Outlook
We expect the Bank of Canada to aggressively raise interest rates given its public stance against inflation. Although the central bank is in a difficult position to control inflation while not engineering a recession, we do not believe a recession will occur in 2023. Our thesis is based on recent ‘green shoots’ of falling prices for semiconductor chips, shipping container prices, and food input costs.
We expect inflation to start falling in 2023, and the pace until then will be moderate increases rather than run away as we experienced in the late 1970s/early 80s. Canadian calendar 2022 corporate earnings are expected at 28% year-over-year. However, 2023 earnings are currently estimated at 6% year over year. Thus, a recession is already well discounted by investors, given the peak to trough decline of 17% of the Canadian stock market and reduced earnings expectations heading into 2023.
The Fund continues to be positioned for a rising rate environment, with the largest sector weights being Financials, Industrials, Telecommunications, and Energy. However, investor sentiment toward equities remains negative, given daily headlines of a pending recession. For long-term investors, this is the time to take advantage of recession fear by buying high-quality dividend-paying companies with sustainable dividends.