Inflation is not the only challenge
The Russia-Ukraine war is leading to soaring commodity prices as both nations are major exporters. Rate hikes are also a burden for consumers and borrowers but will help cool inflation in the long run. In this article by Alfred Lam, CFA, Senior Vice President and Chief Investment Officer at CI Multi-Asset Management, discover what this means for investment markets.
Statistics Canada reported higher inflation in February 2022. The Consumer Price Index rose 5.7% compared to a year ago as of February 2022. Commodity prices have skyrocketed as a result of the current Russia-Ukraine conflict. The two countries are major exporters of commodities such as oil, aluminum, nickel, copper and wheat. They respectively account for 17%, 10%, 22%, 9% and 26% of the global supply. The markets have been aggressively repricing these commodities as shown in the table below. Supply is unlikely to be restored anytime soon as Ukraine is being attacked and Russia sanctioned. The bad news is these commodities are consumed directly or indirectly in our everyday life; the price hikes are effectively impacting everyone. Employees have enjoyed wage growth in 2021 and will likely again in 2022. December’s Labour Force Survey, as conducted by Statistics Canada, indicated that average wages gained 2.7% over 2021. However, they were not enough to offset inflation. What has helped consumers to overcome inflation were their “COVID-19” savings and low borrowing costs. As inflation continues to rise while savings are depleted and borrowing costs increase, consumer resilience to inflation will be tested in the coming months.
Commodity | Year-to-date change in price (USD)* |
---|---|
Oil (WTI Crude) | 38% |
Aluminum (LME Aluminum) | 23% |
Nickel (LME Nickel) | 60% |
Copper (LME Copper) | 8% |
Wheat (CBT SRW Wheat) | 36% |
Source: Bloomberg Finance L.P.*As at April 5, 2022.
Source: Bloomberg Finance, LP
As fixed income gets repriced aggressively, we have turned less bearish. We expect inflation to moderate in 2023 and central banks to be less aggressive than the markets currently expect. Rate hikes will no doubt be cooling consumption and economic growth, along with inflation. Central banks will need to be sensitive and not take rates too far. As such, we are buying fixed income gradually to narrow our underweight position. At the same time, we are trimming equity as we anticipate weaker economic growth to affect corporate earnings. Some countries and sectors will fare better. We remain bullish and continue to increase holdings in certain countries (Canada and emerging markets) and sectors (energy, materials, financials, semiconductors). Overall, our portfolios will be more balanced with higher convictions going into the next 12 months as we anticipate new challenges and opportunities.
We can help
As always, we are here to support you in achieving your financial goals. Please do not hesitate to contact us.
About the Author
Alfred Lam, CFA
Senior Vice-President and Chief Investment Officer
CI Mulit-Asset Management
Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer, leads the CI Multi-Asset Management team. Mr. Lam has over 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI, Mr. Lam has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the CFA designation, Mr. Lam holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.
IMPORTANT DISCLAIMERS
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.
The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.
The author and/or a member of their immediate family may hold specific holdings/securities discussed in this document. Any opinion or information provided are solely those of the author and does not constitute investment advice or an endorsement or recommendation of any entity or security discussed or provided by CI Global Asset Management.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.