Outlook
The second quarter of 2022 observed a few developments that will impact the outlook for interest rates. First and foremost, inflation has continued to be stubbornly high. In 2021, global supply chain disruptions, vehicle price increases and rising oil prices were the primary sources of inflation.
The Russian invasion of Ukraine has put additional upward price pressure on the price of oil and other agricultural commodities. This further intensified inflation concerns in the year’s first six months. As a result, North American central banks have accelerated overnight interest rate increases.
In the second quarter, the Bank of Canada and the U.S. Federal Reserve increased interest rates by 1.00% and 1.25%, respectively. It is anticipated that both central banks will continue to increase interest rates throughout the remainder of 2022. Current expectations are for overnight interest rates to end the year at approximately 3.00%. These rate increases are used as a blunt tool to begin curbing inflation. At the start of the year, Matco’s expectation was for inflation to begin moving lower in the third quarter of 2022. The Russian-Ukraine conflict has extended this expectation to the end of 2022 or the first quarter of 2023.
While rising interest rates negatively impact the performance of bonds, preferred shares can be positively impacted. The Fund’s 14.2% allocation to preferred shares may allow the Fund to achieve capital appreciation in a rising interest rate environment.
The outlook for economic growth is also important for the Matco Fixed Income Fund. If growth remains healthy, corporate bonds will continue to perform well. The growth outlook for 2022 is for continued growth, albeit at a slower pace than 2021.
Due to the slower economic growth profile, we have reduced our corporate bond weighting from 45.5% at the beginning of 2021 to 35.4% currently. The Fund also has a strong income profile of 3.1%. As the outlook for fixed income performance remains modest, maintaining a healthy level of income will remain a key focus throughout the remainder of 2022.