Almost everyone is likely happy and ready to put 2022 behind them. While it was probably the first true year of things reopening and getting back to some sense of normalcy since covid, it was also riddled with potholes between inflation, difficult markets, real estate volatility, and a handful of viruses that seemed impossible to avoid!

In terms of the markets, we don’t think we would be exaggerating in saying this has been the most difficult market we have seen since 5i Research first launched over 10 years ago. It was truly a market with nowhere to hide. In a lot of cases, in hindsight, cash may have been an investor’s best asset to hold, which still would have lost purchasing power to inflation. In the TSX, energy fared well up in the range of 20% with the next best sector being staples up in the 7% range. IT and Healthcare were the clear laggards, down 35% and 50% as we write this (admittedly Canadian healthcare is a bit of a strange sector in the TSX). Further confirming the idea of ‘nowhere to hide’ the below chart shows that Argentina and Brazil were just about the only areas offering positive returns.

Year-to-date, the TSX has fared ok, being down roughly 5% but a lot of this return is supported by the energy sector. Meanwhile, the P/E for the TSX is at 12X and the index offers a yield of 3.4%. The silver lining here is that no matter how the year went, the setup for those who can look beyond 12 months doesn’t look all that bad. You can say the same for fixed income. For years, one of the largest complaints about investing broadly has been how hard it is to get a competitive yield out of fixed income and investor’s getting pushed up the risk curve. Now that has changed with even some of the major banks seeming to offer GICs in excess of 4.5%. It has been a tough year in markets but both conservative and growth-oriented investor’s alike should be facing a far better set of opportunities than we have seen for at least five years and maybe even ten years. Similarly, if an investor hasn’t reviewed how they have set their general asset allocations (split between equity and fixed income), now is probably the time to do it, as a lot has changed!

At 5i, with more of a focus on small and mid-cap growth names, the drawdowns in this market were felt particularly hard in a lot of cases. However, it is a single year, and a point we continually try to drive home is to think long-term. There is probably no better example of why this is important than when looking at Shopify. Shares of SHOP are down roughly 70% this year. We first started covering the name back in June 2019, at a split-adjusted price of $39.44. Over this period, even with a very significant drawdown this past year in shares, the company is still up 33% since 2019 or just shy of a 10% annual return. With simple rebalancing over this period, returns would probably look far better than this. This is not to ‘brush off’ a move in a stock like this but is a great example as to why thinking longer-term matters and how big winners can see declines with an investor still being ahead.  This brings us to another important reminder/lesson about the importance of rebalancing and not letting a portfolio become a bet on a single stock or theme. Doing so might leave some returns ‘on the table’ but should also save an investor from outcomes that are hard to bounce back from.

At the website level for 5i, we updated the portfolio analytics tool, putting what we believe even more power into the hands of the investor with a lot of new functionality and flexibility. If you haven’t checked this service out, we encourage you to do so. Timing also makes sense, heading into the New Year and RRSP season, so a member can quickly and easily understand what they own and the composition of their portfolio.

Looking forward to the next year, we think it is getting time to be optimistic again and start updating or dusting off that wish list of stocks. There are a lot of beaten down companies out there. Some deserved, some less so, but amongst all of the chaos, there is likely to be some intriguing opportunities out there. At a minimum, we think many stocks are at least presenting solid entry points that have not been available for some time. It might not be ‘the low’, depending on where one is looking, but the lower stocks go, the better the odds are that they should work out in an investor’s favour over the longer-term.

One important question to start asking is what exactly is the ‘bear case’ at this point? Inflation and higher rates have been the bear case and essentially the sole focus of markets for the last year but the signs continue to point to inflation having peaked and rates approaching their highs (and in the least, most of the heavy lifting of rate increases being behind us). At the macro level, Canadians might have some difficulty digesting higher rates given mortgage debt being a larger part of balance sheets which could be a bit of weight on economic growth. This is where growth stocks could potentially come back into vogue, as investor’s look for companies that are growing regardless of the economic picture and have the balance sheets to ride out any slowdown.

In terms of other risks to watch out for, the baton is likely to be passed form rates/inflation to recession concerns. If this is the case, we would expect fundamentals to come back into focus as well, which we would view as a good thing from an investing standpoint. Owning high quality companies, growing at above average rates should fare well in an environment where concerns revolve around an economic slowdown. It can take some patience, but fundamentals will eventually start to matter again.

We cannot finish these notes without a big thank you to our members. Between the covid whiplash and then the inflation/rates whiplash this year, it has been hard to catch one’s breath but we continue to be amazed by the questions and thought process we have been seeing from so many. We appreciate you being a part of this membership, many who have been with us since day one! So, here is to what we think will be a far better year in 2023 and all the best over the holiday season!