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CA-EN Advisors

Peak Inflation, Emerging Markets, Energy

September 26 to 30, 2022


Peak Inflation, Emerging Markets, Energy

September 26 to 30, 2022

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Weekly Commentary

Market Recap

  • Equity markets slid further this week, as the Federal Reserve stayed firmly hawkish, recession risks continued to build and geopolitical tensions weighed on sentiment.
  • The S&P 500 fell 4.6%, and is now close to testing the low set in June. All sectors were in the red, with energy, consumer discretionary and banks hardest hit.
  • Meantime, the TSX was down 4.7% on the week, with a dive in energy stocks coming alongside a move in WTI oil prices below $80.

Peak Inflation?

Last week, the U.S. Federal Reserve again raised its key interest rate by 75 basis points. But have these aggressive moves done their job at cooling inflation? Prior to the release of the most recent U.S. inflation numbers, expectations were that the Fed would be raising rates by 50 basis points at this meeting before getting down to 25-point hikes by the end of the year. But those latest numbers showed that while headline inflation may have peaked, core inflation actually went up. That’s why the Fed continues to be hawkish and will continue with aggressive moves—it has determined that inflation is a greater threat than weaking labour markets or a softening economy. We heard that message loud and clear in Fed Chairman Jerome Powell’s speech at Jackson Hole and went underweight. But most investors didn’t hear it, which is why we saw markets react negatively to the inflation numbers. Another issue is that there are some things that the Fed simply can’t control, like supply chain issues. That’s why the Fed can’t get down to 2% inflation and is instead aiming for a number in the 3-4% range.

Bottom Line: Rate hikes have not been entirely effective at cooling inflation, and aggressive increases will continue as a result—making a recession more likely.

Emerging Markets

Speaking of rate decisions—they often have knock-on effects for Emerging Markets. Looking at current trends, most of the EM countries have debt that’s tied to the US dollar. As the Fed has raised interest rates and risk-averse sentiment has been rising, the USD has gained relative to EM currencies. That has increased the cost of borrowing for those countries. Traditionally, when the USD has been strong, EM equities have been weak and vice versa. What we’re seeing now is an extreme example, with the USD strong against most countries, while COVID-related lockdowns in China and other factors have dragged the region down. Our suspicion, however, is that we may see this dynamic start to turn, especially as China begins to open up its economy. Should that occur, demand in China will improve, which will have positive knock-on effects for the global economy, and will minimize the chance of a recession and help bring us away from a risk-averse environment. That, in turn, will weaken the US dollar and provide relief to Emerging Markets. We are not there yet, but that is one of the upsides that could happen.

Bottom Line: Interest rate hikes and a strong US dollar are combining to hurt Emerging Markets, but that may be starting to change.


Just recently, I sat down with our new Global Energy portfolio manager, and despite the recent decline in prices, we’re both still bullish on the sector. The price decline has largely happened because of lower potential demand tied to a likely recession, which the Fed is willing to let happen to combat inflation. It’s important for markets to remember, however, that the baseline for energy prices isn’t pre-COVID—it’s the low levels we saw during lockdown. When prices were at their peak, we weren’t a fully open economy with massive demand—we were a partially reopened economy with only partial demand. As a result, a recession will likely only bring us back to those levels. Looking at the broader picture, the supply side remains limited: OPEC refuses to produce more oil and the ongoing war in Ukraine means that many countries are simply unwilling to buy Russian energy. There’s also the possibility of Vladimir Putin trying to further weaponize oil as we enter the colder winter months. Taken together, these factors all point to energy prices being more likely to move up than move down over time.

Bottom Line: It’s still a good opportunity to be overweight Energy.


Recently, we’ve adopted an even more defensive posture, taking off equities across the board in our portfolios. This decision was made even before the Fed meeting—as previously mentioned, we heard their message loud and clear, while it seems many investors didn’t. There are several reasons to be nervous about equities. Continuing aggressive interest rate hikes, which will impact the consumer, is an obvious one. But we’re also concerned about layoffs, which we saw in smaller companies earlier in the year. Now, companies like Meta (Facebook) and Alphabet (Google) are also talking about cuts, and consumer giant Walmart has announced that they’ll be hiring fewer people than usual for the holiday season. Those developments point to underlying issues in the economy and a weakening consumer. That’s why we’re taking risk off the table and reallocating toward fixed income and cash. Geographically, we remain slightly overweight Canada, neutral on the U.S., and bearish on Europe.


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