Knowledge Centre

Q2 2023


Despite the best efforts of central bankers around the world to ratchet up the gloom, economies keep churning out upbeat numbers, especially on the jobs front. Recent enthusiasm has been primed by the belief that interest rate hikes are ending, inflation has been tamed, a soft landing is likely, and key interest rates will start to tumble over the next year. Still, 90% of the world’s advanced economies are expected to grow less this year than last year. Medium term growth forecasts are the lowest since 1990. While the path back to robust growth will likely be rough and foggy, the sun should shortly peak above the horizon.

The lowest inflation rate since 2021 will come as cold comfort to Canadian consumers who have seen prices rise by 14% in three years, but clearly the tide has turned on this front. The Bank of Canada has not declared that rate hikes are a thing of the past…yet. After cranking up its key interest rate to a 22 year high of 4.75%, the economy has proven to be more resilient than expected. Employers have been defying gravity and are continuing to hire, consumers are spending more, and the economy is growing.

The U.S. stock market is showing surprising resilience despite rising interest rates, chronically high inflation and a banking crisis that could weaken the economy. The economy continues to generate gains and the unemployment rate dipped to a 54 year low. Conversely, there is pressure on wages, manufacturing is in contraction, and retail sales are falling. The Federal Reserve could still do a little more tightening after kicking off a historically aggressive round of tightening with 10 hikes in March 2022, but it is not clear how much until the inflation picture becomes clearer.

Growth in Europe is at best stagnating and inflation has been moderating for months due to lower energy prices and the steepest increase in interest rates in the European Central Bank’s 25 year history. Unemployment is at record lows and wage growth is picking up, even if it still lags inflation. Europe’s business activity has been bolstered by the dominant services industry offsetting a deepening decline in the manufacturing sector. Despite these headwinds, Europe’s prospects are becoming much more favourable. On the other hand, the outlook for the U.K. remains subdued as economic activity has slowed significantly, and inflation remains stubbornly high.

Japan is escaping the era of deflation / low inflation on a sustained basis as wage increases are climbing significantly for the first time since the early 1980s. Japan appears to be on a positive trajectory. India and China are bright spots as they are expected to account for half of global growth in 2023. Other emerging markets including Brazil, Mexico and Russia are seeing substantive improvements as well. While central banks in the developed markets are not expected to cut rates soon, many emerging markets have already flipped the switch and have started lowering rates.

Besides the U.S. stock markets stellar 6.4% gain in the second quarter (all figures in Canadian dollar terms), the most any other major markets could eke out was 1.0% or less. The second quarter was lukewarm for equities but does not diminish the fact that stocks are performing very well this year in the face of a wave of indifference. The Canadian market generated a reasonable 5.7% so far in 2023. While the U.S. surged ahead 14.3% year to date on the back of giant technology stocks. International equities also did very well, climbing 9.7% over the past six months while emerging market stocks gained only 2.8% YTD. Despite a negative second quarter, bonds are still returning 2.5% so far this year.

The economic outlook is less precarious than it was three months ago. Headline inflation has decelerated sharply on the back of falling energy prices. However, massive interest rate hikes typically exert their effects over 18 months so a recession cannot be completely discounted. On the other hand, if a recession does not materialize then investing in the stock markets will be even more appetizing.


The Canadian economy has proven surprisingly resilient amid one of the most intense interest rate tightening cycles in its history. Six months ago, heading into 2023, many analysts were predicting a recession by the middle of the year on the backdrop of Bank of Canada (BOC) aggressive rate tightening. Now halfway through 2023, the broader macroeconomic picture shows an economy with many buffers defying recessionary calls. GDP numbers came in above expectations in the first three months of the year, fueled by consumer spending. The labour market has softened slightly but has still generated steady jobs overall in 2023. The unemployment rate remained at 5% for five consecutive months before rising slightly to 5.2% in May. Although the BOC might have underestimated the resilience of the economy, its determination for higher rates has been effective as inflation plunged to 3.4% in June; the lowest level in two years.

Despite the resilient economy, investor sentiment has been on the negative side in Canada. One of the most popular convictions echoed during the latter stages of 2022 was the outperformance of the S&P / TSX versus S&P 500 in 2023 due to the S&P / TSX’s value bias. However, investors became wary of the resource and commodity heavy S&P / TSX as global growth, especially China’s recovery post-covid, disappointed. The index closed the quarter up only 1.10%. Year to date gains amounted to a decent 5.7%, although this significantly lags the S&P 500’s 14.68% year to date gains in Canadian dollars terms.

