Monthly Market Insights – Inflation set to Continue

Ian Lusher: [00:00:00] Thank you very much for joining us today on our monthly market insights. I’m here with Wayne Wachell, executive chairman and CEO of Genus Capital Management, and my name is Ian Lusher. I’m a partner and also a portfolio management. Purpose of this video today is to recap events and happenings over the last few weeks and to kind of put it in perspective how this affects investors, particularly Genus clients. Our goal is to go a little bit more in depth into what’s happened and some of the things that we did to react to the market’s happenings. I’d like to start by acknowledging the lens that we gather on today the ancestral territories of the Musqueam, Tsleil-Waututh and Tsawwassen peoples. So Wayne, give us a little recap of the happenings in the last month. Yeah.

Wayne Wachell: [00:00:53] Well, the lead story this month is inflation and the increase in inflation expectations that happen this month. Quite amazing. Right now we’re running probably inflation in the U.S. over five percent. Expectations is going to go higher in the coming months, maybe around seven eight. And if you look at the bond market, the bond market is implying forward inflation for the next five years of three percent per annum. That’s a full percent ahead of the Fed. So the bond market has gotten onto this, and that’s a concern and a lot of the lot of the forecasters. Even Janet, Janet Yellen came out yesterday and said that inflation is going to be higher than anticipated in the next year. So the whole transitory story is kind of burnt, burnt down, right? Transitory now it’s become like two years. And when you open up these sort of expectations of inflation longer, that can cause problems in the market longer term. So that was the big story, of course. Because of that, bond yields went up. Oil went up. Banks did very well, for example

[00:01:56] Right. So giving this changing landscape from transitory inflation to maybe inflation, that’s going to last a little longer. What kind of trades did we do at Genus to try to kind of offset what was going on in the markets?

Wayne Wachell: [00:02:08] Well, going into the month, we were already overweight in the financials, which do well when rates rise and we were overweight energy. We did a bit more of that. We sold some health care, which is really performed well, you know, up until recently. So a bit of Moderna to some other names and moved into more financials, more. We bought some of the autos as well, some more Ford, some Magna, some of the energy companies like Chevron and Schlumberger, a bit of Imperial in Canada. So just more into into that inflation type trade. We also add a bit more a bit more equity as well during the course of the month. As we, you know, in equity is a good inflation, longer term, good a good inflation hedge longer term. So it’s a place to hide and be underweight equity bonds. And another thing, for example, we should be worrying about worrying about is China. We talked a bit about a bit last month about the Evergrande issue and what’s going on in the real estate there and common prosperity. This issue, the real estate issue, national issue in China, is going to go on for some time. If we look back at the playbook in the recession in 2008, the cracks in the real estate market in the U.S. happened in mid two thousand seven. Lehman happened 18 months later, so it’s going to be a long played out. This is only round one, around two more rounds to come and issue this issue, and we’re watching it.

Ian Lusher: [00:03:29] Well, I mean, you’ve talked about a lot of things that we’re looking at that are negative, but the positive that I took out of that is we’re looking at these, we’re worrying about these items so that you can worry about these less and any good portfolio manager, any good investment company should be concerned about all these issues on behalf of their clients. Right. So we hear a lot of negative news in the press, a lot of negative stories, a lot of negative news about inflation. But the past few weeks have actually been really good in the markets. We’re heading into earnings season. It seems so far that that in general, both in the U.S. and in Canada, the markets actually have held up quite well and actually are doing much better than perhaps a few weeks ago.

Wayne Wachell: [00:04:18] Well, I think number one, the you know, the COVID numbers have improved that has given the market a bit of a bit of a push, and the earning numbers so far have not been that bad. They they haven’t beat expectations, really, but they’ve matched the expectations, I would say. And so that’s helped, you know, there’s some concerns about inflation impacting margins. We haven’t seen much of that yet. We saw maybe FedEx missed, but the other other companies have done quite well. And so so far, so good.

[00:04:48] Right. Is the market looking more at earnings this quarter? Are they looking at the guidance going forward?

Wayne Wachell: [00:04:55] I think they’re still they’re still as the market still sees so much liquidity in the marketplace, they printed so much money, there’s massive government spending, so it’s just pushing that forward into into next year, so there’s still going to be stronger growth. And there’s been some there’s been some talk of stagflation. There might be an inflation boom for the next six months. And usually, you know, I think it’s going to be sort of a fire and ice story where we get the fire right now and in the inflation numbers can suppress disposable income, can can push up interest rates that’s going to cool the market off. Also, the liquidity that’s been pumped into the system is going to roll off in about six months. So that is going to slow things down at the end of next year. So I think we get the fire now for maybe the next year. And then the ice comes in the second half of next year into twenty twenty three. So that’s the concern. But right now you’ve got to be you’ve got to be aware and be playing the inflation trade because once these things get fired up, they’re hard to undo. Ok, and to break the back of inflation, you may need a move like Volcker and back in nineteen eighty two, but supply chains will improve. But once you get these inflation expectations in the market, they become hard to harness.

Ian Lusher: [00:06:10] Right. So Wayne we’ve talked about a lot of things today, but what’s most important to a lot of Genus clients is where do we go from here? How are we positioned going forward?

Wayne Wachell: [00:06:20] Well, right now we’re positioning for the fire and that means inflation and we want to have inflation hedges. We’re overweight financials, energy under overweight stocks, underweight bonds. We’re going to focus more on the economic sensitive names and just keep an eye on on on the potential ace down the road. Right.

Ian Lusher: [00:06:40] Well, thank you very much for joining us today. If you’re a Genus client and you have any questions or concerns, please reach out to your portfolio manager. If you’re not a Genus client, please go log on to our website, click Get Started and you can book a time with a representative from Genus. Thank you very much and enjoy your day.