As we expected the Bank of Canada has started raising short-term interest rates to tame decades high inflation. The central bank stated that it is willing to aggressively move rates higher to the neutral rate of 2-3% to get inflation under control. In addition, the bank will stop purchasing government bonds to keep interest rates artificially low. The Bank has quickly switched its focus from full employment to inflation-fighting.
The central bank is also trying to talk down inflation which is difficult to do, as a result, its trying to walk a fine line between raising rates and yet not causing the economy to quickly slow down or tip into a recession.
We expect stock markets to remain choppy for the rest of the year as investors adjust to slower economic growth from rising rates. We still expect overall inflation to decline, however likely not until 2023. Canadian corporate earnings should remain intact given our resource-based economy.
The Fund continues to be positioned for a rising rate environment with the largest sector weights being Financials, Industrials, Telecommunications and Energy. These sectors are well-positioned to benefit from an investor rotation into companies with more realistic earnings and lower valuation metrics.
Over the past quarter, many of our portfolio holdings announced double-digit dividend increases and we expect the same in 2022, as corporate balance sheets remain flush with cash. The Fund continues to have an underweight position in the Energy and Materials (gold and silver) sectors. Despite a 3% dividend yield, the Fund is trading at a lower valuation than the overall Canadian stock market.