Technology has carried the load of positive returns, up 40.1% year to date. Reports of slowing inflation and hopes that central banks will soon shift to lower rates has propelled the rate-sensitive technology sector into leadership territory. Despite inflationary pressures, discretionary spending has not pulled back for some households with higher savings. The sector held strong with a 10.1% gain while Industrials also contributed a gain of 8.3% for the first six months of 2023. Energy detracted most from the index with a 7.2% loss while some rate sensitive sectors such as Telecoms weighed negatively, returning -1%. Noteworthy is the financial sector, which posted a meager 1.5% gain in the first six months of the year. That performance fell short of expectations especially in a favorable high rate environment for Banks. However, Financials, especially Banks, are well protected against potential headwinds including mass mortgage defaults and Canada’s highest level of household indebtedness among G7 countries.

The fight against inflation in Canada appears to be going in the right direction as the annual inflation rate has been cut in half since the first hike in 2022. However, it would be premature to assume that the BOC will take the foot off the pedal very soon, even after the interim pause from March to June. The latest CPI (Consumer Price Index) number, which rose 3.4% year over year in May following a 4.4% increase in April, indicates a downward inflation trajectory albeit far from the BOC’s 2% target rate. After rate hikes of more than 400 basis points in fifteen months, signs of peak rates have emerged. Statistics Canada estimates that the economy might start to cool in the next few quarters after a strong start to 2023. The OECD (Organization for Economic Cooperation and Development) has projected that the Canadian economy will underperform its global peers in 2023, growing 1.3% compared to 3.2% in 2022, amid rising costs of living. As for the markets, the S&P / TSX saw a dramatic trend reversal in 2023, as growth outperformed value by about 10%. Last year, value was stronger and there is little doubt that at the index composition level, the leadership will keep rotating between value and growth on the backdrop of the macro environment. Overall, the S&P / TSX has a lot of room to shine as it exhibits great value with a 16.4 P/E (price to earnings) ratio compared to 22 for the S&P 500.


After a strong first quarter, Fixed Income retracted in the second quarter of 2023 with the FTSE Universe Index returning -0.7%. Year to date, Fixed Income has provided a much needed reprieve for bond investors, returning over 2% after a dismal 2022 which saw the index lose nearly 12% of its value (the worst performing calendar year in nearly fifty years). Credit spreads have been widening so investment grade, long-term government bonds have outperformed high yield instruments as investors search for quality. Investment grade bonds are the highest quality bonds as determined by a credit rating agency, whereas high yield bonds are typically more speculative, leading to a lower credit rating.

As we know, the price of a bond is dictated by supply and demand, coupled with interest rates and the rate of inflation. The picture for inflation has cleared up significantly in recent months with Canada’s rate of inflation dropping to 3.4% in May; down from 4.4% in the previous month and at its lowest level since June 2021. The Canadian economy expanded at an annualized rate of 3.1% during the first quarter beating forecasts of 2.5%. Growth in household, discretionary spending was offset by declines in housing investment and the rising price of groceries.

The somewhat normalization of inflation is huge for investor confidence and in line with the Bank of Canada’s (BoC’s) baseline scenario that inflation would slow to 3% by the summer months, decreasing the likelihood that interest rates would continue to increase. The slowdown in inflation can largely be attributed to a slowdown in transportation prices and a relief in pressure on supply chain bottlenecks. As consumers are paying less for essentials, discretionary spending and investing are becoming more compelling uses for one’s capital. Even as the price for goods continues to fall, real estate continues to become more expensive. The BoC’s rate increases have driven the sharpest spike in mortgage rates in the country’s history. Canada’s latest rate increase occurred in June with the target rate increasing to from 4.50% to 4.75%, the only increase thus far in 2023.

South of the border, the Federal Reserve also lifted their key rate by a quarter percentage point to a range of 5.00% to 5.25%, the highest level since 2006. Like Canada, the rate of inflation in the United Staes has cooled considerably to a six-month low of 5.3%. Similar to the BoC, the Fed is taking a wait and see approach before calling for a full stop to further rate increases and, like Canada, the signs are encouraging.

