Portfolio Update

Global equity and fixed income markets are off to a strong start in 2023, following a challenging year. In January, the total return in Canadian dollars for all major indices was positive: the S&P/TSX climbed 7.4%, S&P 500 rose 4.7%, the MSCI ACWI gained 5.5% and the MSCI Emerging Markets index was up 6.3%. On balance, our equity and balanced strategies remained ahead of their benchmarks over the short term and over longer periods. While the monetary policy tightening cycle remains the main factor behind expectations for a weaker global economic outlook, recent trends are encouraging.

The global recession question

In our November 2022 Portfolio Update, we cautioned against viewing the global economic outlook in a binary recession/no-recession framework. While certain economies faced greater headwinds, we believed it was premature to conclude that a synchronized global recession was in the cards. We will discover whether these economies experienced a technical recession as year-end 2022 data is released in the weeks ahead; however, as we progress through this year, financial markets will begin to price in expectations for 2024. Our analysis suggests that there are grounds to remain cautiously optimistic.

Inflation is cooling in most major economies, a sign that central bank policy rates are nearing a peak. In fact, the Bank of Canada recently signalled an end to its rate hike cycle, provided inflation continues to decline in line with the bank’s outlook. The economies of both Canada and the U.S. have adjusted relatively well to higher interest rates and labour market indicators continue to trend favourably. Elsewhere, lower-than-anticipated natural gas prices and fiscal support measures are reducing fears of a recession in Europe. China’s re-opening will provide a meaningful boost to its economy, with positive spillovers on a global level. Indeed, while global economic growth is still anticipated to slow relative to 2022, the IMF recently increased its real GDP forecast by 0.2 percentage points and now expects world output to expand by 2.9% in the year ahead.   

Investment Process: Economic and Valuation Considerations

At our annual investment retreat, which took place over four days in January, our investment analysts and portfolio managers performed a deep dive into our investment strategy and economic outlook. Each sector was reviewed and analysed on a global basis: portfolio holdings were examined, potential risk exposures were highlighted, and new investment opportunities were presented. While these activities are done continuously throughout the year, we are confident this annual exercise enhances our portfolio management process.  

These annual retreats have taken place against many different economic backdrops; nevertheless, our investment approach has remained consistent. We are interested in the relationship between value and price and our objective is to invest in attractively priced securities, while avoiding those with a high degree of valuation risk or an overreliance on extraordinary future growth assumptions. Our equity portfolios currently trade at attractive valuations, with higher anticipated earnings growth than the index (Table 1).

Investment Process: ESG Considerations

Sustainable investing has always been a key component of our research process. As noted in our 2022-23 Highlights Letter, the firm scored very well in its latest assessment by the United Nations-supported Principles for Responsible Investment (PRI). As signatories of the PRI, we are required to report on our responsible investing practices annually. The three areas evaluated by the organization are as follows:

• The Investment and Stewardship Policy (ISP) module aims to capture the reporting organization’s overall approach to responsible investment. Topics covered in this module include policy and governance, stewardship, climate change and sustainability outcomes.
• The Listed Equity module considers how the reporting organization identifies material ESG issues and incorporates ESG information into its investment process and actively managed listed equity portfolios.
• The Proxy Voting module looks at the firm’s policies related to the voting of proxies, including shareholder resolutions, and the disclosure of voting decisions taken.

Letko Brosseau performed well in each of the three categories, surpassing the median score of other signatories worldwide: Investment & Stewardship Policy 87% (60% median score), Listed Equity 95% (71% median) and Proxy Voting 64% (54% median). We are proud of the manner in which our ESG integration process allows clients to benefit from sustainable returns over the long term, while effecting a positive societal impact.

Concluding Thoughts

Our investment strategy entails patience in the face of volatility, a focus on capital preservation and a high degree of equity portfolio diversification by industry and geography. The companies held in our equity portfolios provide the opportunity for growth while paying a dividend that is competitive with government bond yields. Though bond yields have risen, we do not believe now is the time to lengthen duration or allocate more capital to fixed income securities. Indeed, our strategy to avoid overvalued long bonds while favouring equities within balanced portfolios has been a successful one over both short and longer-term horizons, as we will outline in our upcoming report entitled A Strategy That Pays Off: Maximizing Returns Through a Risk/Reward Approach. Having said this, we continue to take advantage of opportunities in all asset classes as they present themselves. In recent months, we tactically shifted a portion of our government exposure in fixed income to high-quality short-term corporate bonds as credit spreads widened to attractive levels. We remain confident that your capital is well positioned for growth over the medium- and long-term.