Guest Appearance on the Brandon Beavis Investing Channel - Shopify

Our Senior Investment Analyst, Chris White, was recently featured on the Brandon Beavis Investing YouTube channel, discussing the merits of Shopify (SHOP). Chris talks about the general support for Shopify, given its successful presence in the Canadian economy as well as interesting facts and metrics about the company.

Check out the video with Brandon and Chris here!

Report Updates

We have posted report updates on Enbridge (ENB) and BRP Inc. (DOO). Enbridge is a natural gas utility provider and distributor, and provides safe, reliable energy for a large base of customers. It is a strong player in the utility industry and its Distributable Cash Flow (DCF) growth has been a key driver in the company's share price performance. BRP is a manufacturer of powersports vehicles and marine products in North America. The company recently raised guidance for the fiscal year 2023 and it has shown a strong five-year annualized revenue growth rate. One company has mitigated macro factors such as supply chain constraints and inflation and demonstrated strong growth, while the other company has demonstrated strong discipline in capital allocation and has a long runway for growth. 

Read the latest updates by logging in here!

Investor Sentiment Survey

Thank you to all of those that have participated in our investor sentiment surveys thus far. We feel that these surveys have added value to our thought process on the current investment landscape, and we hope that you all have felt the same. 

The survey shouldn't take more than 5 minutes and no personal details are required.

Let us know how you are feeling about markets and the economy by following the link below! We will let you know the results in our next market update.

Investor Sentiment Survey

Market Update

The markets have been on a strong upward trajectory over the past couple of weeks, and are nearing important levels on a technical basis. Earnings season is about to come into full swing in the coming weeks and news of mass layoffs at large tech companies continue to make the rounds. The oil market has been rallying on signs of increased buying from China, and the price of gold continues on its path higher. The Bank of Canada will be announcing its interest rate decision this Wednesday and will be offering the policy meeting minutes for the first time ever. The Federal Reserve's interest rate decision will be announced next week. In this market update, we wanted to show some interesting facts behind the annual inflation numbers, and how the path to 2% can be achieved. 

The Importance of Month-Over-Month Inflation
The forces behind inflation are complex – transitory supply chain issues, labour shortages, excess money supply, etc. Although, the math behind calculating the annual inflation numbers is not complex. For the purpose of this exercise, the weights, and the methodologies behind how Owner’s Equivalent Rent and food inflation are calculated are not important, but what is important is the month-over-month change in inflation.
 
Month-over-month inflation percentages are important because they help to strip out and break down large spikes in inflation and get to the root cause of when high inflation took place. Below, we have created a timeline of the month-over-month US inflation numbers for 2022. By using a heat map on the numbers, we can immediately visualize that the largest month-over-month changes took place in the first six months of the year, and then cooled significantly in the last six months of the year. If inflation continued at the rate it was going in the first six months of the year, the annual inflation figure for 2022 would have been around 11.2%. Looking at the back half of the year, if we instead had those month-over-month figures carried out for the whole year, we would have seen an annual inflation rate of 1.9%. Instead, 2022 was a combination of an extremely hot inflationary environment in the first six months and a cool inflation environment in the back six months, ending with a 6.3% inflation rate for 2022.

Source: bls.gov, 5i Research

Month-Over-Month Has Cooled Significantly
Contextualized in a different manner, the average month-over-month inflation increase for the first six months of 2022 was 0.9%. The easiest way to determine roughly what this would represent in an annual inflation rate would be 0.9% X 12 = ~10.8%. Looking at the last six months of the year, the average month-over-month inflation rate was 0.2%, which would represent a roughly 2.4% annual rate (0.2% X 12). Clearly, the US had a structural shift in inflation in the last half of 2022.

Source: bls.gov, 5i Research

Forecasting Inflation for 2023
Shifting gears to what this means for 2023, even if the month-over-month inflation numbers for the next six months are slightly hotter than the last six months at 0.2%, the road to 2% to 3% is much more foreseeable. Let’s assume that for the first half of 2023, month-over-month inflation numbers increase by 0.3% (slightly hotter than the previous six months). By June, the annual inflation rate is ~2.7%. We have created the below timeline to visualize how this takes place. The key to achieving a sub-three percent inflation reading by June is that as time progresses, the hot month-over-month increases from the first half of 2022 are knocked off. Even if the next six months of month-over-month changes are higher, at 0.5%, the annual inflation rate by June 2023 is around 3.9% (calculated as: 0.0% + 0.1% + 0.4% + 0.4% + 0.1% - 0.1% + 0.5% + 0.5% + 0.5% + 0.5% +0.5% + 0.5% = 3.9%).

Source: bls.gov, 5i Research

Conclusion
Looking at the month-over-month inflation numbers is critical because as we have demonstrated, the annual US inflation rate for 2022 was 6.3%, however, the past six months have witnessed a large amount of cooling. As the month's progress and the high inflation readings from early 2022 are knocked off the 12-month inflation calculation, inflation readings have a high probability of coming in lower. The only possibility for higher inflation readings over the next six months is if the month-over-month changes are greater than 0.5%, and this would signal a re-acceleration in inflation. At this point, it is not impossible, but very difficult to envision a scenario where inflation re-accelerates, given the expected higher and sustained rates by the central banks. There is a chance that this scenario occurs, but we are giving it a low probability, especially considering the lagged effects of the housing market, one-third of the CPI index, which has yet to break. We are not ruling out the possibility of higher inflation, but the road to 3% is within our grasp.

Best wishes for your investing!

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