Monthly review – October 2022

Team PolyFinances

Monthly Reviews – October 2022

 

Basic consumption

By Artour Benevolenski 

Below, we can see the progression of the consumer staples market compared to the S&P 500/TSX composite index.

Figure 1: The evolution of XST funds compared to TSX funds during the month of October 2022 (Toronto Stock Exchange, 2022)

We note that the interest sector is slightly underperforming the composite index. Both sectors are still growing. However, this is short term; in the long term, the consumer staples market is likely to outperform the TSX index. That part of the market tends to perform worse when the economy is booming, but that is not the case now. The fear of recession affects all investors, so it makes sense that many will prefer the greater stability provided by the XST. Because it poses less risk, the sector helps attract more cautious investors. Unsurprisingly, the tobacco industry remains the most stable, in contrast to fluctuations in alcohol due to rising prices on its composites and declining consumption by young people.  The war in Ukraine is also affecting agricultural production with a catastrophic rise in the price of urea and other fertilizers (Radio Canada, 2022): a lack of fertilizer can cause corn producers to lose up to 50% of their harvest (Radio Canada, 2022). 

Two major problems are emerging for the consumer of everyday necessities: Drinkflation and Shrinkflation. Among other things, the price of aluminum has increased by 37% and the price of barley by 39% (Canocchi, 2022): beer has become a luxury product! It will become even more so in the coming months. Moreover, Shrinkflation, or the phenomenon that reduces the size of food packages while guaranteeing the same price, is being felt, and 64% of consumers are worried about it (Konish, 2022).

 

Energy

By Guillaume Thibault

Over the past month, there have been several important news in the energy sector. On the global stage, the energy crisis that Europe is experiencing is becoming more and more prevalent as the cold weather arrives.   

• With all the sanctions imposed on Russian energy, Asia has now overtaken Russia as Europe’s top supplier of oil products, according to the maritime organization BIMCO. In addition, 4.4 million tons were delivered to the block from Asia in October, according to BIMCO.   
• Italy has put in place a plan to double its natural gas production to 6 billion cubic meters (bcm) to further cut its dependence on Russian gas. To do this, the newly elected government will allow new drilling in the Adriatic Sea.  
• Germany has asked Brussels for help to revive its solar panel industry and improve the EU’s energy security. Germany used to be a world leader in terms of solar energy production capacity, but the industry collapsed after the government decided to cut subsidies to the sector a decade ago.   

Meanwhile, Europe’s two largest energy companies, Shell and Total Energies, each reported third-quarter profits of more than $9 billion. These strong results are expected to intensify calls in Britain and the European Union for new taxes on energy companies to help households cope with soaring electricity bills. This came almost while nearly a third of France’s gas stations were having difficulty receiving gasoline. This was due to protests by Total Energies employees who are demanding higher wages to cope with rampant inflation and a cost-of-living crisis. 

 

Finance

By Sophia Mounis

This year, Equifax Canada reported that the increase in credit card debt in Canada was 6.4% between the first two quarters. The financial agency revealed that the increase in non-mortgage debt, which now stands at $591 billion, is a concerning matter.  

In the U.S., credit card debt is at an all-time high. The value was previously $870 million following the 2008 financial crisis. It now stands at a record $930 billion, according to the U.S. Federal Reserve. Compared to the last quarter, the 0.16% increase in the delinquency rate suggests that Americans seem to struggle, as prices continue to rise.  

Despite the drop in gas prices, the inflation rate is now 6.9%, interest rates continue to rise and wages do not seem to change. Furthermore, as the restrictive health measures decreased, people are tempted to spend more. This can make it difficult for the world’s population to meet payment deadlines. In fact, credit card demand has increased in recent months. According to Equifax Canada, the limit for new credit cards is $5800 in Canada, a result of competition between various credit card companies. 

As shown in chart 2, despite the poor performance of the financial sector over the past five months, the situation is relatively better in October.   

