Knowledge Centre

Q1 2023


There are signs of hope emerging for global growth, but risks remain. The outlook for this year has perked up thanks in part to increased consumer confidence, the recent decline in energy and food prices, as well as an earlier than expected reopening in China. While economic activity is currently below trend, supply chains have improved, and commodity prices have lowered. Additionally, uncharacteristically warm temperatures in Europe have reduced the risk of an energy crisis and therefore reduced the risk of a recession also. While central banks are taking away the punchbowl quickly, the bottom line is that the economy is quite resilient and is better than expected.

Canada is expected to generate superior growth compared to G7 peers due to its rich resource diversity and historically positive expected returns during inflationary times. While the economy is slowing, interest rate increases appear to have reached their crescendo and inflation is subsiding (in fact, since July 2022, inflation has averaged only 2.9%). There is growing confidence that this year is starting on a better footing. The Bank of Canada continued its conditional commitment to leave its interest rate policies unchanged considering the recent banking turmoil globally. Given that the labour market is sending precisely zero signs of economic stress and consumer spending is holding steady, then in a very real sense most of Canada’s major recessionary pressures may be behind us.

The U.S. economy maintained a moderate pace of growth as consumers boosted spending on goods and personal savings is still far above normal thanks to government COVID-19 handouts and cutbacks in lockdown consumption. However, momentum appears to have slowed considerably with higher interest rates eroding demand. Still, the labour market remains strong, and housing is now stabilizing despite the U.S. Federal Reserve’s fastest monetary policy tightening cycle since the 1980s.

The international growth outlook has improved slightly due to an apparent peak in European inflation thanks to declining energy prices and an easing in food price pressures, which could be a sign that the worst might be over for weary consumers. The U.K. is likely to be the only major advanced economy to fall into a recession, as households struggle with rising living costs, especially energy and mortgages. The reopening of China’s economy after abandoning its strict COVID-19 restrictions is projected to sharply push up growth. At the same time, India’s outlook remains robust. Combined these two Asian powerhouses are expected to be responsible for over 50% of global growth in 2023.

International equities have started to outperform Canadian and U.S. equities beginning in 2022 for the first time in several years. For the most part the recent upswing in stocks has occurred as investors pushed money into out of favour, beaten up and lower quality securities. In the first quarter of the year Canadian stocks gained 4.6% (all figures in Canadian dollar terms). U.S. stocks climbed 7.4%; while international stocks surged 8.6%. After a dominating January jump, Emerging market stocks gave back much of their success for the quarter, gaining only 3.9%. Canadian bond also resumed their recovery gaining 3.2% for their best quarterly increase since the second quarter of 2020.

The outlook is slightly more optimistic than previous forecasts though the global economy remains tenuous. Fragility remains from risks such as the ongoing war in Ukraine, persistent inflation of service costs and financial market turbulence. The improvement in the near term outlook reflects China’s post COVID-19 reopening, a material easing of the European energy crisis and surprising resilience in U.S. consumer demand that is providing strong support for markets to rebound meaningfully.


The Canadian economy started the year by defying expectations of a slowdown. January saw GDP expand 0.5% which was above Statistics Canada estimates. Preliminary forecasts for February are also positive. The strength of the economy coupled with a relentless job market has made the Bank of Canada’s (BOC) mandate of controlling inflation and avoiding a recession more difficult. There are, however, clear signs that the fight against inflation is going in the right direction. Rate sensitive pockets of the economy such as housing have already cooled. In March, the Bank of Canada declared a conditional pause for rate hikes and expects the pace of hikes to slow amid weaker inflation.

On the street, the S&P/TSX began 2023 strongly with a 7.4% gain in January after a difficult 2022. The rally did not last amid fears of an economic slowdown and sticky inflation, causing the index to give back some of the January gains in February and March. Despite the collapse of a few the regional banks in the U.S. adding to market turbulence, the S&P/TSX still managed to close the quarter positively with a 4.6% gain. All sectors but Energy advanced with some cyclical and defensive sectors being particularly strong. Technology strongly led the pack with 23.6% gain in Q1 2023, supported by the change in BOC’s policy stance. Materials gained 7.5% as the prolonged war in Ukraine continued to curb the supply side of global crop inventory; and crops benchmarks have seen repricing above their ten-year average which is favourable for the increased use of fertilizers. Gold’s rally was also beneficial for the sector and can be largely attributed to a sizeable drop of the U.S. benchmark 10-year yield, a bullish signal for Gold. On the flip side, Energy lagged with a 5.4% loss for the quarter. Two opposing forces, the reopening in China; a catalyst for higher demand, and concerns of recession were the main drivers. Investors shied away from the sector as global central banks’ determination to reduce inflation appeared likely to induce a recession, an impetus for slower energy demand.

