Your portfolios in brief
Royal Bank of Canada caught our attention this week. Canada’s largest financial institution recently acquired Brewin Dolphin Holdings PLC (“Brewin Dolphin”), a prestigious wealth management firm based in England. Royal Bank’s growing international expansion could generate higher-than-expected quarterly revenues.
We believe that the stock currently deserves a bigger spot in our portfolio. At the moment, its price is considered to be at a discount, its dividend has increased to 4.19% while its price-earnings ratio is at 10.92, which makes it an interesting stock.
The stock represents a good mix of defence and growth and we could see an above-average revenue growth throughout 2023.
Market Brief
At the beginning of the week, investors were awaiting numerous economic data as well as the start of the quarterly results season with the major American banks.
Markets fell on Tuesday following remarks by the Governor of the Bank of England (BoE) announcing that efforts to stabilize the British bond market would cease on Friday. The BoE has been trying for days to stabilize the UK bond market as volatility challenges the country’s pension funds. However, he reiterated that the BoE’s purchases of Treasuries were “temporary” and that pension funds had “three days” to rebalance their assets.
The Fed’s minutes, released on Wednesday, support what the markets had been anticipating for several weeks, namely that the Central Bank will continue to raise its interest rates, always with an objective of Bringing down inflation. Officials consider it necessary to continue their tightening monetary policy “despite the slowdown in the job market,” because inflation (8.3% in August over one year, according to the CPI index) is at a level unacceptable,” said the Monetary Committee.
“Calibrate is the key word in the Fed’s minutes as some of the participants from the central bank asserted that a calibration of the hikes pace will be necessary. The term calibrating demonstrates that the Fed will be attentive to the reactions that the economy may have followed a rate hike,” said our president and portfolio manager, Philippe Pratte.
High uncertainty in global economic and financial markets will require the Fed to calibrate its policy response, especially in the context of a globally synchronized but uncoordinated monetary policy tightening cycle," said Gregory Daco, chief economist at Ernst & Young LLP. But "the balance of risks is shifting rapidly," he said.
Published on Wednesday, wholesale prices (PPI index), which calculate producer prices, started to rise again in September, gaining 0.4% against -0.2% in August and + 0.2% than what was planned. However, the PPI fell over one year to 8.5%, showing, according to Peter Cardillo, that “inflation has probably peaked at the level of producer price.”
Inflation data showed an increase of 8.2% year on year for the month of September, higher than expected, but recording a slight decline since August. Indeed, the consumer price index (CPI) rose 0.4% in September, more than the 0.3% expected by economists.
The markets tumbled down after the release of these economic data, then turned 180 degrees in the middle of the day and recorded a spectacular rebound. The Dow, down 500 points in early trading on Thursday, eventually closed with gains of 800 points. Same scenario for the NASDAQ (+2.23%), as well as the S&P 500 which ended a streak of six consecutive sessions on the decline by ending up 2.60%.
Thursday marked the fifth-biggest intraday reversal from a low in S&P 500’s history, and the fourth-biggest rebound for the NASDAQ according to SentimenTrader.
“Thursday’s rebound was spectacular! However, despite a worse than expected CPI index, investors were already positioned for higher inflation and therefore ready to face these new data. Following the publication of inflation numbers a little higher than expected, no change has been made in the anticipation of the number of hikes planned by the Fed,” says Philippe Pratte.
“The high level of protection in the market contributed to this rebound as investors bought the market to cover their short covering, of which there is a large number at this moment. This means that investors had already anticipated the worst and that once again, bad news becomes good news, which could help to give us a basis for a more sustained rebound,” adds Philippe Pratte.
Here is the average for the week of the three main indexes at 1 p.m. Friday.
Dow
NASDAQ
S&P 500
And here's the average for the week for the TSX in Canada.
International Monetary Fund (IMF)
The IMF announced this week the reduction of its global economic forecasts. Indeed, it estimates that growth in the United States should decline to 1.6% this year, against the forecast of 2.3% in July. The organization cites several factors responsible for this new prediction, including the war in Ukraine, the Chinese economic slowdown, inflationary pressures, sharp increases in interest rates and the accentuated consequences of the pandemic.
For a few months already, we have been able to observe increasing volatility in the financial markets as investors face an environment of high inflation combined with tighter monetary policies. In addition, the rise in the US dollar has increased imports sold in US currency, including oil, thereby increasing global inflationary pressures.
Thus, the IMF recommends in its report that the institutions be clearer on the objectives of the leaders to “preserve credibility and avoid unjustified market volatility” while investors are increasingly risk averse in the face of economic and political uncertainties.
Central banks must “stay the course” and “do more” to combat persistent inflation, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said on Thursday. For the time being, “The risk is that they are not doing enough, not that they are doing too much” in the face of inflation, which “remains stubborn and persistent. If the central banks do not act, we will see a transfer of high energy and food prices to underlying inflation,” underlined the Managing Director of the IMF. “If we have only one message: be careful, be careful, fiscal and monetary policies must be coordinated so that an even more complicated situation is avoided,” repeated Ms. Georgieva.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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