Knowledge Centre

Q4 2021


As we enter a new year that is still being dominated by the pandemic, investors are looking for the best way forward. 2022 is set to bring some significant changes which may see COVID-19 move from being a pandemic to an endemic in many parts of the world largely thanks to vaccines and new treatments. As COVID-19 become less life threatening for developed countries, it may continue to pose a significant risk to emerging economies. Still, even amid incessant market concerns about inflation, supply chain constraints and rising bond yields that will feed the fear rhetoric and garner most of the headlines, the reality is that low interest rates, positive earnings and improving investor sentiment appears likely to continue to propel equities higher.

The Canadian economy rebounded strongly in the third quarter as consumers unleashed a wave of savings and Canadians went back to more normal spending patterns as restrictions eased. Canadian households are in good financial shape with the household savings rate at 11%, indicating that households are well prepared to deal with potential challenges ahead. The Canadian unemployment rate is at a pandemic era low, putting it within range of the lows of the past four decades. However, this outlook is rife with uncertainty. Annual inflation is running at an 18 year high on the back of global supply chain issues. Although the Bank of Canada will tolerate this kind of inflation, they will likely start to gradually raise interest rates. The main point to remember is that the enemy of the economy is not higher interest rates but rapidly rising interest rates.

The U.S. economy is likely to remain the primary engine of global growth in 2022. It grew at a slightly better than expected rate in the third quarter, following the explosive growth at the start of 2021. This newfound strength came primarily from stronger consumer spending and businesses rebuilding their inventories. However, monetary policy concerns continue to swirl as interest rates and bond yields rise. Still, an accommodative U.S. Federal Reserve, excessively low interest rates, potential peaking inflation, transitory supply chain issues and positive earnings growth remain a very good recipe for equities. 2022 seems to be the year the world shifts to learning to coexist with COVID-19 as variant outbreaks should have a diminishing impact on capital markets. While several countries in Europe and other parts of the world have introduced new restrictions in attempts to manage rising case counts, these are expected to be more temporary and isolated in nature. Instead, international markets more likely focus on reverberating shocks like rising inflation and supply chain snarls. Still, global deflationary forces, increases in business spending and productivity gains, are expected to keep inflation from spiralling out of control and allowing financial markets to appreciate further.

While financial markets are facing many normal mid-cycle problems (better growth colliding with higher inflation, shifting interest rate policies and more expensive valuations) it has not curtailed stellar performance. In fact, global stocks have more than doubled from the deep but brief pandemic trough of March 2020. Equities performance in 2021 was driven higher by the North American markets: U.S. equities surged upward 27.9% (all returns in Canadian dollar terms) and Canadian stocks climbed 25.1%. Global REITs led all security classes, soaring 28.8%. International stocks gained 11.0% last year, while emerging market stocks were the only losers falling 3.0%. Commodity prices spiked 39.6%; despite precious metals having their worst year since 2015. Global bond markets had their worst year since 1999 as Canadian bonds fell 2.5%, for only the fifth decline since 1970. With the Omicron variant disrupting a large part of the global economy now, it may just be the storm before the calm. COVID-19 may no longer have the same capacity to disrupt the world. The strongest phase of economic and market recovery from the initial pandemic has already happened, especially since global corporate earning did grow by 45% in 2021; it is likely to give way to a more normal period with the equity market maturing and leading to more modest returns.


2021 saw a dramatic rebound for some of the world’s economies and markets to near pre-pandemic levels. In Canada, both GDP growth and unemployment experienced one of the most staggering periods of growth of the previous nineteen months. A reassessment of growth numbers over the last few years revealed that 2020 GDP was higher than previously announced and preliminary projections for 2021 put GDP at more than 4%. The job market has been particularly stellar and has exceeded expectations most of the time. For instance, it quadrupled estimates in November with 154,000 new jobs. The unemployment rate is now back to near the pre-pandemic range of about 6%. The S&P/TSX responded strongly with streaks of consecutive winning days to close the quarter with a decent 6.5% return. Over the past twelve months, the index returned 25.1%, ranking it among the best performing indices across the globe.

