Mutual Funds | Above all… you have to be careful

For mutual fund owners, the June 30th statements certainly came as a cold shower. Both equity funds and several bond funds posted losses of 10% to 20% in the first six months of the year.

Posted at 7:00 am

John Gagnon
Special collaboration

Buoyed by fairly good quarterly corporate results, markets should stage a nice recovery over the next month and a half, allowing investors to recoup about half of their losses. But the recovery was short-lived and the market slump appears to be trying to make investors dizzy again. Equity markets have resumed their downtrend and bond markets appear to be in free fall.

What can we do ? The old adage goes that when the markets are depressed, it’s time to buy. Would we be in this situation?

Now caution is the order of the day, says Philippe Côté, portfolio manager at Eterna Groupe Financier. First, because it is generally impossible to predict when markets will bottom. The rate hikes are not over yet, if we are to believe the words of central bankers who are more determined than ever to contain inflation. With rate hikes taking 18 to 24 months to really make themselves felt, there doesn’t seem to be any urgency to take advantage of the bargains, the manager believes. Instead, he suggests investors gradually use their liquidity when market downturns occur to add to their positions.

But he also really advises against selling certain positions at this point in order to buy them back later at a better price. Stock indexes are down 18% in the United States and 13% in Canada this year.


Philippe Côté, portfolio manager, Eterna Financial Group, urges caution.

There is no guarantee we are close to bottom and it would be dangerous to sell now as markets have already depreciated heavily and there is no guarantee we can buy much lower.

Philippe Côté, portfolio manager, Eterna Financial Group

The Eterna manager senses an economic slowdown is setting in, but he doesn’t think a recession is in sight. “As we get closer to 2023, there should be a more attractive outlook if inflation at least stops rising,” he believes. But in his opinion, the motto remains caution for the time being.

Several major obstacles

The market weakness stems from the fact that they are facing several problems, explains Guy Côté, portfolio manager at National Bank Financial. Firstly, the geopolitical situation was certainly a very negative element. The Russian attack in Ukraine has had a huge impact on the energy sector and has sent oil and natural gas prices skyrocketing. Inflation, which we already had under control, worsened as a result of government injections of liquidity to prevent the global economy from slipping into recession following the pandemic-induced shutdowns.

Inflation is inevitably reflected in interest rate hikes, Guy Côté reminds us. Because of this, central banks had started the rate-hike cycle somewhat slowly, believing that this inflation would be temporary. But now these central bankers have decided to make up for lost time by increasing the magnitude of recent rate hikes. And they announce that it is not ready yet.

Guy Côté believes that signs that inflation has been defeated are needed to determine when we can confidently return to the market. And the indicator will be the US 10-year Treasury rate. The return on these securities, which was still under 1% last autumn, has recently jumped to over 3.5%.

Until we see the US 10-year Treasury yield fall, it’s hard to believe that we can see a rebound in the equity market’s bullish move.

Guy Côté, portfolio manager at National Bank Financial

If the impact of the current situation on the financial markets has made one thing clear to us, it’s that bonds are no longer the supposedly safe item in a portfolio, explains Daniel Lanteigne, Senior Partner, Reverbe Integrated Financial Strategies. Because bond prices move inversely to interest rates, interest rates have fallen significantly over the past 10 to 12 months, and the longer the bond’s term, the greater the fall in value.

“This means that serious thought needs to be given to the place of bonds in individuals’ portfolios and that new alternative solutions need to be developed,” says Daniel Lanteigne. And the mutual fund industry can certainly help, he says.

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