Friday, April 9, 2021

Q2 Outlook

 A reversal to reason seems to have started this quarter as old economy stocks finally started to move higher expecting a return to better times ahead. Most developed economies are rebounding taking with them traditional investments based on P/E ratios and dividend yield which far exceed what you might get in fixed income like government bonds or GIC's.  The best indicator of this is that Canada outperformed (TSX returned 8.1%) compared to the US market (S&P500 4.7% in Canadian funds).

The index was led by Health Care, Energy and Financials while Materials and Information Technology were negative. Utilities were an interesting case in the quarter. Overall, they were positive, up 2.4%. But renewable power generators, which had garnered a lot of attention from the swing in environmental policies of the US government, had outperformed traditional utilities. This too reversed in early January as earnings were not keeping up with valuations and traditional utilities outperformed by more than 6% in the quarter. This is a good reminder that any sector, no matter how positive its long-term potential, can become overvalued in the short term based on over enthusiastic investor sentiment. 

Interest rates continued to rise in the quarter from the lows established last summer. But 5-year rates still at less than 1% pale in comparison to equity portfolios with dividend yields well over 3%. Our focus on companies with economically fundamental businesses that provide steady dividend growth has not waivered. Companies we hold in the Telecom, Energy and Pipelines sectors increased dividends during the quarter and portfolio income continues to grow.

Fragility of the international trade system has been highlighted not only by the pandemic and vaccine production but also by international relations and the recent blocking of the Suez Canal by a stranded container ship. 

Merger and acquisition activity seems to be perking up and your portfolio benefited from holdings in the Telecom sector in the quarter as Rogers Communications made an offer to purchase Shaw Communications. Regulatory review is yet to be completed in this merger which would result in Rogers becoming a nation-wide Telecom provider.

We stay cautious as this unbelievable run continues while Ontario records the highest COVID19 case load. We are also having slow administrative response from some of our custodians. Your patience is highly appreciated.

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