Each quarter, our Investment Management teams publish their key observations and portfolio updates across Global Equity and Fixed Income markets. This is a summary of our views for the First Quarter of 2022. You can download the full reports via the links shown below. KEY OBSERVATIONS Markets were volatile during the first quarter of 2022. The S&P 500 fell by more than 12% during the first few months of the year, but then rallied by nearly 10%. It ended the quarter down -5.34% in US dollars and -5.85% in Canadian dollars, as the Canadian dollar appreciated about 0.4 cents. The TSX saw a sizable selloff in January, but managed to post a healthy +4.0% total return over the quarter thanks in part to its heavy exposure to natural resources. There was no shortage of reasons for this volatility. Between rampant inflation due to rising oil and commodity prices, rising interest rates, companies issuing negative earnings guidance and the tragic situation in Ukraine, there is a lot to be concerned about. We should probably throw COVID-19 in there as well, although it’s become one of the further things from investors’ minds. The balancing act that many of us are watching concerns central bank efforts to tame inflation without tipping the economy into recession. Both the Bank of Canada (BoC) and the Federal Reserve (Fed) have hiked rates by 25 basis points so far. The Fed’s projections suggest seven or eight more hikes in 2022 followed by three or four in 2023. The Fed currently believes the odds of a recession in the next 12 months are low, citing strong household and business balance sheets, unemployment remaining near 50-year lows, and real GDP expected to hit 2.8% in 2022, which is well above the 20-year average of 1.9%. We note that, in 2018, the Fed went too far raising interest rates, which caused a sharp albeit temporary market selloff. Inflation then was at 1.9%, not the 7.9% we see today. There is clearly a much greater need to raise rates in 2022. In closing, we hope the issues surrounding Ukraine and COVID-19 are resolved in a positive way and, barring any surprises, don’t expect further major market impacts. Meanwhile, inflation is in the cross-hairs of the Fed and the Bank of Canada, and the effectiveness of their approach bears close watch. Unfortunately, recessions do work at killing inflation! They are just not the desired outcome.

NORTH AMERICAN EQUITY UPDATE

During the quarter, our overall equity exposure decreased by 4% to 93%. Our US equity exposure decreased from 50% to 43% while our Canadian exposure increased from 47% to 50%. Cash increased from 4% to 7%. It is important to keep in mind that many of our clients’ portfolios are invested equities globally, through our North American plus International Equity strategy, meaning that the actual weights of US and Canada within their equity holdings will be proportionately less than this given the allocation to international companies. We have continued to position the portfolio toward value-oriented stocks to benefit from the economic recovery. Value stocks now make up 60% of the portfolio. Our exposure to growth stocks was trimmed by about 4% to 29% of the portfolio. Staples, which we don’t classify as either growth or value, make up the balance of our equity exposure. During the quarter, we added two new stock positions: CAE has two strong tailwinds at its back – airline traffic recovery through its pilot training business and increased NATO defense spending which, as a result of recent acquisitions, are now about half of its business. CAE should benefit as NATO countries ramp-up their defense budgets going forward. Linde is a company that produces atmospheric and process gasses sold to customers in the Healthcare, Food & Beverage, Manufacturing Chemicals and Electronics markets. It is an oligopolistic market where three competitors control 70% of the global business, which allows them pricing power. During the first quarter, Linde announced a 10% dividend increase and a new $10 billion share repurchase program. A complete review of the business and fundamental outlook for each company can be found in my full report.

GLOBAL EQUITY UPDATE

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FIXED INCOME UPDATE

Download Full Commentary The first quarter of 2022 was far from boring for bond portfolio managers: it was like watching the greatest bond movie in history unfold. The movie starts in January with US and Canadian central banks warning that interest rates needed to be higher. This put the bond markets on edge, even though it was clearly evident that higher interest rates were needed – data released in January showed the highest inflation rates in 30 years. In February, the action intensified. With oil prices already up 15% for the year, OPEC announced that it would stick to the gradual increase of oil production. Inflation continued to steam ahead. Then Russia invaded Ukraine as the world watched in fear. Bonds surged as investors fled to safe havens. March provided a climax as both the Bank of Canada and The Federal Reserve raised rates by 25 basis points amid heightened conflict between Russia and Ukraine. Oil peaked at 40% above its February highs. This movie is still in motion, and you’ll need to stay tuned for how it ends: will inflation and interest rates stabilize? Will the war be resolved? Not to mention, will the latest COVID-19 variants finally mark a transition to the endemic phase? We closed Q1 with COVID-19 still around, though milder than the virus was two years ago. The Russia/Ukraine conflict is still going and likely to leave lasting changes. Central banks are on the move and likely will only back down when they feel they have reached a point where their respective economies can absorb the increases without slowing them down too much. The number of bonds trading above par in the Canadian Investment Grade Bond Universe was ~45% at the end of Q1, far lower than the 85% at the end of Q4. The Canadian Bond Universe Index now yields 3.01% vs. 1.91% at the end of Q4. Bonds are looking attractive, but with additional interest rate increases coming, a slow approach to increase duration is prudent. In the meantime, we see opportunities in the short-end to lock in decent all-in-yields, while still saving some dry powder.