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2022 - July Update:

Quantitative Tightening:

As North American central banks reach the seventh month of a vicious battle with multi-decade high inflation through supersized rate hikes and extensive Government balance sheet reduction programs, GrowWell Capital believes that these quantitative tightening measures are important for the long-term health of the economy, and present attractive buying opportunities, despite the tumultuous short-term uncertainty which this type of government intervention undoubtedly generates. The Bank of Canada recently increased rates by 100bps in one step, which is the largest rate hike in more than 20 years. We believe the Bank of Canada is front loading interest rates hikes to avoid the necessity for additional higher rate hikes down the line. This is a positive indicator for markets that the Bank of Canada can be trusted to make unpopular decisions in the face of high inflation. South of the border, the Federal Reserve is also expected to raise rates between 75bps to 100bps at the next meeting, with a broad consensus that the neutral rate sits between 3-4%. Unfortunately, the capability of the Federal Reserve Board has come into question given their previous misinterpretation of inflation, which they initially declared as transitory, when in-fact we have seen steady growth of inflation numbers throughout the past year. This mistake to act in 2021 has put the North American markets on a deeply uncertain course, with three separate yield curve inversions occurring in 2022, the last of which has remained inverted for more than ten consecutive trading days, resulting in most major Canadian and US Banks estimating at least a 50% chance of recession during the next 4 quarters. This thesis is backed by leading indicators; such as, price movements in the energy markets with the price of oil stabilizing over the past quarter, and the number of housing starts (as of June 2022) falling to the lowest since September 2021. As US GDP has already declined by 1.6% in 2022-Q1, there is a chance we are already in a recession or may be in the near term.

Outlook:

We at GrowWell Capital know that a recession can be one of the best equity buying opportunities for medium and long-term investments, and believe that the robust consumer balance sheets supported by a strong labour market and improving supply conditions should provide some cushion in the event of a recession in the near term. Since the equity markets are forward-looking, being what the market “believes” equities to be worth in the near-future, we believe that much of the downside uncertainty has already been priced into the market. With the technology sector seeing a larger collapse in prices in the first six months of 2022 versus any January-to-June in history, (including the Tech-Bubble), and most of the so-called Zombie companies (such as Roku, Peloton and Shopify) having their day-of-reckoning with trailing 12-month equity declines greater than 70%, we believe there are pockets of value throughout the medium and large cap technology equities. Other sectors like healthcare, utilities and industrials also present attractive opportunities for us to capitalize at this time.