However, there is still reason for caution. We continue to see one of the unfortunate side effects of price increases in labour markets. Average weekly earnings of non-farm payroll employees in Canada have risen materially and with that we are seeing an increase in unemployment rates in some sectors of the labour market. Until it is clear to central banks that inflation is under control, the uncertainty of increases will remain in the minds of investors everywhere.

The market has proven to be resilient already and as prices continue to cool and inflation continues to normalize we should continue to see confidence in bonds as they make a comeback. Investors should be keen to invest in fixed income products before the tide fully turns and money starts piling into undervalued markets such as high quality fixed income.


After a difficult 2022 for U.S. equities, the second quarter of 2023 has rewarded investors with the S&P 500 returning 12.1%. Most of the positive performance occurred in June when the S&P 500 returned 6.5%. The S&P has surged over 96% since the COVID trough in March of 2020. Since 1950, on occasions where the S&P 500 returned between 10-15% in the first half of the year, the index has always produced a positive return in the following two quarters.

Leading the charge were technology and growth stocks which investors may find a tad surprising given the Federal Reserve’s latest rate hike at the beginning of May. This lifted the country’s key interest rate figure by a quarter percentage point to a range of 5.00% to 5.25%, the highest level since 2006. Despite higher rates and sky-high price to earnings ratios, technology giants NVIDIA Corporation (+151%) and Meta Platforms, Inc. (+134%) were the top performing stocks for the quarter. They were driven by the all too popular artificial intelligence theme in addition to strong earnings reports and analyst’s positive long-term outlook on the sector. The eight largest companies in the S&P 500 are technology companies and as of June 30th, Information Technology made up 28.3% of the market index, highlighting the sector’s importance. Eight out of the other ten sectors produced positive returns for the quarter, with Utilities and Energy companies being the only losers. As eye catching as the run up in growth stocks has been, dividend paying stocks also chipped in with a strong second quarter.

Despite a strong first half to the year there are reasons to remain cautious. Although the Federal Reserve put a pause on rate increases in their latest meeting, they also signaled that this might not be the end to the restrictive monetary policy which pushed rates to where they are now. If inflation were to start ticking back upwards, the Fed will not hesitate to raise rates again, a scenario best avoided. The Fed continues its mission of reducing inflation without sparking a recession. The yield curve remained inverted for the fifth consecutive quarter, leaving the door open for a recession and emphasizing the Fed’s responsibility to stay committed in maintaining the purchasing power for the U.S. investor.

On the inflation front it has been a mixed bag but quite positive overall. Inflation declined to 4% in May 2023, the lowest in fourteen months. As the EU continues to lessen its dependence on Russian oil and gas, prices have cooperated. The cost of energy slumped by double digits amid sharp declines in the price of fuel oil, gasoline, and natural gas. After a 20% drop in fuel prices for April, prices fell a staggering 37% in May alone. Unemployment rose to 3.7% in May, but the jobless rate remained historically low, signalling a tight and healthy labour market.

Looking forward, there is reason for optimism. The Fed is focused and has not taken its eyes off inflation, reminding us at every opportunity that the battle continues. Fears of hyperinflation are no more and for the most part, COVID-19 is a thing of the past with restaurants and shopping malls back at capacity. The relief in Energy prices is a massive boost to the economy, especially as the summer months approach where travel demands peak and discretionary spending typically rises.

The U.S. market has shown resilience as the fears of contagion following a regional bank collapse during the first quarter were quickly pushed aside once it became clear that the Silicon Valley Bank (SBV) failure came down to company-specific negligence, not a systemic flaw. As we continue to see prices come down, market participants will become increasingly confident that price stability is possible, and rates will come back down to earth likely spurring a broader market rally.


The global economic outlook is less precarious than it was a little while ago. Inflation has decelerated sharply on the back of falling energy prices while core inflation has also begun to decelerate. The risk of regionalized recessions is declining however it is likely that growth will be less than other areas in most developed economies over the next year. Labour market conditions remain tight but holding firm. Consumer confidence remains in the doldrums, but once the tsunami of negative headlines unleashed by popular media flatlines, the outlook should drastically improve.

