Friday Market Insights – Equity markets took a downturn over inflation fears

Thomas Irwin: [00:00:04] Good afternoon, everyone, thanks for joining us on our Friday Market Insights. Today is Friday, May 14th, and my name is Thomas Irwin. I’m a partner and associate portfolio manager here at Genus. And with me today is Justin Hahn, our global research analyst. Welcome, Justin.

Justin Hahn: [00:00:24] Thanks Thomas.

Thomas Irwin: [00:00:25] Busy week in the markets. Lots to talk about. Our first question, as always, is what’s happened this week past?

Justin Hahn: [00:00:35] Yeah. So this week we saw equity markets take a little bit of a downturn correction due to the fears of inflation coming up again. Names that were doing well tended to underperform a bit more, such as the technology sector. We also saw the official fed up inflation numbers come out this a couple of days ago and numbers were quite high with the month over month being about zero point eight percent and the year over year number being coming in around four point two percent. It’s important to note, however, that these numbers are coming off a very low base with the economy almost halting for a few months last year. We saw the Federal Reserve come out also and say that this inflation is very transitory and they expect it to dissipate soon and the Bank of Canada also a couple of days ago came out and reiterated those views.

Thomas Irwin: [00:01:25] Right, maybe we’ll start there, actually. So central banks around the world have been revising their GDP expectations, this week, it was the E.U. Inflation is is in the news every day. And CPI’s had its biggest jump since 1981. I read that used cars are up 10 percent in price, and we keep hearing and you just said it, we keep hearing inflation is transitory. Should investors be worried about this? And how are we positioning our portfolios?

Justin Hahn: [00:01:53] Yeah, that’s a good question for our portfolios. We still believe that we are positioned well for an economic recovery and have been reducing our exposures to more of the inflation sensitive sectors such as the technology and leaning more into the economic sensitive sectors with with more exposures to consumer staples and financials. We will continue to lower our rates as well. We’ve done it this month as well as last month in our portfolios, whether it be in an asset class perspective or within our funds as well.

Thomas Irwin: [00:02:26] And Justin, this week was a big week for the markets in terms of volatility. We saw the biggest one day drop since January, and we’ve had a few consecutive days of of down markets. And I just wondered, you know, with this sell off largely led by tech, whether that is simply a pause in the market and profit taking by investors, or is this maybe the start of something bigger?

Justin Hahn: [00:02:52] Yes, so we view this more as a small pause and a bit of profit taking, the tech earnings were extremely good this past quarter, with a lot of them beating expectations by quite a bit. Small corrections we see as very good for the markets as it allows for a more, longer, longer term run for the markets. It also brings price to earnings valuations, lower and more average levels per say, versus what we’ve seen during the previous years. And we don’t believe that it’s anything to worry about. Yet today, the markets, the tech sector specifically was back up two percent. So it has done a little bit of a bottom and has been up for two days now so.

Thomas Irwin: [00:03:31] Right, so let’s talk more about our portfolios then. You mentioned a few changes. I know that last week we shifted a little bit more out of our CanGlobe Fund and into our dividend strategy. Is is value replacing growth?

Justin Hahn: [00:03:48] Yeah, we still believe there’s a lot of good value in value. And we did move more towards our dividend fund this month as well. Following last month’s change this month specifically and within our funds, we trimmed some of our technology holdings and communications such as Netflix, Square and Microsoft, and purchase more of the banks such as Intact Financial and Morgan Stanley.

Thomas Irwin: [00:04:14] So Colonial Pipeline is big in the news this week. They’ve had their troubles relating to the gas shortage that’s happening in the southern United States. And I just wonder what is the ramification of that and certainly here in Canada?

Justin Hahn: [00:04:32] Yeah, so the most recent update, I think it was yesterday around the Colonial Pipeline was they paid off a ransransomware somewhere around five million and were working to restart their operations. Although the pipeline only directly affects the US and eastern US, a lot of the eastern Canadian oil prices and gas prices are directly tied to the New York port where the oil is received. However, we believe this is more of a short term issue. It’s kind of like when we saw during covid times the short supply of toilet paper. It’s kind of exaggerating the situation here. We see with oil prices and demand and everyone panic buying all the oil.

Thomas Irwin: [00:05:11] All right. Thank you. So Elon Musk was in the news again this week, as he often is, and he actually was on Saturday Night Live. And I don’t know if you saw it, but I did watch it. And I thought he was quite good on it. But he came out this week and and basically said that they were going to suspend vehicle purchases using Bitcoin because of the use of fossil fuels involved and the cost to the environment. Now, I know we don’t hold any cryptocurrency, and we’ve talked about that in the last couple of videos. But I wondered what our current view is on Tesla and whether we hold it in any of the portfolios.

Justin Hahn: [00:05:46] Yeah, so we currently don’t own any Tesla, but we did hold it towards the end of last year and the beginning of this year. Its ranking has kind of fallen through the past few months due to it, our models more favoring the value sectors, less in the technology side. Longer term, we still believe that Tesla is a key player in the space, but there is a bit more pain to come. The reason Tesla fell quite a bit was a lot of the names that have been trading at more of a higher price to sales ratio. I think Tesla’s around 11 while the market average is around two, they’ve been hit the most. So there’s still more room for short term pain for the stock. But the long term, we still believe it is one of the leaders in the sector.

Thomas Irwin: [00:06:31] And thank you very much and thank you for your insights, Justin. That’s all the time we have today. Thank you for watching our Friday market insights. If you have any questions, please contact your portfolio manager. And I just like to say thank you for watching to our valued clients for your trust in your business and to our prospective clients for considering us. Thanks very much. Enjoy your weekend.

Justin Hahn: [00:06:53] Thanks, everyone.