Team PolyFinances

Monthly Reviews - January 2022

Financial services

The impact of rising interest rates on the global economy, by Manal Mouhajir

The objective of central banks is to ensure the stability of the currency and to limit inflation by regulating key interest rates. In addition, they can create or destroy money, which influences the whole economy of the country. The more money is in circulation, the more its value deteriorates, which leads to an increase in prices. On the other hand, high circulation can also allow for more investment, as it stimulates the economy. January 26, 2022, marks the unveiling of the FED (Federal Reserve of the United States) calendar for the coming year. On the agenda, a rise in key rates that will impact the global economy. The higher the rates, the more difficult it will be to borrow money and the less accessible it will be to the population. Following the financial crisis of 2008, the FED had particularly lowered its rates in order to allow greater accessibility to money to help the American economy. However, this decrease can create an overheating, and this is what we are currently observing. The United States is experiencing a record inflation rate of 7% in 2021 (the highest since 1982). It is therefore essential for the FED to increase its rates to regain balance. This increase in key interest rates has impact the financial markets, which have been unstable and more sensitive. The Nasdaq had its worst start of the year since the crisis in 2008. In the rest of the world, the European Central Bank (ECB) is applying its own policy, but the changes in the U.S. neighbors are still being felt throughout the continent. The ECB is not planning to raise rates, saying that inflation should calm down later this year as the post-Covid economy gradually recovers.

 

FinTech

By Hugo Lirette

The cryptocurrency market as a whole is having a bloody January, recording a 24.81% drop since the beginning of 2022. This is exactly 17.8% more than the decline recorded by the S&P500. The financial markets are doing very badly, and for the cryptocurrency market, it is even worse. This can be seen by the following

Figure 1 : Comparison between the performance of the S&P Cryptocurrency Broad Digital Market Index and the performance of the S&P500

Bitcoin has lost almost half its value since its ATH (All time high) in November. This can be seen in the following figure.

Figure 2 : Change in the value of Bitcoin since its previous ATH last November

Just a reminder that cryptocurrencies are hyper-dependent on the performance of BTC: if Bitcoin goes down, the crypto market will go down.

It’s interesting to note that Bitcoin has been trading in about the same price range for the past year. The following chart shows this.

Figure 3 : Bitcoin transaction intervals in the last year

Finally, still taking a more macro view as well as a technical analysis approach, there is a “double top pattern” in the Bitcoin trading chart. In finance, this kind of pattern represents a signal of an extremely “bearish” trend ahead. However, there is a “higher high”, i.e. a second high higher than the first, as well as a “higher low”, i.e. a second low higher than the first, meaning that the one-year uptrend still holds for the time being. Keep in mind that there is always the possibility that the second low will become a lower low in February. In that case, the market could enter a “bearish” period.

Figure 4 : “Double top pattern” of the Bitcoin trading chart

Finally, looking at the market fear index, we can understand that there is an emotion of extreme fear among investors.

Figure 5 : Fear & Greed Index

But where is the cryptocurrency market headed? Will it sink even deeper destroying the hopes of investors or will it fly to the moon allowing for absolutely staggering enrichments? To be continued in the next monthly reviews…

 

Industries

S&P 500 Earnings: Industrial Sector Expected To Lead In 2022, by Lynn Doughane

Tableau 1 : Tracking  S&P 500 sector earnings growth

Looking at the chart above, we can see the tracking of earnings growth for the S&P 500 sectors for 2022 beginning in October 2021 because with Q3 2021 earnings, companies begin to make their first announcement for 2022, usually prompted by analyst questions. Most of the 2022 guidance will come in the January ‘February ’22 period when companies release their Q4 ’21 earnings, but investors get a feel for the year ahead starting with Q3 ’21 results.

Figure 6 : Projections for earnings per share

The industrial sector is expected to achieve the best EPS growth this year, trailed closely by the consumer discretionary sector. In addition, this sector is expected to take the lead in 2023 and have the best two-year EPS CAGR and that’s after the sector put up almost 89% growth in 2021.

The industrial sector, currently about 7% – 8% of the S&P 500’s entire market cap, is thought to be economically sensitive and thus readers have to factor in a Federal Reserve System that is going to be withdrawing excess liquidity up until June ’22 and then outright tightening monetary policy after that period.

 

Basic Consumption


By Catherine Kallas

A recent publication from Statistics Canada showed that 2021 was the most significant year in terms of inflation rates since 1991. Several issues have affected the Canadian market such as the pandemic, supply chain disruptions, high energy prices and rising real estate prices. The following figure represents the inflation of different goods and sectors in Canada. The most striking data is the 31.2% increase in gasoline prices and the 24.4% increase in fuel prices.

Figure 7 : Inflation of various goods and sectors in Canada (Statistics Canada, 2022)

The core consumer index known as the “Consumer Price Index” has experienced the same trend with an inflation of 3.4% in 2021. The following graph illustrates this effect.

Figure 8 : Consumer Price Index Inflation (Statistics Canada, 2022)

This inflation concerns all the provinces of Canada, with a more marked increase in the Atlantic regions because of the strong dependence of this region on furnace oil, the price of which has greatly increased. This region is also the most affected in terms of inflation in the rent and basic grocery sector. The following figure provides a comparison between the different provinces in Canada.

Figure 9 : Consumer inflation across Canada (Statistics Canada, 2022)

 

Real Estate


By Marie-Pier Dufour

The Invesco S&P/TSX REIT is the index characterizing the Canadian stock market at the real estate market level.

