CA-EN Institutional
CA-EN Institutional
This week with Sadiq

China Lockdown, European Energy, Canada

September 5 to 9, 2022
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China Lockdown

Last week, 21 million residents of Chengdu were locked down as a result of China’s zero-COVID policy. Just when we think these issues are behind us, they re-emerge. We haven’t seen significant COVID-related issues popping up elsewhere, but because of China’s strict protocols, it becomes a major story. This development highlights that there are still risks when it comes to China. The lockdown will certainly impact growth in the near term. The big questions are—how long will this lockdown last, and will similar issues pop up elsewhere? Although this isn’t the same region that was locked down previously, it’s a reminder that lockdowns are still a part of China’s COVID strategy—and as the weather gets colder, more COVID cases seem inevitable. There have been some positive developments out of China recently from an earnings perspective, but the rection to news of the lockdown was predictably negative. Any further lockdowns could potential impact supply chains and have a knock-on effect on inflation as well. Going forward, these are all important considerations for investors.

Bottom Line: There are still reasons to be wary of China—strict COVID policies are not going away anytime soon.

European Energy

Recently, we’ve seen European energy prices come down a bit despite Russia’s Gazprom restricting supply by temporarily shutting off the Nord Stream pipeline. On the surface, this appears to be a violation of basic rules of supply and demand—if the supply goes down, shouldn’t the price go up? But it makes sense when you consider that investors had already priced in much of the risk of Russia limiting energy supply. Overall, though, this is very bad news and demonstrates why we’re remaining underweight Europe. Russia still has the capability to do major damage to the European economy, and their power will only increase as the colder winter months approach. There are also many uncertainties around the Russia-Ukraine war, which does not appear to be any closer to being resolved. That dark cloud will hang over the European economy for the foreseeable future.

Bottom Line: The probability of a long-lasting recession remains higher in Europe than anywhere else and this decline in European energy prices should only be considered temporary.


Generally, Canada’s economy is doing well. There have been some mixed reports on the jobs side recently, but unemployment is still low. Energy prices have begun to move up again and remain well above the level needed for the Energy sector to be profitable, which benefits the entire Canadian economy. GDP numbers are relatively strong but can be expected to slow down as the consumer weakens. The biggest threat is the housing market. Housing prices are likely to drop further across the board, with the greatest impact being felt in the GTA and Vancouver. Recently, I had an interesting conversation with an Advisor on these topics. He said that in the past, wealthy clients have been eager to buy the dip. But this time, they’re preferring to wait a while. The difference is that now they’re getting hit from all sides—lower equity markets, a down fixed income market, higher interest rates and inflation hurting their business, rising mortgage rates, and housing prices coming down. This makes them cautious about adding funds to their investment portfolio. The Bank of Canada will have to closely monitor these sentiments as they weight the size and frequency of future interest rate hikes.

Bottom Line: Canada’s economy is still fundamentally strong, but a weakening consumer is a cause for some concern.


Our positioning remains mostly unchanged. We’re still underweight equities, which has been the right call thus far and appears to be the prudent course heading into September and October—typically a more difficult period for markets. We’re underweight fixed income as the Fed has recently reiterated that rates will continue to rise. But we’re now leaning slightly overweight Investment Grade and underweight High Yield, because earnings are starting to come off and that will affect weaker companies more. Regionally, we’re neutral on the U.S., underweight international, and overweight Canada. We’re also neutral on Emerging Markets, which is largely because we’re slightly bullish on China over the longer term. Despite the recent lockdown, China is still a huge economy, and valuations there remain cheap in comparison to the U.S. and elsewhere. Overall, the big question is whether markets will break through the lows we saw earlier in the year. If we approach those levels again, we’ll be buying, especially on the equities side.

Market Recap

  • Stocks slumped this week, still drying off the cold water tossed on the market by Fed Chair Powell in Jackson Hole.  
  • The S&P 500 slipped 3.3%, with technology and materials posting the deepest declines, and industrials not too far ahead. All other sectors were also in the red on the week.
  • Meantime, the TSX gave back 3.0%, with materials and energy dragging as oil prices fell. Consumer staples posted the lone gain in a defensive week.


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