New Report
We have posted a new report on EQB Inc. (EQB). The company operates as a digital bank in Canada and has more than 325,000 Canadian customers with total assets under management of $42 billion. Its unique proposition is in its flexibility and agility in offering new products and is the first bank in Canada to move to a cloud-based system. The company has demonstrated robust financials, a strong ROE, and an acquisitive growth strategy. We think that this name shows promise as a leading digital bank in Canada.
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Report Update
We have posted a report update on Enghouse (ENGH). ENGH is a software communications company that provides services centered around contact centers, video communications, healthcare, telecommunications networks, and public safety. The company benefited from the sudden demand for remote work but has since found difficulties in maintaining its momentum. It has a strong balance sheet but will need to demonstrate the execution of its new strategy.
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Market Update
The US markets have been mostly flat over the past couple of weeks, while the Canadian markets have dipped lower amidst falling energy and commodity prices. Energy prices have been falling alongside concerns of a global recession that could negatively impact fuel demand. Several companies have been reporting results citing weak outlook, hiring freezes, and concerns of inflationary pressures. The markets are feeling heavy with anxiety over upcoming CPI readings, Central Bank interest rate decisions, and concerns of a global recession. In this market update we aim to cover how the US and Canadian sectors fared for the first half of the year, and where we might be heading in the second half.
Canadian and US Markets
The US and Canadian markets have both been off to a rocky first half of the year, as demonstrated by the first half performance chart below. All the major indices are down more than 10% for the first half and this has not been without its periods of sideways price action and severe sudden declines. Needless to say, this first half has made its mark on several investors and has even broken a few records of its own. We figured that we would be remiss if we did not discuss the individual sector performances for the first half of 2022 and by doing so we can set ourselves up for what to expect in the second half of the year.
Both the Canadian and US sectors performed similarly for the first half of 2022, but there are some slight differences between the two. In the Canadian markets, Energy and Utilities were the only sectors to end the half positive, and Energy outperformed the market by a wide margin. The Energy sector continued its momentum from 2021 into 2022, and this was supported by underinvestment in oil and gas infrastructure, increased demand for the services sector (oil demand associated with travel), and a supply shock due to the Russia-Ukraine conflict.
Unsurprisingly, traditionally defensive sectors such as Utilities and Consumer Staples have held up for the first half of the year and have provided Canadian investors with some level of support in their portfolios. Sectors that are more sensitive to rising interest rates, such as Technology, Real Estate, and Consumer Discretionary have been some of the worst performing sectors of the year so far. Given that healthcare in Canada is mostly within the public sector, the Healthcare sector in the TSX is primarily cannabis companies, and this is largely the cause for its ~48% decline for the first half of the year. Sectors that are in the middle of the pack, that can benefit from rising rates, inflation, and the increased demand for the service sector are the Materials, Industrials, and Financials sectors. Telecommunications in Canada are highly regulated and concentrated, and this is largely the reason why this sector has fared well so far this year.
At first glance, the US sector performance chart closely resembles that of the Canadian sector’s first half performance. Energy performed extremely well for the first half, gaining close to 26%, supported by the same factors mentioned above for the Canadian markets. The US Utilities sector has held up well considering the performance of the overall US markets but is still trending negatively. Unsurprisingly, the more traditionally believed conservative sectors, such as Utilities, Consumer Staples, and Healthcare, have been the best performers of the pack. The highly cyclical and interest rate-sensitive sectors such as Technology, Communications, and Consumer Discretionary have been the worst performers. Once again, similar to the Canadian markets, we see the Materials, Industrials, Financials, and Real Estate sectors in the middle of the group, being negatively impacted by demand destruction and rising rates as well as benefiting from higher inflation, rising rates, and demand for the services sector.
Thoughts for the Second Half of the Year
Overall, it has been a tumultuous start to the year, to say the least. While we may not be fully out of the woods, all things in life have a balance, and to us, this means that good news is an inevitability. The timing of this ‘good news’ is, however, unclear. It has been one of the worst starts to a year on record, and so we certainly cannot rule out a positive second half to the year.
Decade’s high inflation has been forcing Central Banks to tighten monetary conditions expeditiously, which in turn has forced equity valuations and demand lower, and to the Central Banks, the public enemy number one is inflation. We feel that if we begin to see any consistency in the flattening or decline of inflation in the second half that this will give the Central Banks good reason to adjust their expectations for monetary tightness, and in turn, this will ease demand destruction and valuation suppression on the financial market’s front. Earlier in the year we spoke about the importance of having an ‘iron gut’ and being able to stomach large drawdowns, and we feel that those investors who are still here today and actively engaged have successfully passed the ‘iron gut’ test. We believe that the next phase of importance will be survival, reminding ourselves of our initial theses on certain investments, and rather than preparing oneself for bad news, preparing oneself for any sliver of good news.
Best wishes for your investing!
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