Although easing inflation and strong GDP numbers has given the Canadian economy a nice head start, investors should pay heed to the old saying “as inflation goes, so will central banks”. There have been signs of cooling inflation in the last few reports but to expect a sharp policy reversal from central banks at this stage may be premature. For the BOC, conflicting signals of positive GDP and negative business sentiment indicate the challenge of accurately assessing the true impact of rake hikes on the economy, although there appears to be progress towards the neutral rate. Amid geopolitical uncertainties, the monetary path ahead for global central banks is uncertain but will closely depend on the state of inflation. Investors should brace for more turbulence and measured return expectations.


Fixed Income provided relief to investors in the first quarter of the year, with the FTSE returning 3.2%. However, there was positive news for bond investors as The Bank of Canada held the target for its overnight rate unchanged at 4.5% in its March 2023 meeting and stated that it should continue to hold this rate at the current level if economic conditions develop broadly in line with expectations. Considering that the overnight rate was a mere 0.25% at the start of 2022, this pause is widely welcomed by investors.

South of the border, the U.S. Federal Reserve raised interest rates again in March 2023 to a new range of 4.75% – 5%, the eighth increase in one year and the highest overnight rate since October of 2007. As in Canada, these rate increases have a sole purpose and that is to combat inflation. Fortunately, the U.S. is also seeing some progress. Although significantly higher than the long-term target of 2%, February’s inflation figure of 6.1% is the lowest since September of 2021 and a far cry from its peak level of 9.1% in June 2022.

Despite a bumpy ride in 2022 the economy is showing signs of progress. The unemployment rate in Canada held steady at 5% in February 2023, up from the record lows we observed in June and July of 2022 but still positive for the economy. In the U.S., unemployment is even lower; at 3.6%. However, some caution is advised for investors as inflation tends to rise faster than it falls, and economic signals can change swiftly.

Following consecutive years of negative bond returns and the worst single year for bonds in over half of a century, fixed income securities are expected to rebound. World renown investor Peter Lynch once said, “Know what you own, and why you own it.” Fixed income investments play an essential role in a well diversified investment portfolio, providing income generation, diversification, capital preservation and flexibility. In a choppy / volatile market environment, these traits become even more valuable to the investor.


After a year to forget, 2023 began impressively with the S&P 500 returning 6.6% in January alone. There’s an old Wall Street adage which says that the direction of the stock market during the first five days of the year can give us a rough expectation for the year to come. With the daily headlines of regional bank failures, earnings misses, large layoffs in the tech industry and a potential recession, investors are hopeful that the saying rings true again.

As COVID-19 fades into the background and the war in Ukraine continues, warnings of a recession and sky-high interest rates have dominated the news cycle. In 2022, we saw unprecedented increases in the rate of inflation and as consequence, we entered into a restrictive monetary cycle which saw the Federal Reserve raise interest rates throughout the year to a new range of 4.75% – 5% in March of this year, the highest since October 2007. The current cycle might bring to mind scary memories for equity holders as 2008 saw one of the worst calendar year returns in market history, with the S&P 500 falling 37% (only to rally sharply over the following five years; $1,000 dollars invested on the first day of 2008 would have grown to $1,437.47 by 2013 despite an abysmal 2008 for stocks).

Although the rate hikes are a tough pill to swallow, they are necessary. If inflation is not contained, prices would continue to rise and introduce the potential for hyperinflation which, in addition to massive losses in purchasing power and employment, could lead to economic instability, even social and political tensions. As rates rise, companies which need to borrow money to invest in research and development, marketing and other critical activities will see their profit margins shrink and, in some cases, fail.

We witnessed a prime example this past March with the collapse of Silicon Valley Bank (SBV), a bank which primarily finances hedge funds, venture capitals and tech startups. The bank stepped outside of its risk limits and paid the ultimate price. Although scary in this environment, the SVB collapse came down to company-specific negligence, not a systemic flaw. The U.S. Justice Department, the U.S. Attorney’s Office for the Northern District of California and the Securities and Exchange Commission are all investigating SVB for wrongdoing. The company did not even have a risk officer for most of 2022. This is a stark contrast to the 2008 financial crisis which was caused by a combination of factors including the widespread issuance of risky mortgages and the securitization of those mortgages into complex financial instruments which were then bought and sold by investors around the world.

The Fed has a dual mandate in Keeping prices stable and maximizing employment. It has been ratcheting up rates since March of 2022 and we are seeing signs of significant progress in lowering inflation. Although significantly higher than the long-term target of 2%, February’s inflation figure of 6.1% is the lowest since September of 2021 and a far cry from its peak level of 9.1% in June of last year. We are also seeing the labour force strengthen with the participation rate inching higher to 62.5%, the highest since March 2020. It’s as clear as day that inflation is the primary battle for market participants and although slow moving, price stability looks to be on the horizon. As prices come down the odds of rate increases fall dramatically and that is exactly what is required for a strong market rally.