The double-digit performance over the year should not overshadow the existence of downside risks. November alone saw severe declines, dragging the index marginally into the red after a hefty 5% handover from October. All sectors besides Health Care and Information Technology were in positive territory and as expected Cyclicals fared the best. Energy led the pack during the quarter with a 13.3% gain, followed by Materials and Financials respectively with 10.2% and 8.4% gains. On the flip side, Health Care was the biggest detractor with 21.0% loss while Information Technology posted 3.6% loss. As anticipated at the beginning of the year, value stocks, which dominate in Materials, Energy and Financials, were well positioned in this cycle to trounce stocks in other sectors. That prediction has been proven accurate as the value index’s return was almost twice its growth counterpart’s with respectively 30.1% and 15.7%. Financials were recently relieved from the regulator’s dividend and share buyback freeze so investors should see big dividend increases in 2021 from the Canadian major banks.

The rapid ramp up of the nation’s economy to near full employment amid labour shortages and supply chain bottlenecks ignited unprecedented inflationary pressures. The inflation rate at 4.4% (an 18-year high and initially thought to be transient), and the persistent rise of costs across the board in various sectors seem to indicate that inflation will be around longer. The Bank of Canada, in its last policy update, cemented that view and projected increasing its tapering pace initially, and then embarking on a series of rate hikes earlier than expected.

Though 2021 was the S&P/TSX’s best year since 2009, it still has outstanding potential to stretch the upside. Positive global macro, economic and sectorial factors set a favorable stage for Canadian markets at this point in the cycle. For instance, as demand bounced back from the pandemic, Canadian energy benefited enormously in 2021 despite sporadic retreats on the backdrop of new variants of Covid-19 such as Omicron. That trend is poised to persist along with protracted inflation. Historically over the last 50 years, the Canadian benchmark has been a good inflation hedge with positive returns when inflation exceeded 4%, compared to its counterpart south of the border which has had negative returns in the same circumstances. Even with the spectacular performance of value versus growth, the rotation appears to only be an initial leg up. The S&P/TSX is still trading at 15 times forward earnings versus the S&P 500; a 5-point discount. At this stage of the expansionary economic cycle, many stars seem to be aligned for the index to reach its full potential.


The FTSE Canada Universe Bond Index gained 1.5% for the fourth quarter of 2021 and fell -2.5% over the year. Yields on 10-year Government of Canada bonds fell below the 1.5% level at the end of the year as the Bank of Canada continued to keep its key interest rate unchanged over the quarter at 0.25%, The U.S. Federal Reserve also maintained its rate at between 0.0% and 0.25%, which is effectively zero.

The key question facing the bond market is when and how much interest rates will rise in 2022 given the recent high inflation numbers. As soon as the Bank of Canada believes it is losing the battle on inflation and needs to raise rates it will take interest rates higher, regardless of whether the U.S. Federal Reserve is ready to do the same. Over the past 25 years Canada’s central bank has boosted its key rate independently of the Fed on only three occasions. Implied future rates in the bond market suggest it may happen again in 2022. Some say low rates are not fueling inflation this time and raising rates won’t help bring inflation back to its target of 2%. Others note that rate tightening is the Bank of Canada’s best tool, and it will use it to save its reputation as an inflation fighter. While we can expect some divergence between Canadian and U.S. rates, it should not be excessive as that would drive up the loonie and hurt Canadian exports.

The 12-month inflation rate in Canada rose a modest 0.2% in November to 4.72%, the highest inflation rate in 30 years and a fact that quickly found its way into headlines. The single biggest source of inflation was gasoline prices which were up a whopping 44% from a year earlier but these staggering increases are expected to become tamer over the course of 2022. Excluding energy and food costs, the two components of inflation that are prone to sharp price swings, November inflation for the balance of the consumer price index was 3.1%, just above the top end of the Bank of Canada’s 1 to 3% comfort range. Bets in the overnight swaps market are increasingly tilting toward a move this year, well ahead of the U.S. Federal Reserve. Traders have now priced in three hikes in Canada by the end of 2022, which would bring the policy rate to 1% from the current 0.25%. Before Omicron led to fear of more shutdowns, the futures market was expecting four to five hikes in Canada.

Some time ago the U.S. Federal Reserve said interest rates would remain near zero until 2024 but more recently it said it would end bond purchases earlier than forecast and likely raise rates three times this year. The Bank of England went one step further as it became the first central bank in a major economy to hike rates. When the Fed finds that it is behind the curve on inflation, which just surged to a three decade high of 6.2% in the United States, the Fed will likely catch up to the Bank of Canada. While the Fed expects inflation to ease by the second half of the year, monetary policy makers are watching inflation expectations and labour costs so they do not cause a spiral of price increases.