The European economy continues to show resilience in a challenging global marketplace despite the fact it did fall into a technical recession on weak German results over the winter. Growth in business activity has sped up as robust services more than offset a 10th consecutive monthly downturn in manufacturing. Europe’s painful inflation rate has been falling from its peak but is still running over three times its target level. This is keeping the pressure on the European Central Bank to continue to raise interest rates.

The cost of food in the U.K. rose at the fastest pace in 45 years keeping inflation among the highest in the industrialized world. Britain’s withdrawal from the European trade bloc is a major contributor to the country’s inflation and economic problems. It has had exacerbated strains on supply chains and labour markets throughout the recovery from the COVID 19 recession. Brexit has also cost the British labour market more than 300,000 workers. The Bank of England has raised interest rates 11 times to their highest level since 2008 as it continues to combat stubbornly high inflation. While a recession is unlikely, vulnerabilities resulting from higher borrowing costs are likely to dampen business and household activity this year.

Most countries are fighting tooth and nail against inflation; yet Japan is doing the opposite. Japan is a country where deflation has been the dominant factor keeping consumers and companies away from investing. The Bank of Japan is unwavering in its stance of patiently maintaining ultra loose monetary policy and reassuring markets that Japan will be a dovish outlier compared with its global peers. Japanese stocks have reached their highest level in nearly 33 years as a direct result of low interest rates and a weak currency. While Japan’s economy grew in the first quarter, shifting economic policies may be signaling a dramatic change ahead as an aging population means that the labour supply is falling, and social norms could be transformed.

New Zealand s economy has dipped into recession as the central bank raised interest rates 12 straight times as it tries to tame inflation. Interest rates are at their highest level since 2008, making it more expensive for people to borrow money for homes, cars, and other purchases. One of the most notable affects has been on the housing market, which has seen prices fall 18% since their peak.

International equities climbed 3.2% in the second quarter and 12.1% for the year to date (all figures in U.S. dollar terms). Asian stocks jumped 7.0% in the quarter and 11.6% so far this year on the back of Japan’s stellar results. European stocks managed a small 1.3% in the second quarter and a very respectable 11.4% for the year. Many of the major European countries surged between 19% and 25% year to date; conversely the U.K. lagged behind but still achieved a respectable 8.4% for the year.

The global economy is proving more resilient than anticipated despite the prospect of interest rates staying higher for longer. Still there is strong evidence that economic activity in advanced economies has become less sensitive to interest rate movements over the last 30 years as nations and corporations become more globally diverse. The bottom line is that international markets have turned the corner and look to be on an upward trajectory.


Emerging markets were the first region to get hit by the COVID-19 pandemic. Their Central banks began their rate hike cycles nearly a year before the developed markets and were hiking at a much faster pace. As a result, recessionary growth conditions largely due to tightening, higher prices, and capital outflows, weighed heavily in 2022. Many countries began to gradually lower rates and as a result equities started this year strongly. However, they have experienced significant profit taking since then. As Emerging Markets are face mounting pressure, stock market valuations are reaching some of their most attractive levels ever.

The end of China’s zero COVID-19 policy has bolstered its economic prospects and is improving the growth prospects of Emerging Markets overall. China’s first quarter growth was the best in a year, with surprising strength of retail sales as the government’s efforts toward consumption appeared to be taking hold. Unfortunately, since then China’s economy has stumbled. All indicators are pointing to insufficient domestic and sluggish external demand which has weakened momentum. Because consumer prices are climbing at the slowest pace in more than two years, the central bank has cut some key interest rates for the first time in nearly a year. However, despite these short term economic setbacks the reality is that China is still on track to be the top contributor to global growth over the next five years.

Emerging Markets have struggled to embark on a sustained rally as China’s economic recovery lost steam. Meanwhile, the number of smaller emerging government defaults has risen to record levels, resulting in frantic efforts to accelerate the sovereign debt restructuring process. Still, some countries like El Salvador, Nigeria and Turkey are turning the corner from domestic troubles and have much greater potential upside from a financial market point of view. Others are about to join the parade of declining central banks interest rates, such as the Philippines, Malaysia, and Indonesia.

