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Equity Commentary: As at March 31, 2022

Source: David Picton | Jeff Bradacs, CFA | Michael Kimmel, CFA | Michael Kuan, CFA | Travis Irwin, CFA
Publish Date: Apr 20, 2022
Read Time: 5 minutes
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Global economic growth remained strong over the quarter but was constrained by supply-chain and labour shortages as new COVID-19 variants emerged. Oil markets performed strongly amid a strengthening of demand and tightening of supply as a number of oil-producing nations struggled to meet their additional quotas. In February 2022, global energy prices shifted significantly higher as Russia invaded Ukraine, magnifying supply fears given that Russia produces 11% of global consumption of oil and 40% of Western Europe’s consumption of natural gas according to International Energy Agency (IEA). A shift by the U.S. Federal Reserve Board (the Fed) in the fourth quarter of 2021 toward raising interest rates to combat inflation led many growth stocks, particularly in the information technology sector, to decline. 

The combined challenges of slowing economic growth and a shift in central bank policy response to rising inflation have been exacerbated by the war in Ukraine. Financial markets have trimmed expectations for monetary tightening, but policy-makers appear set to maintain their course for the foreseeable future. That said, as economic growth expectations continue to decline, inflation could also ease on base effects and easing supply constraints going forward. Therefore, as the current year progresses, a more neutral environment for taking equity risk could open up. 

Within the portfolios, we have reduced exposure to cyclical stocks. We continue to have a favourable view on select commodities, such as copper, that we believe have a positive fundamental outlook and in addition can provide inflationary hedges within the portfolios. We also remain steadfastly dedicated to our core momentum-based investment discipline.

Small Cap Spotlight

We would like to highlight our position in Celestica Inc. (CLS) – We are positive on shares of Celestica Inc. Celestica designs and manufactures electronic components globally. Over the past number of years, Celestica has undergone a transition to exit unprofitable contracts and focus on higher value-add, higher margin products. Since 2019 they have exited C$1.25 billion of non-strategic and low margin revenue, and grew a record level of bookings in 2021, 50% of which were engineering-led which is higher value as it tends to be higher margin and have a stickier customer base1. The result of this transition is that Celestica is now operating at the highest operating margin level in its history, and has recently returned to topline revenue growth following the exit of non-strategic revenues. Celestica is also targeting strategic acquisitions after completing the highly accretive acquisition of PCI in 2021, and they have a strong balance sheet that is ready to be deployed. Celestica trades at a discount to the Electronic Manufacturing Services (EMS) peer group, which we see narrowing over time as they prove out the results of their transformation.
1 Celestica, Form 20F

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