President Joe Biden, citing his commitment to lowering unemployment, confirmed Jerome Powell for another four-year term as Chair of the Federal Reserve. The Fed has said it will begin winding down its monthly asset purchases at a pace of $15 billion per month, starting the withdrawal of emergency pandemic support, while more recently expressing less certainty that the jump in inflation will prove temporary. After reductions in November and December the Fed noted that “the committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook”. The pace of the taper clears the way for a possible interest rate increase in the second half of 2022.

Longer term, the bond market has gained confidence in the view that peak inflation is near which will help cap further rate increases. On the corporate side, decent corporate profits will make for a less risky backdrop as companies make their payment coupons and refinance their debt coming up for maturity.


U.S. equities advanced strongly in the final quarter of 2021 despite ongoing concerns over COVID-19 as the Standard & Poor’s 500 index climbed 11.0% in U.S. dollar terms. The index is up 28.7% for the year. U.S. equities saw broad gains across most sectors, with energy and technology stocks leading the way. All sectors of the S&P 500 had gains in the quarter. In Canadian dollar terms the quarterly return was 10.9% for the quarter and the index increased 27.9% for 2021. The loonie lost 0.2% during the fourth quarter and was down 0.8% since the beginning of the 2021.

The U.S. economy grew at a 2.3% rate in the third quarter of 2021, slightly better than previously thought, but prospects for a solid rebound going forward are being clouded by the rapid spread of the latest variant of the coronavirus. The third quarter gain follows explosive growth that started the year as the country first began to emerge from the pandemic, at least economically. Growth soared to 6.3% in the first quarter and 6.7% in the second quarter. As a consequence of the Omicron variant growth has mostly been delayed but is not expected to be completely derailed. For example, Goldman Sachs cut its GDP forecast to 2% from 3% for the first quarter of 2021, 3% from 3.5% for the second quarter and 2.75% from 3% in third quarter after Senator Joe Manchin voiced opposition to his party’s spending plans. Earnings season is helping to counter concerns that elevated inflation, political disarray and tightening monetary policy will slow the recovery.

By most measures the economy fared quite well in 2021 even though high prices have undercut Americans’ confidence in it and made it harder for many households to afford food, fuel and other necessities. The Labor Department confirmed the consumer price index increased 6.2% as higher prices for energy, shelter, food and vehicles fuelled the supercharged reading and indicated inflation is broadening out beyond categories associated with reopening.

Federal Reserve Chair Jerome Powell, whose term was recently extended for another four years, has noted that inflation has become “more persistent” and should no longer be referred to as transitory. He said an elevated inflation rate will linger well into 2022. Inflation has jumped to a three decade high and Powell’s efforts to contain it will constitute the stiffest test of his next term. Getting inflation under control will be particularly difficult because the Fed is not facing a traditionally overheating economy. Normally the central bank can cool runaway growth and the threat of high inflation by raising its benchmark interest rate which affects other loan rates throughout the economy. Doing so tends to slow borrowing and spending. This time huge government stimulus spending, the release of pent up demand as the economy reopened, and the Fed’s own low interest rate policy have supercharged consumer demand. The jump in demand has clogged ports and railways and collided with labour and supply shortages. That combination of factors isn’t something the Fed can fix.

2022, without question, is going to be one of the hardest years that the Fed has had to navigate. The economy still has 4 million fewer jobs than it did before the pandemic and the Fed has a new policy which places a renewed emphasis on reaching maximum employment. Should the Fed miscalculate and keep rates too low for too long to try to spur further job growth, price increases could accelerate. The central bank would then have to resort to sharper rate hikes to bring inflation back down.

Looking forward, this new economic cycle may be hotter but shorter because of the sheer size, scope and speed of the dual monetary and fiscal stimulus. As well, the deleveraging of both household and U.S. banking debt and a favorable demographic tide should allow demand to return. The equity market should continue to be supported by robust global recovery, a moderation of U.S. growth and inflation, as well as more balanced monetary and fiscal policies.


The world economy was unable to completely shake off the COVID-19 crisis amid persisting supply disruptions, soaring prices and resurgent outbreaks in 2021. As the global recovery continues in the year ahead the outlook is for more stable growth which should be strong enough to withstand unforeseen complications. The current inflationary surge is likely transitory in nature, although it could show a higher degree of persistence than initially thought. As a result, longer dated interest rates have risen over the last little while. Still, any unnecessary tightening of financing conditions by central banks is not desirable at this time as it would represent an unwarranted headwind for the recovery.

