2022 Q4 Newsletter

As we get to the end of 2022 with the holidays fast approaching, like so many past years, this one seemed to fly by. Sadly, the war in Ukraine continues to overshadow many of the stories/events of the year. We tend to reflect on how lucky we are to live outside an area of conflict.

Some of the highlights that stood out to us was the change in Monarchy with Prince Charles III becoming King, Canada making the World Cup, and the support for women’s rights in Iran.

For those that live in the lower mainland, a few events around the city showcasing Christmas lights are in VanDusen Gardens with the Festival of Lights and at Capilano Bridge with the Canyon Lights. A great way to spend an evening with friends and family.

Our newsletter will focus on the following topics:

Patience will be Rewarded
Fixed Income
The Collapse of Cryptocurrency and FTX
Friendshoring
US Dealer, Tax Filing and TFSAs
Holiday Recipe Ideas

Patience will be Rewarded

We recently listened to a presentation from an investment firm discussing how they had managed through previous challenging economic periods. And we found the perspective they provided was valuable. No one enjoys these periods, but fundamentally sound strategies will reward patient investors. We never know when market conditions will improve but they always do, and news cycles are geared towards problems, not the future solution. Understanding market fundamentals and history allow us to place events into perspective for clients financial plans.

Perspective really is key during these periods, not long ago supply lines were snared and shipping costs were sky high as the Baltic Dry Index chart shows for shipping costs of bulk commodities (think ore, coal, wheat and so forth).

Interest rates were effectively lowered to zero after the global credit crisis and then after the start of the Covid pandemic.

These and other factors such as government subsidies during Covid, quantitative easing by central banks, production disruptions in China, and the Russian invasion of Ukraine all contributed to inflation rising rapidly over the last year.

To combat inflation, central banks have been aggressively raising interest rates.

The chart of the US Federal Reserve (the US Central bank) to the right shows how low interest rates had become compared to those over the last 50 years or so. Even with recent increases, they are still relatively low.

We have all experienced the effects of inflation recently, but we would argue that inflation will abate, as the chart of the Baltic Dry Index suggests. Other factors in the economy, such as retiring baby boomers, will make the fall of inflation bumpy and irregular, but it will happen.

Change causes uncertainty and financial markets take time to figure out the new normal. At some point investors will recognize that corporate earnings have remained healthy, companies will adapt to this new normal, which is like a previous normal. This normalization period is a marathon, not a sprint. Process and Patience will be rewarded.

Fixed Income

An allocation to fixed income investments (bonds) in investors portfolios has traditionally been used to accomplish two things, provide an income into the portfolio and reduce the volatility of the portfolio through the diversifying characteristics of a different asset class. Usually, fixed income assets have a low correlation to equities, which means they usually behave differently.

*Source: ICE BofA Canada Broad Market Index*

With interest rates having been essentially 0% through 2021, we had been expecting a challenging year for Canadian bonds and in fact they have had their worst year since 1992. The Bank of Canada and The US Federal Reserve have both raised rates 7 time this year. They are likely to continue raising rates in the first half of 2023 and then the expectation is that they will hold rates for the last half of 2023. All of which will depend on how they see inflation and especially wage increases reacting. Markets are forward looking but no one knows how much of these future rises are “baked” into current prices. New bonds are being issued with higher coupons and are getting more appealing.

The Collapse of Cryptocurrency and FTX

2022 has not been a friendly year to many asset classes and it’s been particularly hard on cryptocurrencies. Year to date some of the larger coins like Bitcoin and Ethereum are down over 60%.

Much of this decline has been caused by negative news surrounding some of the larger exchanges. FTX, had been the second largest cryptocurrency exchange in the world and was owned by Sam Bankman-Fried. This year the firm went from managing almost $32 billion in June to under $440 million today. A drop of about 98%.

Issues such as poor compliance and a lack of regulation are the main concerns. On November 8th, Mr. Bankman-Fried reportedly told his investors the firm is short $8 billion dollars of client money and on the brink of going bankrupt. Since then clients have not been able to access their funds, Mr. Bankman-Fried has been arrested, and many allegations have been discovered towards the misuse of client money by the firm.

Crypto was starting to be embraced by larger institutions and even some governments around the world. Institutions such as Softbank, a Japanese tech-investing group and the Ontario’s Teacher Pension Plan had dipped their toes into FTX. This setback may be hard to erase any suspicions surrounding these coins and exchanges.

Although we haven’t heard many questions from our clients surrounding the coins this year, we did field many questions from 2018 - 2021. Our primary concern about the coins materialized, as their price seems to be based on hype. For instance, if you purchased Bitcoin, your hope as an investor is the hype would continue to grow and someone else be willing to purchase it from you at a higher price. Once the hype is gone, the valuation drops.

Whereas when you purchase shares in companies, the valuation is based on specific financial factors.

Is the crypto industry going to burn down in flames?…..only time will tell. However, increased regulation and compliance must be the primary drivers to bring larger institutions and/or governments back – which could be a tall task. We still find it hard to believe there is any fundamental value in cryptocurrencies and the potential for a Ponzi style collapse remains very high.

Friendshoring

Over the last 50 years, economies became more global as production of goods moved to regions with lower labour costs. This has had a couple of benefits, lifting hundreds of millions of people out of poverty and lowering costs for those of us in the developed world. A 55” TV (which once would have been considered super massive, but now is only modest in size) can be bought for less than $500.

Chinese policies around Covid quarantines and the Russian invasion of Ukraine have led to disruptions in global supply chains. That and geopolitical tensions have caused policy makers to promote the shortening of supply lines and hence the term “Friendshoring”.

One could argue that it would require technological advances in artificial intelligence, robotics or 3D printing to really displace our manufacturing reliance on lower wage countries. All of which seems possible. Stay tuned!

US Dealer, Tax Filing and TFSA’s

Every now and then we run across people who have pension assets in the US, and it can be difficult for them to have those assets looked after. iA Private Wealth has set up a US dealer, allowing us to manage client’s US based investment accounts.

If you own a non-registered account (also known as cash account), please wait to file your taxes closer to the deadline in mid-late April. The deadline for companies to mail you tax information about the investment are March 31st. At which point it may be a week or two before you receive it. If you have any questions on this matter, ask Jack or Travis and they can better guide you on the timelines.

Other year end important details:

You have until December 31st to make charitable contributions which can be claimed against this year’s income. The same deadline applies for RESP contributions to maximize the grant for 2022.
Withdrawals from a TFSA can be reinvested back the following year, without requiring contribution room.
TFSA contribution room will rise to $6,500 next year.
Tax loss selling must be made by December 28th so that the trade settles before year end.

Holiday Recipes

We wanted to include a couple of ideas for the holiday feast: sour cream drops, sausage stuffing, and cheese straws!

Check out our recipe page here:
https://www.beaconwealthpartners.ca/recipes

We hope you can share time and laughter with friends and family over the holidays. As always, please reach out if you have any questions.

Jack Fournier B.Sc, FMA, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency
700-609 Granville St. Vancouver, BC
p: 604 895 3348
jack@beaconwealthpartners.ca

Travis Kidson, B.Sc, CFP®, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency
700-609 Granville St. Vancouver, BC
p: 604 895 3486
travis@beaconwealthpartners.ca

This information has been prepared by Travis Kidson and Jack Fournier who are Portfolio Managers for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Managers can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

Insurance products are provided through iA Private Wealth Insurance Agency which is a trade name of PPI Management Inc. Only products and services offered through iA Private Wealth Inc. are covered by the Canadian Investors Protection Fund.

Beacon Wealth Partners is a personal trade name of Jack Fournier and Travis Kidson.