Global markets and international economic data are starting to provide a strong indication that the worst is likely behind us. Growth continues to be underwhelming, weighed down by still high inflation, tightening financial conditions, and wavering consumer confidence. However, labour markets are still resilient and the potential of an end to increasing interest rates are adding to a validation of a recovery. The outlook is less gloomy than originally predicted as the worlds economies have displayed some unexpected resilience.

Surprisingly strong services growth has meant the recovery in European business activity is gathering steam for the first time in eight months, thanks to easing supply bottlenecks and improved underlying demand. Still, Europe’s economy barely expanded in the last quarter of 2022 and narrowly avoided a recession. There should have been below zero growth, but Ireland’s surging growth offset negative performance in other European countries and distorted the overall picture. Inflation is down from its peak due to a huge drop in natural gas prices, but it remains persistent and is triggering workers’ demands for higher pay. This has forced the European Central Bank to carry through with a large interest rate increase, underlining its determination to fight high inflation with further hikes.

The U.K. narrowly avoided a recession last year and they are the only G7 country that has not fully recovered the output lost during the pandemic. Even so, a recession is now likely to be underway and could wind up extending into early 2024. The U.K. are probably going to be the only major economy to shrink this year even as the outlook for the rest of the world improves. Compounding their problems is inflation reaching a 41 year high; manufacturing and construction stalling; and household spending is floundering. The Bank of England is forcefully increasing interest rates in order to fight inflation which is fuelling a cost-of-living crisis that has led to the U.K.’s biggest drop in living standards since the 1950s.

Japan narrowly avoided a recession last year. Looking ahead, growth should pick up slightly as spending by domestic travelers and foreign tourists continues to support the economy. Government subsidies to reduce utilities costs should also slow inflation and increase household disposable income. Japan has seen inflation ramp up to its highest reading since December 1981 but that is still much lower than in Europe or the U.S. The Bank of Japan is maintaining its monetary easing framework for the time being while managing the heaviest debt burden in the industrialised world. Japan’s aging and declining population has developed over decades and is rapidly devolving into a serious problem that could completely stifle growth in the future.

Once again, international equities had another scintillating quarter which follows the best quarterly results in the fourth quarter of 2023 since 2009. Unfortunately, stocks have not yet surpassed their previous highs set in mid-2021. International stocks as a whole surged 8.6% in the first quarter (all figures in U.S. dollar terms). European stocks climbed 9.9% lead by France and Germany’s 14.7% and 14.8% respectively; while U.K. stocks had a fairly good quarter gaining 6.1% and Japanese stocks rose a slightly better 6.3%.

With recession fears fading, optimism about the year ahead has improved. While the future looks better than feared for the global economy, it still remains fraught with risks including an escalation of the conflict in Ukraine and the emergence of a transatlantic trade war. One possible risk is tied to China’s re-opening with its potential to heat up global demand and prices for energy, triggering a new wave of inflationary pressures only months after the recent bout has started to recede. However, compared to the previous bleak outlook, some calm returning to the markets will be very welcomed.


The economic outlook for emerging markets is looking far more encouraging, particularly for countries such as China, India, Mexico, Vietnam, and Brazil. Last year there was a lot of the bad news in the market, after a dry patch, investors are starting to tip-toe back into stocks, aided by China’s reopening and softening inflation pressures worldwide. A peaking U.S. dollar, greater clarity around key political events and structural shifts across the regions are just the type of inflections in market sentiment that have historically led to an improvement in growth and earnings.

China is such a dominating presence on the emerging markets landscape (comprising 32% of the marketplace) that if it outperforms, it will pull other economies higher. With its 180 degree turn on COVID-19 and other policies, the world’s second largest economy is setting the stage for a broad based rally. China’s economy is expected to rebound in 2023 and monetary policy will focus on supporting domestic demand expansion, stabilizing economic growth, employment and inflation. The greatest potential of the Chinese economy lies in the consumption by the 1.4 billion people who are sitting on piles of cash as they struggled during the pandemic. Household spending accounted for 38% of Chinese economy, almost half that of the U.S. If this divergence could be shifted then the upside potential would be huge.

So while inflation and interest rates have risen, the magnitude of these rises have been much less dramatic than in the developed markets. As such, Asia is expected to be the largest contributor to overall emerging market growth, led by India, Indonesia, Malaysia and the Philippines. India has proven to be very resilient and like much of the emerging world, inflation picked up a little, but much less dramatically than the developed world and now looks to have peaked. For many countries like India, Mexico and Vietnam, inflation has been on a long and downward. As growth takes hold, Taiwan and South Korea should be beneficiaries of a recovery in the semiconductor and hardware technology sectors. Commodity base countries like Brazil could be the first regions outside of China to enter an easing interest rate cycle in the near future.