Europe is now back to its pre-pandemic size but it is still at the sharper end of the developed worlds current issues: soaring energy prices, Covid-19 infections rising (which are starting to trigger new lockdowns) and supply chain bottlenecks dragging on; and consumers are expected to become even more cautious in the coming months. The near term outlook is quickly becoming more pessimistic as risks ramp up. Growth was accelerating slightly but persistent supply bottlenecks continued to weigh on output and have pushed up inflationary pressures to unprecedented 13 year highs. While the European Central Bank claims the rise in inflation is transitory, it could be forced to retreat from its ultra easy monetary policy and raise rates next year for the first time in over a decade.

U.K. economic activity is slowing even as prices rise. British inflation surged to its highest level in more than 10 years and could hit a 30 year high in 2022 due to higher energy prices and COVID-19 related supply chain bottlenecks. Post-Brexit trade and migration barriers have also caused problems. The labour market is tight and has continued to tighten. As such, the Bank of England was the first major central bank to increase interest rates since the start of the pandemic, likely with several more increases in the near future.

Japan has become a stunning and somewhat mysterious pandemic success story. Japan, unlike other places in Europe and Asia, has never had anything close to a lockdown, just a series of relatively toothless states of emergency as a result of a remarkably rapid vaccination campaign. The net effect is that while it is seeing more signs of a pickup in prices as energy costs soar, the overall economy is steadily growing. Elsewhere, New Zealand and Korea are both expected to raise interest rates for the second time since the pandemic began as they lead the pack in taking action to step back from full throttle stimulus to get ahead of the curve in stemming any inflation risks. Australia, on the other hand, is taking more of a wait and see attitude.

A rebound in business activity and a rise in consumer demand boosted profits and dividends to record highs. As a result, financial markets have continued to appreciate in 2021 and could continue to see further healthy gains in the coming year. Overall, international stocks climbed 11.8% in 2021 (all figures in U.S. dollar terms). European stocks as a whole gained 17.0%, propelled by French stocks which grew by 19.9%; and U.K. stocks were up 14.2%. Asian stocks were the laggards; Japanese stocks were only up 2.2% and Australian stocks gained 5.1%.

Many aspects of life will likely return to how they were pre-pandemic in 2022, despite the current threat of the Omicron variant. However, 2022 may not be kind to investors who have taken on too much risk. While inflation poses a number of long range economic issues, valuations, volatility, and interest rate policy represent more immediate investment challenges. Still, the upside is that an economic expansion with emerging growth potential in financial markets will likely continue to generate meaningful rewards.


Emerging Markets have lost much of their growth advantage during the COVID-19 lockdowns as they typically provided much smaller stimulus packages to their economies than the U.S. or Europe. Emerging economies expanded an average 2.4% faster than developed countries in the six years before COVID-19. That has shrunk in half during the pandemic. Central banks in the region are learning that their longstanding strategy of hiking interest rates has failed to work its magic this time. They are finding out that rate increases alone will not bring back investors when growth is a question mark as hikes are leading to declines in local currencies and choking off a fragile recovery. The net effect is that investors are damping their enthusiasm for buying riskier emerging market equities.

Unequal vaccine distribution is battering global supply chains and sparking inflation across the globe as diminished emerging market workforces and higher transportation costs have taken their toll. Getting people vaccinated in emerging market countries would lead to economic growth and ease supply and price pressures. The impacts from bottlenecks to the supply chain are likely temporary but the longer they persist the greater the risk that this will feed into underlying inflation in a meaningful way. This puts more pressure on central banks worldwide to tighten policy sooner.

China’s economy grew by a record in the first quarter of 2021 but has since leveled off and then dramatically slowed in the fourth quarter as a construction slowdown, weaker retail spending and official curbs on energy use by factories weighed on its recovery. Growth is under pressure from government controls aimed at making the energy hungry economy more efficient and reducing reliance on debt that is dangerously high and could cause financial problems. The outlook going forward is less optimistic and if growth slows further it could prompt the government to ease lending controls to try and prop up activity.

