds in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

Our expected lower GDP growth forecast is driven by higher commodity prices and tightening global financial conditions as shifting expectations for central banks and inflation risks push global interest rates higher. Meanwhile, real interest rates remain low, private sector balance sheets are healthy, and the impact of the global commodity shock is for now, limited. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China Inflation. March 16, 2022.

2 Trading Economics. China Unemployment. March 16, 2022.

3 Trading Economics. Europe GDP Growth. March 8, 2022.

4 Trading Economics. Europe Inflation. March 17, 2022.

5 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. March 4, 2022.

6 Trading Economics. U.S. Inflation. March 10, 2022.

7 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. March 8, 2022.

8 Trading Economics. Canada GDP Growth. March 1, 2022.

9 Trading Economics. Canada Inflation. March 16, 2022.

10 Trading Economics. Canada Unemployment: Statistics Canada. March 11, 2022.

11 Trading Economics. Canada Trade Surplus. March 8, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2022. Index performance is based on total returns and expressed in the local currency of the index.

Geopolitical escalation in February has materially increased the risk of further aggravating the energy and commodity crisis developing over the past 2 years. After weeks of rising tensions, Russia launched a full-scale invasion of Ukraine on February 24th. The U.S., in cooperation with its Western allies, has responded by imposing sanctions against Russia, prompting significant shifts in global markets. Resulting higher commodity prices, especially in food and energy, will exacerbate inflation in the U.S. and other developed economies, slowing economic growth, and leading to stagflation. In February, we have maintained out current outlook of three months of inflation followed by 9 months of growth for the U.S. economy. We will revisit this outlook as events evolve.

China’s annual inflation rate fell to 0.9% in January 2022 from 1.5% a month earlier. This was the lowest reading since last September, as the cost of food dropped the most in four months.1 The Euro Area economy expanded 4.6% year-on-year in the last three months of 2021.2 The annual inflation rate in the Euro Area edged higher to a fresh record high of 5.1% in January of 2022. Energy continues to record the biggest price increase.3 The unemployment rate in the Euro Area fell to 7% in December of 2021. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Spain (13% vs 13.4% in November), Italy (9% vs 9.1%) and France (7.4% vs 7.5%).4

The American economy expanded an annualized 6.9% in Q4 2021, higher than the 2.3% in Q3.5 The annual inflation rate in the U.S. accelerated to 7.5% in January of 2022, the highest since February of 1982, as soaring energy costs, labour shortages, and supply disruptions coupled with strong demand weighed on the number.6 The U.S. unemployment rate edged up to 4.0% in January of 2022, little changed from December’s new pandemic low.7 The U.S. trade gap in both goods and services rose 27% to hit $859 billion in 2021, an annual record as imports grew faster than exports. The imports surged 20.5% or $576.5 billion last year, as Americans purchased more foreign products and strong demand pushed up the prices. Exports were up 18.5% or $394.1 billion.8 Canada’s headline inflation rate accelerated to 5.1% in January of 2022, remaining the highest since September 1991. COVID-19 pandemic-related challenges continued to weigh on supply chains, and energy prices remained elevated.9 The unemployment rate in Canada rose to 6.5% in January of 2022 from an upwardly revised 6% in December of 2021.10

Anxiety about impending rate hikes as well as a tapering in asset purchases by the Fed to combat inflation led to the worst monthly performance for U.S. equities since March 2020, with the S&P 500 down 5.2% in January. Smaller caps performed even worse, with the S&P MidCap 400 down 7.2% and the S&P SmallCap 600 down 7.3%. Energy was the only sector to post a gain in January, up a staggering 19.1%, boosted by the continued rise in oil prices. In Canada, The S&P/TSX Composite was down 0.4%. Energy posted a 12.5% gain. The S&P Europe 350 started 2022 on the back foot, finishing January down 3.0% and giving back its gains since the end of November 2021. The U.K. was the sole country to make a significant positive contribution, while the Netherlands and Switzerland were the largest detractors; each pulled back the overall return by -1%. Energy and Financials stood out among pan-European sectors, rising 13.5% and 4.4%, respectively, while consistent with global trends, Information Technology was the main laggard, plunging 12.9%.

In February, we adjusted our Asset Allocation across all models. Total exposure to small and mid-cap equities was replaced with exposure to gold. This reflects the safe haven status of gold in times of uncertainty, including war and inflation. We are monitoring large cap U.S. equity exposure as we weigh the impact of multiple factors including Fed tightening, the impact of the pandemic, and geopolitics involving Russia-Ukraine against a strong earnings season. U.S. fiscal spending that will fund local governments in the pending infrastructure bill supports our exposure to short-term treasuries and municipal bond exposure in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

The reality of what could turn out to be the biggest conflagration in Europe since the Second World War has been reflected immediately in global equity markets and pressures have broadened across sectors. The base effects and volatility generated by the pandemic are still affecting the data, and additional supply side issues that had begun to normalize are reversing. From U.S.–China decoupling to the shift to a low-carbon economy to the rise of technologies, we are not going back to the 1990s, when cheap goods were the zero-inflation offset for the rising cost of housing, as well as education and healthcare. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Trading Economics. China Inflation. February 16, 2022.

2 Trading Economics. Europe GDP Growth. February 15, 2022.

3 Trading Economics. Europe Inflation. February 2, 2022.

4 Trading Economics. Europe Unemployment Rate: Eurostat. February 1, 2022.

5 Trading Economics. U.S. GDP Growth. January 27, 2022.

6 Trading Economics. U.S. Inflation. February 10, 2022.

7 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. February 4, 2022.