In fact, inflation concerns led to the increase in the policy interest rate by 50 basis points in Canada and 75 basis points in the United States. Nevertheless, as shown in the Chart 2, the financial sector is performing poorly. Indeed, the XFN has declined by 3.71% over the past five months. Despite these 5-month losses, the sector recorded a gain of 1.97% for the month of October. This is represented by the S&P/TSX Composite, which rose by 4.97%. Therefore, the issue of credit card debt will possibly need to be closely monitored and may require more complex measures. 

 

Real estate

By Dahlia Iness Bouaou

In the optic of stabilizing inflation, the central bank’s key rate was raised to 3.75% on October 26. Indeed, this increase of 0.5% compared to last month is intended to put downward pressure on inflation in order to achieve the control target set at 2%.

Thus, as shown in Figure 3, when comparing the XRE, which is a characteristic index of the Canadian real estate stock market, with the TSX, we observe a rather equal performance. Indeed, since the 0.5% increase in the key interest rate was anticipated, the negative effects of this increase on the real estate sector were already taken into account by the stock market.

With fewer buyers able to take out a loan, demand is falling while supply continues to rise, slowing the housing market. While this trend is likely to continue, sales in Quebec fell by more than 18% in the third quarter compared to the same period last year, reaching 18146 transactions.

 

Industries

By Maxime Bourdeau

The trend in recent months has changed: the industrial sector is growing faster in the United States compared to Canada

During the months of June through September 2022, the U.S. S&P 500 Industrials Index (S5INDU) had fallen by 11.7% and the Canadian S&P/TSX Capped Industrials Index (TTIN) had gained 1.5%. These trends were reversed during the month of October 2022. In fact, the Canadian sector index increased by 4.0% while the sector index increased by 10.9%. The following figure illustrates the growth of the 2 indices during the last month. We can also observe that the two industrial sector indices are highly correlated with proportional variations.

The Canadian industrial sector index outperformed the S&P/TSX Composite Index (TSX) by 1.29 times, while south of the border, the industrial sector outperformed the broader S&P 500 Index (SPX) by 1.81 times. On October 26, 2022, the Bank of Canada announced a 50 basis point increase in the policy rate (Bordeleau, 2022). The TSX Index and the TTIN Index were unchanged by the central bank’s major announcement. In Canada, Automation Tooling Systems Inc (ATS) is a stock that has benefited greatly from the month of October 2022 to believe. The automation company has seen several brokerage firms assign it a 12-month average target of $57.14. This ATS valuation allowed the company to gain the confidence of investors in the market and grow by 16.7% during the month of October.

Over the next month, a strike by U.S. railroad workers could disrupt the industry. Indeed, 115,000 workers could go on strike as early as November 19, 2022 (LaRocco, 2022), which would cost US$2 billion per day (Shepardson, 2022) and also affect the energy, agriculture, retail and manufacturing sectors. To be continued!

 

Basic Materials

By Soumia Saouli

The term basic materials follows the evolution of this sector by studying the following two indices: XMA.TO as well as S&P/TSX Capped Materials. This past month, the XMA.TO index (in pink) has outperformed the S&P/TSX Capped Materials (in purple) although it nevertheless ended the month with a decline. The S&P/TSX Capped Materials index will however have increased by 6.5% while XMA.TO remained relatively stable with an increase of 0.2%. We note that since XMA.TO’s portfolio is 50.39% compound exposed to the gold sector, its value has necessarily followed the trend of gold. 

 

While gold was flat at $1642.55 an ounce, it was down 1% for the month. Indeed, it experiences its seventh monthly loss on Monday, October 31, due to high US interest rates. This is because gold is very sensitive to rising US interest rates, as these increase the opportunity costs of holding zero-yielding bullion. So, although gold is usually considered a hedge against inflation, investors preferred to be cautious again this month.

Copper, also part of the sector exposures of the XMA.TO index, has seen a decline this month due to investor concerns about a possible recession next year. This has therefore resulted in a direct drop in the prices of copper and aluminum.