With the peak of inflation in the past for many countries, monetary tightening cycles are reaching the latter stages. For some emerging market countries which have already been exceedingly aggressive with rate hikes (Brazil, Mexico, Chile, Uruguay, Colombia, and Hungary), they are all beginning to cut rates from double digit starting points. Even serial defaulter Argentina has seen its bonds rally in advance of the nation’s upcoming elections which will allow a new administration to potentially deliver market friendly priorities that will reverse the current government’s agenda that caused inflation to spike above 100%.

Emerging market equities eked out a 1.0% gain in the second quarter and 5.1% so far this year (all figures in U.S. dollar terms). Latin American and Eastern European equities have led the pack in 2023, rallying 18.9% and 25.3% respectively. Unfortunately, Asian performance slumped, losing -0.6% in the second quarter and gaining only 4.2% for the year due largely to the crushing decline in Chinese stock which fell 9.6% in the most recent quarter and are down -5.4% year to date.

The trajectory for emerging market countries over the last three years has been challenging. They trade at attractive valuations compared with other regions of the world and this discrepancy is expected to become even wider. However, demographic trends and urbanization are supportive of long term tailwinds for outperformance. Barring a major global recession, Emerging Markets are likely to enter a period of economic recovery beginning relatively soon.


The first half of 2023 marked a continuation of one of the most aggressive cycles of interest rate tightening in global economies since 1980. In a span of 15 months, starting from the first quarter of 2022, the Bank of Canada and Central banks around the world tweaked their key rates upward several hundred basis points. Curbing inflation gradually to its 2% target rate appears to be underway but that objective has yet to be reached as core inflation remains stubbornly sticky. The abrupt spike in rates has been bleak for commercial REITs over the last few months as most rely on relatively short term financing. Canadian REITs posted a -3.5% total return in the second quarter after a relative strong first quarter. Canada underperformed compared to its global peers as the MSCI Global REITs was also negative but only down 1.59% in Canadian dollars. Year to date, Canadian REITs lagged the broader S&P/TSX index with a sector return of 0.71% compared to 5.70% for the overall index. A recent report by Moody’s Investors Service indicated that Global REITs, including Canadian, will face increased headwinds over the next few months on the backdrop of tighter financial conditions.

The bear market persists in the office segment of Canadian REITS with little hope of recovery to pre-pandemic levels. While the resilient economy, along with a healthy job market, might bolster some rebound, the culture shift to work-life balance since the pandemic is not favourable to a full office rebound. Vacancy rates are in double digits and creeping higher. CBRE (a Real estate services and investment company) estimates that as of the first quarter the average office vacancy rate is 17.7%, which is an increase from 16,9% in 2022. For B-offices (less prestigious than higher quality Class A offices), the vacancy rate is worse at 22.7%. South of the border, the pressure is higher on the office segment with average vacancy rates more than 20%. In the U.S. alone it is estimated that there is a record 242 million square feet of sublease space available. According to Cushman & Wakefield (a global real estate service firm) 330 million of square feet of U.S. office space might become obsolete by 2030 if this trend holds. In Europe and APAC regions (Asia Pacific) the picture is relatively better with vacancy rates in the office segment in the 8-10% range.

Other REIT segments such as Industrials and Retails have experienced less severe declines. Canadian Industrials, notably warehouse and distribution centres, upheld their resilience of the last few years with consistent lease activity in major cities. The retail segment has seen post- pandemic growth despite inflation and recession fears on the backdrop of higher rates. As of the first half of 2023, vacancy rates have decreased across the country and retail rent has reached all time highs.

The fate of global REITs in the near term will largely depend on the economic and financial environment. Although regional fundamentals have been split between resilience and softness, the overall sentiment is on the negative side. Moody’s Investors Service lowered its expectations for global REITs sector to negative from stable in its latest report. Cyclical headwinds created by the elevated stress in the banking sector, especially in the U.S., combined with quasi-secular problems such as unused office space will be the main drag on the asset class. However, painting the global sector with the same brush will greatly overlook the diversity and unique fundamentals in select markets. For instance, the office segment in Canada is more concentrated than in the U.S. with relatively few well capitalized owners including pension funds and insurance companies. The financing is for the most part secured by these entities or large banks with solid balance sheets unlike in other global REIT markets. The long term investment approach of companies involved in Canadian REITs ownership and financing will likely prevent them from swift sell offs if the outlook deteriorates in the months ahead.

Contact Us

  • * Denotes Mandatory Fields