8 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. February 8, 2022.

9 Trading Economics. Canada Inflation. February 16, 2022.

10 Trading Economics. Canada Unemployment: Statistics Canada. February 4, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The International Monetary Fund cut its world economic growth forecast for 2022 as the Covid-19 pandemic enters its third year, citing weaker prospects for the U.S. and China along with persistent inflation. Concerns over the stalled talks between Russia and NATO allies have added a layer of geopolitical risk to the heightened uncertainty. The IMF has estimated that the world economy expanded 5.9% last year, the most in four decades. That followed a 3.1% contraction in 2020 that was the worst peacetime decline in broader figures since the Great Depression.1

The IMF has indicated that inflation is expected to remain elevated in the near term, averaging 3.9% in advanced economies and 5.9% in emerging market and developing economies in 2022, before subsiding in 2023.2 A big part of the inflation story involves trade decoupling and increased support for domestic labor. Central banks that slashed interest rates to soften the economic decline caused by the pandemic face pressure to tighten policy to confront surging consumer prices, threatening to curtail the growth rebound. Governments also have less fiscal space for spending to address health needs and buoy their economies after piling up record debt. In January, we revised forecast of Growth (U.S. GDP greater than 2.5%) to an Inflation Outlook (U.S. CPI greater than 3.5%) for the first three months and Growth for the remaining nine months of the twelve -month forecast horizon.

China’s economic growth slowed during the fourth quarter of 2021. The economy expanded by 4.0% year-on-year in October-December, as multiple headwinds including a property downturn, supply chain issues, and COVID-19 outbreaks occurred. In the full year of 2021, the economy grew 8.1%, the fastest expansion in nearly a decade.3 China’s trade surplus in 2021 widened to USD 676.4 billion, the highest on record, from USD 524 billion in 2020, as exports surged 29.9% and imports 30.1%. China’s trade surplus with the U.S. was USD 396.58 billion for the whole of 2021, 25% higher than in 2020.4

The Eurozone economy expanded 3.9% year-on-year in the third quarter of 2021.5 Annual inflation in the Euro Area accelerated for the sixth straight month to a record high of 5% in December of 2021 from 4.9% in November.6 Annual inflation in the U.K. increased to 5.4% in December of 2021 from 5.1% in November. This is the highest reading since March 1992.7

The U.S. economy grew by an annualized 2.3% on quarter in Q3 2021. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country.8 Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased in the third quarter. The annual inflation rate accelerated to 7% in the last month of 2021, a fresh high since June of 1982.9 Energy was the biggest contributor to the gain. Inflation spiked in 2021 due to soaring energy costs, pandemic-induced supply constraints, labour shortages, increasing demand, and a low base effect from 2020. In the United States, a sharp decline in unemployment has been accompanied by nominal wage growth, a degree of tightening in U.S. labor markets that is not occurring in other economies. Tighter labor markets may feed through to higher prices. As a result, the Federal Reserve communicated in December 2021 that it will taper asset purchases at a faster pace and signaled that the federal funds rate will be raised in 2022.

Despite the ongoing pandemic, U.S. equities had a banner year in 2021, with the S&P 500 reaching 70 closing highs on its way to a 28.7% return. Mega-caps outperformed, with the S&P 500 Top 50 up 30.8%. Small-Caps outperformed Mid-Caps in 2021, with the S&P Small Cap 600 up 26.8% while the S&P Mid Cap 400 was up 24.8%. Canadian equities had a strong year, with the S&P/TSX Composite up 25.1%, the best performance since 2009. The S&P Europe 350 set several new records, adding 5.6% in the final month to finish 2021 with a 26.1% total return. The Netherlands, Austria, Sweden, Italy, and France all had positive contributions. The S&P Pan Asia BMI gained 2.1% in December, narrowly moving into the black for 2021 with a gain of 0.9%. The market standard commodities benchmark, the S&P GSCI, rose 40.4% in 2021, as high and rising inflation provided a backdrop for this inflation-sensitive asset class. Commodities finished strong in December, rising 7.6% over the month as energy bounced back.

In January, we maintained our Asset Allocation across all models. We are monitoring U.S. equity exposure as we gauge the impact of multiple factors including Fed tightening, the impact of the pandemic, and geopolitics involving Russia-Ukraine. The high multiples and ‘intentional plan to lose money now because the future is huge’ business models have led to volatility and corrections in January. Corporate earnings across all market caps were solid in Q3 and are being monitored as reporting begins for Q4. U.S. fiscal spending that will fund local governments in the pending infrastructure bill supports our exposure to short-term treasuries and municipal bond exposure in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

The changing picture of the economy comes with structural challenges but eventually leads to improved liquidity, healthy consumer balance sheets, and a healing labor market. From U.S.–China decoupling to the shift to a low-carbon economy to the rise of technologies, we are not going back to the 1990s, when cheap goods were the zero-inflation offset for the rising cost of housing, as well as education and healthcare. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 International Monetary Fund. World Economic Outlook. January 2022.

2 International Monetary Fund. World Economic Outlook. January 2022.

3 Trading Economics. China GDP Growth. January 17, 2022.

4 Trading Economics. China Trade. January 14, 2022.

5 Trading Economics. Eurozone GDP Growth. December 7, 2021.

6 Trading Economics. Europe Inflation. January 7, 2022.

7 Trading Economics. U.K. Inflation. January 19, 2022.

8 Trading Economics. U.S. GDP Growth. December 22, 2021.

9 Trading Economics. U.S. Inflation. January 12, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.