As can be seen in the following image, January was a more difficult month for the REIT than the S&P/TSX. This difference between the two indices can be explained by the slowdown in real estate sales. In fact, a decrease in buyers increases the vacancy rate for real estate developers, which affects their financial health. Another reason for the sector’s underperformance may be the announcement of an increase in the key interest rate. Indeed, this increase which took place in January created several fears and uncertainties affecting the real estate sector due to its correlation with the increase in interest rates. However, interest rates have an impact on the economic context of companies and therefore of funds. It should be noted that the government’s announcement regarding the obligation to be vaccinated for truckers and citizens wishing to enter big box stores must have contributed to this underperformance.

Figure 10 : S&P/TSX Composite Index

One portfolio did perform better than the Invesco S&P/TSX REIT. As can be seen in the following figure, Automotive Properties REIT tracked the TSX index and then outperformed the index from January 26 to 31. It can be argued that funds specializing in buying and leasing automotive dealerships were less affected this month. This can be explained by the growth potential, revenue and profit margins, which are attractive to the automotive industry, and therefore also to the owners of the facilities.

Figure 11 : S&P/TSX Composite Index

 

Energy

By Abderraouf Nechadi and Justin Lachapelle

The ETF that tracks the performance of the energy sector, HXE, ended 2021 with a gain of 81.48%, or a price increase of $8.80. This was mainly due to the increase in the price of oil per barrel, caused by supply chain problems, an increase in the consumption of oil products and the decisions of OPEC+ members regarding their maximum production. Indeed, global consumption was 96.90 million barrels per day, while global production was 95.53 million barrels per day, reducing inventories and causing the price of a barrel to rise by about $36.

The year 2022 begins with a great deal of uncertainty, and it will be difficult to predict oil consumption, as it will vary greatly depending on government policies regarding the management of the pandemic and the impacts of various variants of COVID-19. However, it is clear that a transition to green energy is occurring and a powerful message from the CEO of BlackRock sets the tone by stipulating that capitalism goes hand in hand with sustainability and indicates that the next 1000 “unicorn companies” will be companies that reduce carbon emissions and facilitate the transition toward sustainable energy. Thus, every investor should keep this transition in mind before taking a position:

“Every company and every industry will be transformed by the transition to a net-zero world. The question is, will you lead, or will you be led?” (Larry Fink, Letter to CEOS 2022)

Figure 12 : HXE price chart

 

Basic Materials

By Abderraouf Nechadi and Justin Lachapelle

The majority of the portfolio is exposed to the gold sector (52.64%), as well as the fertilizer and other agricultural chemicals sector (15.18%). The ETF had a meagre gain of 3.43%, which is slightly lower than the S&P/TSX Capped Materials Index’s return of 4.06% and much lower than the S&P500’s return of 26.9%. The share price fluctuated between $19.08 and $16.27 and averaged $17.63 over the year, meaning that the materials market remained fairly constant, despite some significant directional moves over the year. These fluctuations were caused in part by very loose fiscal and monetary policies, huge infrastructure investments by the Biden administration (‘’Bipartisan Infrastructure Deal‘’), and supply chain issues.

Given the current uncertainty caused by the pandemic and geopolitical tensions, it will be difficult to predict with certainty a trend for the sector in 2022. Indeed, with inflation currently very high, monetary and fiscal policies are likely to tighten, reducing growth in many industries and, by extension, demand for materials. In addition, tensions in Eastern Europe may create problems in the oil distribution chain, which could increase production costs for the chemical industry. However, investments in green energy and infrastructure could be seen as positive for the materials sector.

Figure 13 : XMA.TO (black) chart compared to the TTIM (orange) index

 

Information Technology

By Guillaume Thibault

It is no longer surprising to any modern investor to see technology stocks rise week after week, month after month and now year after year. These companies are difficult to value because their current profitability almost never reflects the incredible potential of their future cash flows (those stocks that deserve the title “growth stocks”). However, these stocks continue to surprise investors by reaching new highs that few would have imagined just a few years ago.

However, January 2022 is an exception to this strange new norm (to which we are currently accustomed). Indeed, the S&P 500 has declined by 5.86% this past month. There are several reasons for this decline, but analysts agree on two main factors:

  1. Technology stocks are at their peak. Statistically speaking, there is a higher probability of disappointing returns in the short term.
  2. Rising interest rates are hitting companies whose valuations are based heavily on future cash flows hard.

Figure 14 : Evolution of the S&P500 for January 2022

 

Utilities

By Félix Glorieux

The utilities sector consists of companies that provide electricity, natural gas, water and other services to homes and businesses. This sector had a market capitalization of over $1.5 trillion as of March 2021.

In fact, the Vangaurd Utilities Fund ETF’s (VPU) returns of approximately 6.57% can be compared to the 14.37% growth that the TSX has experienced over the past year.

Figure 15 : Comparison of VPU returns

The market correction of late has not spared the utilities sector, which has lost 3.8% in value over the past month, while the market has lost 4.4% over the same period. However, the utilities sector has been less volatile than the overall market: the lowest value reached in the last month was -4.0%, while the overall market reached a low of -6.1% a few days ago.

The utilities sector has tended to perform better when concerns about slowing economic growth resurface, and to underperform when those concerns fade. This is due in part to the sector’s traditional defensive nature and stable revenues – people need water, gas and electric services through all phases of the economic cycle. Meanwhile, the low interest rates that typically accompany a weak economy provide cheap financing for the large capital expenditures required in this industry.

However, while interest rates are historically low, they are expected to rise as the economy continues to grow. There could be significant government funding for utilities for clean energy initiatives that would benefit the profit prospects of the sector, depending on the extent of new regulations, which could also increase costs.