The outlook for many other emerging market countries is not as promising as a fresh round of International Monetary Fund (IMF) bailouts is under way. Three debt laden countries: Egypt, Pakistan and Lebanon have been forced to drop their exchange rates to unlock IMF assistance. Argentina has been trying to stave off another sudden devaluation. This may be just the beginning with at least two dozen nations queuing up before the IMF for rescue packages. Rising global interest rates and higher commodity prices have exposed many developing countries. The spike in inflation has enhanced the risk of political and social instability.

Emerging market stocks had a solid first quarter jumping 4.0% (all figures in U.S. dollar terms). Which is a good follow up on the 9.8% gain in the fourth quarter of 2022. However, despite these gains, Emerging Markets still have a long way to go to surpass their previous market peak from mid-2021. Asian stocks climbed 4.7% in Q1 2023; Latin American stocks gained 4.9% in the quarter, while eastern European stocks appeared to have bottomed after last years decimation, as they were up 4.0% so far this year.

The recent bear market for emerging market equities resulted in five straight quarters of negative returns which appears to have ended in the third quarter of 2022. The last time that occurred the index rallied more than 80% during the following year. Given that emerging market stocks currently have valuations that are near the lowest levels since 2007, the potential upside rally could be highly rewarding.


2023 started with increased optimism in the REITs sector that the pace of the rate hiking cycle would slow amid moderating inflation. After navigating through a challenging 2022, Canadian as well as Global REITs outperformed their broader equity peers in January, reversing sharp downward pressure over the past twelve months. The interplay between inflation and central bank policies, as well central bank forward guidance was the primary focus for investors. Any positive sign of these measures was a catalyst for REITs to rerate their deep discount. The optimism at the start of the quarter receded in the last two months as investors grappled with the prospect of an unwavering monetary tightening trajectory. Most global REIT markets gave up some of their initial gains although they finished the quarter with positive returns of 4.34% for the S&P/TSX REITs Index and 0.85% for the MSCI World REITs Index in Canadian dollars terms.

In Canada, the S&P/TSX REITs outperformed the broader S&P/TSX as of February but stumbled during a rough March to fall slightly behind the S&P/TSX which finished the quarter up 4.55%. After a strong 2022, investment activity looks to be resilient in the coming months with more than $58 billion expected. But the sector faces challenges related to tougher financial conditions and the risk of an economic slowdown. These headwinds are disparate across sub-sectors with the office market exhibiting the most weakness. The office market is still far away from reaching pre-pandemic levels. Vacancy rates are on the rise and CBRE Canada (a commercial Real Estate services and investment company) estimates that nationwide, office vacancies hit a record 17.1% at the end of last year- a sticky trend due to hybrid and remote work becoming the new normal. For now, Industrials and Apartments are the backbones of the REIT rebound. Industrial space continues to be the most sought after for eleven consecutive years. The apartment sub-sector remains very positive with housing affordability a growing issue. The specter of elevated home prices for most households, coupled with increased immigration has propelled rents to unprecedented levels. In a recent report by the Royal Bank of Canada, the country needs more than 300,000 new rental units over three years for a balanced rental market. Until that daunting objective is attained, rents will stay higher and supportive to the apartment sub-sector.

On the global stage, most sub-sectors of U.S. and International REITs reversed their January gains in the last two months of the quarter and continue to exhibit mixed fundamentals. In the U.S. particularly, Industrials, Retail and Apartments have seen rent growth similar to pre-pandemic level. Likewise in Canada, the struggle in the office sub sector has yet to abate with occupancy at around 50%, despite stricter return to office polices enacted by some large corporations such as Amazon and Disney. The industrial sub-sector in US has become expensive and risky over the last few years as historically low vacancy rates, especially in the e-commerce space, has attracted excess capital and outsized developments. Encouragingly, the logistics subspace (such as storage terminals) present better pricing alternatives.

The unambiguous signals from world central banks to curb inflation by almost any means necessary will continue to be the focus in the upcoming months. The Bank of Canada is expected to keep its policy rate on the higher side until evidence of sustained cooling inflation emerges. There is growing speculation in favour of a soft landing for the Canadian economy, bolstered by an upward trend in total employment even though GDP is forecasted to contract this year. Most forecasts for global economies in 2023 are skewed toward some form of contraction. The regional U.S. banking crisis in the latter part of the quarter has not exploded into a worldwide crisis. However, it is creating another challenge for Global REITs already embattled with higher costs of capital. Thus expectations for subdued returns in the months ahead appear more likely.

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