CA-EN Investors
CA-EN Investors
This week with Sadiq

Peak Inflation, Emerging Markets, Energy

September 26 to 30, 2022
Share on facebook
Share on linkedin
Share on twitter
Share on email
Share on print

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.


The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.


article collection

Mutual Funds

Sadiq Adatia
Weekly Commentary
November 28, 2022

What to Expect from Q4 Bank Earnings

What will Q4 bank earnings tell us about the strength of the economy? What impact could external economic shocks like a possible U.S. railroad strike have on outlook and positioning?
Sadiq Adatia
Weekly Commentary
November 21, 2022

When Will the Recession Hit?

What should investors expect from a split U.S. Congress following the recent elections? How will the inverted yield curve impact markets?
November 17, 2022
November 2022

A recap of our 2022 proxy voting in Canada

Proxy voting is a key element of our stewardship and responsible investment approach. This piece summarizes how we voted in the Canadian market during the 2022 proxy voting season.
Sadiq Adatia
Weekly Commentary
November 14, 2022

Chaos in Crypto: Should Investors Be Worried?

Why the latest crypto crash is affecting equity markets? Is demand for energy weighing down oil prices?
Sadiq Adatia
Weekly Commentary
November 7, 2022

Don’t Doubt the Fed

Why are equity markets continually surprised by the U.S. Federal Reserve? Do lower equity valuations finally present opportunities for re-entry?
Main Landscape
Main Landscape
November 2, 2022

What to look for at COP27

The UN’s annual climate conference meets in Egypt November 6-18 amid rising environmental threats, an urgent need to accelerate funding and an energy crisis that is testing commitments to fight climate change.