 

Health Care

By Abdoul Majid Ibrahim M Djido

October 2022 brought good news for companies in the healthcare sector. In particular, those in the medical and recreational cannabis market have been given new opportunities by the passage of a criminal measure in the United States. Indeed, US President Joe Biden has announced a federal process to decriminalize the crime of drug possession and to provide a pardon for inmates [1]. From an economic point of view, this measure is equivalent to the opening of a market of several tens of billions of dollars (American cannabis market) for these companies [2].  

The stock market in Canada reacted to this announcement with a rise on 24-25 October. The following figure puts the market price in perspective with that of Canopy, which announced its intention to enter the market even before the federal process was completed [3]: 

If the trend continues, it is very likely that the Canadian healthcare market will gain momentum in the coming months after experiencing difficult times.

Information Technology

By Walther Guillaume

Over the past month, despite investor fears of a recession due to inflation and soaring interest rates, the information technology sector has continued to perform well. Share prices rose 6.69% in the Canadian market and 6.56% in the U.S. market.

However, the stocks of several large Silicon Valley technology companies such as Google, Meta, Amazon, Apple, etc. took a completely different turn. Meta’s share price has fallen 31.86%. The company is struggling to increase its revenues while continuing to invest heavily in its restructuring and in the innovative and futuristic technology of the metaverse. In fact, its revenues decreased by 4% for its third quarter, to $27.7 billion, compared to $29 billion last year while its expenses increased by 19%. To compensate for this increase in expenses; Zuckerberg, the company’s founder and chairman, announced a plan to lay off underperforming employees. Google and Microsoft, whose share prices fell by 2.31% and 1.12% respectively, promised investors that they would cut back on hiring and keep a closer eye on energy consumption and their supply chain to reduce expenses. As for Apple, the company remains a strong performer in the sector with a 9.81% increase in its market value during the month. However, the weakening economy has reduced their sales, the growing geopolitical tensions between the United States and China and the restrictions on the Corona virus in China are impacting their supply chain, as 90% of the company’s products sold worldwide come from China.

The following graph illustrates the short-term trend of the shares of the major technology companies in the U.S. market (VGT Index) compared to the Canadian market (XIT Index). These companies followed the performance of both markets during the first two weeks of October. However, the last two weeks have been decisive, and the Canadian Market has outperformed the U.S. Market companies.

On another note, Twitter, purchased by Mr. Musk at the end of the month for US$44 billion, will become a private company and will stop trading on the New York Stock Exchange on November 8. Mr. Musk announced that he has big plans for the company. Indeed, he intends to integrate new technologies, make their algorithm more transparent and add a subscription service for users. This is news that will need to be followed closely given the impact that Mr. Musk’s decisions may have in the communications industry.

In conclusion, the post-pandemic period, which results in a punctual resumption of normal life with the reopening of leisure activities and shopping malls, is causing a decrease in online traffic and the purchase of technological services and devices. In addition, rising interest rates, inflation and health restrictions that persist in some countries are having a negative impact on the revenues of major technology leaders. These companies are having to rethink their offerings and find more efficient ways to operate to counteract this decline in revenue. According to Microsoft executives, the declining revenue trend is likely to continue at least through the end of the year.

 

Utilities

By Léo Lamy-Laliberté

Earlier this year, the utilities sector was among the best performers in the market as investors shifted towards more protective sectors to navigate the economic downturn. Stocks in this sector are generally considered less volatile than other sectors of the market, as the companies providing such services are systematically collecting payments, even when the economy slows down. At its peak, the sector was up 8% year-to-date. 

However, over the past month, the sector’s stocks have fallen rapidly and have dropped more than 13% compared to the 4% decline in the benchmark. The sector even had its worst performance of the year. Rising interest rates made the utilities sector less attractive. Utility stocks are known for their healthy dividends. But when interest rates rise, so do bond yields. In addition to offering lower risk, 10-year Treasury yields finished above 4% for the first time since 2008, outperforming the sector’s returns in the process. 

