Entering the final stretch … (TWTW – Nov 14-18, 2022)

November 17, 2022 – we are, for all intents and purposes in the final stretch of what has been an overall terrible year for investors (War, inflation, bear market, death of 60/40, energy crisis), but one where, late in the year, the word “pivot” is probably becoming one of those keywords / buzzwords we’ll all look back on at some point with mixed feelings

As I write, CREDO Consulting has had the opportunity to be involved with the 9th Annual ETF conference, which was presented by ETFinsight, and took place on a hybrid basis (part physical / in person; part virtual/streamed, via our Commersphere platform). For anyone who missed it, the entirety of the proceedings is available for postview – by clicking HERE.

I am thankful for the support and participation of many in that endeavor, and will shortly write something related to the conference which will be posted here as well.

For now, I want to circle back to my last posting here, dating back to June 24, 2022 (time flies …), entitled “Enjoying The Volatility?”

This I think is worthwhile to capture what has happened in the ensuing 5 or so months, respectively attempt to highlight anything worthwhile coming out of that, as we look forward to 2023.

So here we go.

First, Let’s have a look at the % changes since June 24, across Sectors; Thematics; Factors; and Geographies:

Sectors:

Noteworthy:

  • Energy, Materials – Leadership! For the most part, despite ongoing concerns surrounding inflation, and alongside that how much higher the FED will tighten policy rates, sectors enjoyed positive returns since the end of June, with leadership still provided by the Energy and Material space.
  • Financials – for their part have by the looks of it remained in the penalty box of uncertainty regarding how much higher rates will go, respectively feared impact of what the most publicized recession on record (before it even starts …) will have as far as losses for banks, etc.
  • Technology – Having borne the brunt of the massive re-valuation exercise unfolding in 2022, Tech essentially hasn’t strayed very far … no meaningful rebound (although recent inflation data did produce a significant bounce of relative upside …) nor further follow through weakness … (though that isn’t necessarily to be ignored as far as continuing risks)
  • Global Communication – shown aside from Utes as worst performing in the last 5 months, isn’t Canadian Telecom, but rather a basket including Entertainment, Media, tech etc – which explains the downside experienced recently … more details on that ETF – Click HERE! Note that my providing a link to COMM does not imply any endorsement, or recommendation. I do not own it, opting instead to have some exposure to Canadian telecom due to the latter characteristics – namely a general lack of meaningful competition in Canada … (but that … of course is another story). 

Themes:

Noteworthy: 

  • Has the Thematic Bear mostly played out by now? As 2020 brought us a strong bull market in all things “thematic”, 2022 brought a continuation of a bear market in Thematic that arguably began in the early fall of 2021 already. Interesting in the period covered here is that a few themes were actually able to regain some ground after the savage beating they were earlier subjected to.
  • Clean / Green Energy, for one, continues to benefit from regulatory developments, respectively huge government spending programs providing the space with a nice secular tailwind, around which we can likely continue to expect strong up and down moves
  • ARK – is now available via BMO ETFs – Click here to read!

for me, until proven otherwise, disruption is in the penalty box.

That, + Until and unless I begin to sense otherwise, and/or I begin to see “Money Tree” (an affectionate nickname bestowed to Cathie Wood by her South Korean fans in better days) regain her mojo, I will likely remain on the sidelines, opting instead for “indexed” thematic solutions.

Factors:

  • This probably says it all … Canada besting both broad US, and Tech even more so, with Value, Fundamental Indexing, as well as Minimum Volatility either besting market cap weighted indexing here, or in any event delivering decent performance in otherwise difficult market conditions

Geographies:

Noteworthy:

  • China … NOT so much … and otherwise dragging down an EM category which historically doesn’t fare that well when the USD reigns supreme … which it has until very recently (is change on that front underway?)

 

And now onto the YTD picture:

Sectors:

Noteworthy:

  • Leadership – which has for some time now shifted to Energy and Materials in particular, I would argue remains intact, having only been strengthened by an inflationary backdrop they generally fare comparatively better in than other sectors
  • Canada as a market – obviously benefiting from both Energy and Materials, as well as relatively better performance from Financials, all of which contributing to resilience of Canadian equities

Themes:

Noteworthy:

  • relative performance reflective of “duration” of the respective “themes”, as validated by relative performance of Metaverse, respectively Blockchain technology ETFs (hurt more = opportunity will take possibly much longer to play out …)
  • at the other end of the spectrum, Cybersecurity, 5 G, and even more so Travel and Leisure, all arguably benefiting from nearer term developments, respectively “structural” (infrastructure/utility like attributes – such as cyber security)

Factors:

Noteworthy:

  • Value; Fundamentals; and Min Vol all outperforming market cap weighted Canada. That trend, prevailing for some time by now likely still in play for foreseeable future.
  • ESG Advanced – significant “underperformance” to be attributed to the Energy sector not being represented at all here. In the Aware category … Canada ESG, with its 19.50% Energy weight currently, fared significantly better (all the while qualifying as ESG). Turns out, Exclusion vs motivated inclusion can have quite an impact  – which it has had here …

Geographies:

Noteworthy:

  • Relative performance of Canada across geographies
  • Japan exposure here is CAD hedged (= JPY significant weakness this year explaining most of the relative performance gap …)
  • World (XWD)- as mentioned by Sionna Investment Managers Kim Shannon at the 9th annual ETF conference, is significantly overweight US (close to 70%), with Canada coming in in 4th place after Japan and the UK. Implication? World not as much diversification as you might like – as US at 70% will obviously dictate where performance goes from here for the world.  (arguably better diversification to be found in XEF for instance, with much greater weightings to non North American exposure). For me, as an aside, EM given China, isn’t desirable, respectively investable, in the sense that a) I’d want X China (which does exist, by the way …), but also b) I’d like “good” EM vs “bad” EM. Why is category lumped together when all countries included can be so different … I’d want to know I own “good” EM exposure/countries, otherwise, why do I want EM, if half of the exposure drags everything else down?

Voila … c’est tout 🙂 I shall leave it at that for now 🙂 Stay safe out there!