Stock markets have pulled back on fears of further rate hikes, recession and the recent failure of a few small regional banks which we believe are isolated cases. Bond markets continue to be very volatile and credit spreads have widened unnecessarily despite the economy being very strong. We believe that this volatility has presented some excellent buying opportunities in both stocks and bonds. In particular, corporate bonds are yielding “equity-like” returns of between six per cent and eight per cent, which investors should take advantage of since this won’t last. Inflation is coming down as supply chain issues ease and demand softens, and the rate hiking cycle is ending (it already has in Canada). If there is a pronounced recession or more turmoil in the banking sector, central banks might even cut rates which would cause a rally in both stocks and bonds.
We believe that in Canada and the U.S., there will be a “soft landing” as those economies are strong with low unemployment. Investor sentiment has been extremely bearish which is a great contrarian signal and as we know when sentiment starts to turn positive, markets usually rise sharply. This is why it’s important to stay the course. We remain nearly fully invested, but well diversified in recession-resistant businesses that are generating record profits. We also own many safe, high dividend-yielding companies like telecoms, pipelines, utilities and now banks which continue to look very attractive. We also own companies benefiting from long-term trends such as aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, Tecsys, MDF, and ATS) as well as infrastructure (Stella Jones, AG Growth, Logistec). We also continue to take advantage of volatility to add high-quality companies at more reasonable valuations as share prices come down such as WSP, Colliers, and CCL).