“ The 10-year rate is repricing everything. I’ve got something that’s less risky and still delivers more,” said Kevin Barry, chief investment officer at Summit Financial, comparing Treasury bonds and utility stocks.

The drop of the utility sector highlights the difficulty of finding safe havens in the current market conditions. However, November is expected to bring many catalysts to the equity markets as the U.S. midterm elections, rate hikes and the holiday season are expected to drive the market.

 

References 

https://money.tmx.com/fr/advanced-chart/XST

Canocchi, C. (5^th  of september 2022). Beware beerflation! Cost of beer production rises 62% in two years with further inflation ahead as the price of making your pint soars. This Is Money. https://www.thisismoney.co.uk/money/markets/article-11169705/Drinkflation-Cost-beer-production-soars-62-two-years.html

Konish, L. (29^th of august 2022). 64% of consumers are worried about ‘shrinkflation.’ What it is and how to watch for it while shopping. CNBC. https://www.cnbc.com/2022/08/29/64percent-of-consumers-worry-about-shrinkflation-heres-what-to-watch-for.html

The team of journalists of Radio Canada. (16^th of march of 2022). Hausse du prix des fertilisants : les producteurs de grains s’inquiètent. Radio Canada. https://ici.radio-canada.ca/nouvelle/1869350/azote-engrais-semence-russie-transport

Bocca, R. (October 31, 2022) The global energy crisis ‘could speed up the green transition’: What you need to know about energy this week. World Economic Forum. https://www.weforum.org/agenda/2022/10/global-energy-sector-latest-news-31-october/

Bocca, R. (October 10 2022) Oil down on recession fears, France fuel shortages and more. World Economic Forum. https://www.weforum.org/agenda/2022/10/global-energy-sector-latest-news-10-october/

Bordeleau, J. (27 octobre 2022). La hausse des taux d’intérêt laisse de plus en plus présager une récession. La Presse. https://www.ledevoir.com/economie/767603/la-banque-du-canada-augmente-son-taux-directeur-a-3-75

LaRocco, L. (26 octobre 2022). A second railroad union votes down labor deal needed to avoid nationwide strike. CNBC. https://www.cnbc.com/2022/10/26/second-railroad-union-votes-down-deal-needed-to-avert-strike.html

Marketbeat. (28 octobre 2022). ATS Automation Tooling Systems Inc. (TSE:ATA) Receives Consensus Rating of “Buy” from Brokerages. https://www.marketbeat.com/instant-alerts/tse-ata-consensus-analyst-rating-2022-10-2-3/

Shepardson, D. (27 octobre 2022). More than 300 groups urge Biden involvement to avoid rail shutdown. Reuters. https://www.reuters.com/business/autos-transportation/more-than-300-groups-urge-biden-involvement-avoid-rail-shutdown-2022-10-27/

Benchetrit, J. (6 septembre 2022). Cbc.ca. https://www.cbc.ca/news/business/rising-credit-card-debt-in-canada-1.6571516

Bhattarai, A. (17 Octobre 2022). Washingtonpost.com. More debt, higher fees: Credit card borrowers face mounting burdens. https://www.washingtonpost.com/business/2022/10/17/credit-card-debt-interest-rates/

Consumer.equifax.ca. (2022). Financial stress Mounts, Credit Card Demand and Debt Rise. [Equifax Canada Market Pulse Quarterly Credit Trends Report]. https://www.consumer.equifax.ca/about-equifax/press-releases/-/blogs/financial-stress-mounts-credit-card-demand-and-debt-rise/

Données mondiales. (2022). Évolution des taux d’inflation au Canada. donneesmondiales.com. https://www.donneesmondiales.com/amerique/canada/inflation.php

Federal Reserve Bank of New York. (11 Octobre 2022). Newyorkfed.org. Inflation Expectations Decline in the Short Term; Tick up in the Longer Term. https://www.newyorkfed.org/newsevents/news/research/2022/20221011