In Latin America, peak global fiscal stimulus has passed with the policy debate increasingly focused on inflationary pressures. Mexico’s central bank increased interest rates for a fourth straight time as inflation continued to accelerate even as the economy continues to experience a solid rebound. Brazil’s consumer price data has climbed into double digits and has remained there since May 2020. Economic activity in Argentina has been surprising to the upside since mid-year and has returned to its pre-pandemic level.

Elsewhere, investors are focusing on those emerging economies that have managed an optimal mix of growth and inflation control. Israel is expected to keep borrowing costs on hold due to strong growth and slowing inflation. Indonesia’s central bank is forecast to hold its benchmark rate. Russia’s central bank is set to increase its key interest rate to 7%. In contrast, Turkey will probably cut rates by 1% to 17% in an effort to stimulate the economy a little bit.

Despite faster growth and cheaper valuations, emerging market equities have trailed developed markets for most of the past 11 years. Emerging market stocks dropped about 2.2% in 2021 (all figures in U.S. dollar terms), its worst annual performance since 2018; as a poor earnings outlook discouraged investors from buying. European emerging market stocks had a resoundingly good year climbing 14.7%; but these gains were more than offset by returns of -7.7% and -4.8% in Latin American and Asian stocks respectively.

Emerging market vaccine rates are picking up and economies are reopening which should be positive for consumer spending. Still, companies are struggling to meet a post pandemic snapback in customer demand causing inflation to shoot up as bottlenecks have emerged in global supply chains. Surging commodity prices should also be positive for earnings; and for the first time in three years, developing nation companies are forecasted to see upbeat profits. For investors in emerging market stocks this will hopefully lead to meaningful rewards.


As ongoing economic uncertainty lingers due to COVID-19, the most obvious risk to the rosy outlook for real estate and REITs would be a big rise in interest rates. Soaring rates would increase borrowing costs for REITs and also make their payouts look relatively less attractive. REITs had a very strong 2021 and at this point investors should expect more of the same in 2022. If rate hikes around the globe are gradual and if there’s healthy economic growth, then real estate investors are likely to see top line revenue growth outpacing higher debt costs that typically come with rising rates. However, should central banks become more aggressive in fighting inflation and hike rates dramatically the outlook could change.

Real estate investors favoured apartment buildings, warehouses and industrial properties; the top transactions in 2021. Industrial and apartment REITs have thrived over the past year, with returns of 30% or more. The challenge for investors is that both industrial and apartment REITs have climbed so much that their share prices tend to reflect their solid fundamentals. Still, the outlook remains positive and appear healthy enough to carry into 2022. Current conditions are setting the stage for steady earnings growth and further price appreciation.

Many companies have reduced their office space. Others have embraced a hybrid work model in which staff choose which days to work in the office. In some cases employees have been trickling back to their workstations despite the continuing uncertainty around the impact of the Omicron variant of COVID-19. Early predictions that offices would vanish have not come to pass. 2022 should show a good improvement over 2021 in office operating results.

The pandemic’s stay at home requirements have forced consumers to shop for much of their products online. That quickened the shift toward e-commerce and increased retailers’ need for large warehouses to store products before shipping. Properties anchored by grocery stores were a bright spot in retail REITs, as portfolios within that asset class have had strong performance before and during the pandemic. Coming out of the crisis, retail sales across the board have gone up dramatically.

An aging population is expected to create a multi decade surge in demand for seniors housing, as seniors continue to transition from their current residences. Unfortunately, the pandemic has at least temporarily deterred new residents from moving in. However, the annual pace of construction in apartments, condos and other types of multiple unit housing projects climbed higher to meet expected long term demand.

If ever there was a year to show investors just how resilient real estate can be as an asset class, 2021 would be a very good contender. Global REITs managed to advance 11.1% in the fourth quarter and 29.1% for 2021 (all figures in Canadian dollar terms) as they recovered handily from the battering they suffered amid lockdowns in 2020. REIT gains were led by the Canadian and U.S. markets which rose by 35.1% and 30.0% respectively. Both of which were much higher than REIT results in Europe and Asia.

REITs have received a lift from investors searching for tools against surging inflation. The real estate segment offers one the best inflation hedges available. They are unique and can be a very useful tool in an investor’s arsenal. The biggest issue to keep an eye on is how the central banks and governments will react to inflation. Monetary and fiscal stimulus is going to wind down at some point, and the pace of the removal of that stimulus could surprise the market. If the rug gets pulled out from under the economy, we could experience some instability and all financial securities would become more at risk.

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