Market Insights: Week of March 5, 2023

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, summarizes the latest financial headlines and explains what they mean for Canadian investors.

Canadian banks absorb higher costs and collect a recovery dividend

Canadian banks are facing a number of pressures right now. Interest-rate uncertainty is slowing economic activity and prompting lenders to raise loan-loss provisions. The federal government has applied an extra 15% tax for the year to capture roughly $3 billion of bank earnings. On top of that, wage demands are rising as employees try to keep pace with higher living costs.

There are also legacy legal issues that still create headlines—cases involving past misconduct such as selling fraudulent U.S. housing securities or being tangentially involved in Ponzi schemes can require large settlements. Even when settlements include no admission of wrongdoing, they still dent reputations and add to costs.

So how are Canada’s banks responding?

They’re focusing on business fundamentals and protecting profitability.

All six banks reported higher loan-loss provisions and rising cost pressures, yet the overall outlook for major-bank shareholders remains reasonably solid. Markets had largely priced in the headwinds before earnings season, and share prices were relatively stable during the reporting week. Scotia shares fell about 3.18% over the week, National Bank rose roughly 3.57%, and the other major banks landed somewhere between those moves.

Key strategic issues remain focused on U.S. expansion. TD’s planned acquisition of First Horizon Corp. and BMO’s purchase of Bank of the West will significantly influence each bank’s growth prospects in the near and medium term. BMO’s deal appears to be progressing according to plan, while TD’s takeover has faced delays. These cross-border moves will shape earnings and capital allocation decisions going forward.

The American consumer appears resilient

Headlines have warned that high interest rates could severely curtail U.S. consumer spending and trigger a sharp economic downturn. Predictions of a “hard landing” have circulated widely, but recent data suggest the U.S. consumer is holding up better than some feared.

With solid labour-market figures, a deeply negative shock to consumer spending does not seem imminent. Earnings from major U.S. retailers have generally painted a positive picture, although several companies tempered expectations for the remainder of the year. Below are recent results reported in U.S. dollars.

Despite some companies beating expectations, investors still reacted cautiously. For example, Target reported its first quarterly beat in a year but its shares dropped around 3.6% on the following trading day; Lowe’s also fell more than 5% despite positive results. Such moves reflect investor sensitivity to guidance and forward-looking commentary, not just quarterly numbers.

Warren Buffett still backs cash, America and Berkshire Hathaway

Investors eagerly await Warren Buffett’s annual letter to shareholders and his comments at Berkshire Hathaway’s meeting, which often provide perspective on markets and long-term investing. Buffett’s recent shareholder letter reiterated familiar themes: capital allocation discipline, a positive long-term view of the U.S. economy, and a preference for holding significant cash until attractive opportunities arise.

For the fourth quarter, Berkshire reported adjusted earnings per share of $3.01 (versus $3.57 predicted) and revenue of $78.18 billion (versus $79.93 billion predicted). Despite a softer final quarter, Berkshire posted record operating profits for the year, illustrating the company’s diversified earnings base.

Buffett emphasized that quarterly swings driven by investment gains or losses can be misleading for long-term shareholders: “The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings (losses) per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.”

Summing up the company’s position, Buffett noted Berkshire’s ownership stakes across a wide range of major businesses, observing that over time a few strong winners can deliver outsized results for investors who persevere.

Russia’s war effort relies heavily on oil and gas revenues

Coverage of the Russia-Ukraine conflict often focuses on battlefield developments and diplomacy, but economics will likely play a key role in any path to negotiations. Russia’s economy has not collapsed, as some predicted, but lower energy prices and international market pressures are squeezing government revenues.

Urals crude—the grade most commonly exported by Russia—has traded at a significant discount to Brent crude. That gap reduces the revenue available to finance military activity and government spending. Market measures, price caps and restricted market access may limit Russia’s ability to fund prolonged operations indefinitely.

Start date adjusted from prior posting of this chart: 1 year after Russia’s invasion of Ukraine, Brent crude oil is down by 17% … at worst point, it was up by 29% from start of invasion — Liz Ann Sonders

Institutional investors and fund managers have responded to the political and market risk by shutting or suspending Russian market products. Several Russian-focused ETFs were discontinued or suspended after the invasion, and some funds that traded widely before the war have since been liquidated or locked, underscoring the severe political risk of investing in regional securities exposed to geopolitical disruption.

When global investors decide a market is no longer accessible or investible, that decision makes long-term capital formation and economic rebuilding much harder for the affected country. The withdrawal of ETFs and other international listings is a visible example of that dynamic.

Kyle Prevost is a financial educator, author and speaker. When he’s not coaching youth on the basketball court or training in the boxing ring, he writes and speaks about personal finance. Find his work at MillionDollarJourney.com and learn more about the Canadian Financial Summit.