New Report

We have posted a new report on Dream Industrial Real Estate Investment Trust (DIR.UN). Dream is one of the largest Canadian REITs with an approximately 43 million square foot portfolio of logistics-focused assets in key markets across North America. Over the past year, the REIT has completed $2.4 billion of acquisitions, adding over 15 million square feet of real estate to its portfolio. With a focus on the industrial space, we feel that it has lots of room to grow and attract strong logistics-focused tenants. It has an impressive yield and uses a disciplined capital allocation approach to add value for shareholders. We think this is a name worth taking a look at. 

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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. 

We will be starting out by sending this survey on a monthly basis and reporting back to members on the results! 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 Link!

Market Update

The markets have bounced back from their lows over the past couple of weeks, as inflation data and an interest rate decision by the BoC have been mulled over. The markets are now at price levels that have also been seen in May, June, August, and September, marking a sustained period of sideways volatility. Earnings season is upon us, and some large-cap tech names have seen massive one-day declines due to missed earnings, while others are posting mixed results. Yields, gold, and the dollar have been flat, awaiting indications for future rate hikes from tomorrow's Fed meeting. For now, we will be focusing on last week's decision by the BoC.  
 
What is a 'Pivot'?
There has been a lot of chatter around Central Banks ‘pivoting’ or there being a ‘pivot’ in monetary policy, and here we are going to describe exactly what this means and what we define as a pivot.
 
Increasing and decreasing interest rates, monetary policy, is a valuable tool employed by Central Banks (Federal Reserve, Bank of Canada, etc) to stimulate or tighten monetary conditions in the economy. When interest rates are rising, borrowing costs for consumers, businesses, and governments increase, and vice versa when rates are declining. With the onset of escalating inflation, central banks have been actively increasing their interest rates. We believe last week marks an important milestone in the development towards a pivot, but we are referring to it as a change in direction.

A Deceleration in Rate Hikes
Since March of this year, the Bank of Canada (BoC) has been increasing interest rates at an accelerating pace, up until September when a deceleration in rate hikes then began. Last week, the BoC increased rates by only 0.50%, a material difference from the 0.75% hike seen in September and the 1.00% hike seen in July. We believe that this signals that the BoC has finished with its acceleration of rate hikes phase and has begun its deceleration in rate hikes.

Source: bankofcanada.ca

Interest Rate Hiking Cycle
Although the central bank interest rate is still increasing, albeit, at a slower pace, we note this to be an important move towards easing, and an eventual ‘pivot’. Traditional rate hike cycles look like the chart below, which is taken from the BoC’s rate hike cycle from 2005 to 2009. Here we see an increase in the interest rate, until there is a pause in rate hikes, followed by an eventual decline in interest rates (what we define as being the ‘pivot’ moment).

Source: Koyfin

It is a pivot because largely it’s unanticipated. Ideally, central banks would prefer to hike interest rates, pause, and then keep rates there for as long as possible - in the hopes that the economy remains strong at higher rates. Although, as we know from history, this is not the case, and the economy eventually weakens from the interest rate pressure. That is why we believe today’s current rate hike cycle will look like the diagram below, where central banks have accelerated rate hikes, are now beginning to decelerate rate hikes, will eventually pause, and after some time be forced to pivot (decrease rates).

So, while we do not believe this change in tone by the BoC to be a ‘pivot, it is certainly a change in direction. A change in direction towards a pivot represents a path towards easing constraints on the economy, which is why we believe this to be a positive development for the financial markets.

Historical Hiking Cycle Length
Over the past ~20 years, when the BoC has increased rates, it has done so for a period of 1.7 years, then pausing rate hikes for 1 year, and decreasing interest rates for 0.8 years. This makes the average interest rate hiking cycle last a total of 3.6 years (hike for ~1.5 years, pause for 1.0 year, decrease for ~1.0 year). Thus far, the BoC has hiked for just over half a year, which falls short of the average 1.5 years for rate hikes, but the pace and total interest rate that it has achieved far exceeds that of past instances. This is why we believe that the BoC is close to finishing the deceleration stage and will soon pause rate hikes. We think it is reasonable to expect rate hikes to be paused for a period of one year, followed by rate decreases. We believe a rough schedule could be: pause in early 2023, decrease rates in 2024.  

Source: Koyfin

Conclusion
Much of 2022 has been spent in increasingly tighter monetary conditions. The most recent move by the BoC to decelerate rate hikes is a positive development towards decelerating tightness in the economic system. What follows the deceleration in rate increases is a pause in rate hikes, and this bodes well for bond prices (yields fall) and equities (the discount rate declines). We believe the most recent action by the BoC to be an important milestone in the current hiking cycle as it signals that we are closer to easier monetary conditions than we were months ago, and since the markets are forward-looking, they are well aware that we are inching closer towards a pivot.

Best wishes for your investing!

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