Insights

We are now in record territory; a full decade of economic growth and stock market expansion has many investors fearful that we are overdue for a correction.  In this quarter’s letter we make the case that the investments we hold in Avenue’s portfolios remain compelling, but at the same time we need to actively avoid certain stocks and sectors where there is excess valuation. 

We have experienced good performance in the last three months in both Avenue’s Equity Portfolio and Bond Portfolio.  The key reason is an extraordinary reversal in interest rates.

In last quarter’s letter we wrote that as interest rates rise, they will likely cause a stall in the economy given the level of consumer and corporate debt.  It is always hard to predict the timing of when the market will react to a slowdown, but that reality finally happened in December.  What is unusual is that this was a global phenomenon where almost all asset classes were down worldwide in 2018.

The last three months have seen the continuing trend of gradually rising interest rates in both Canada and the US. In this quarter’s letter we will elaborate on Avenue’s bond portfolio strategy where the majority of our investments are in shorter maturity Canadian corporate bonds.

In investing it is important to directly address the challenging and ever-changing economic environment head on.  It was only last quarter when there was a real fear of inflation and surging interest rates.  Now escalating trade wars are threatening a global recession. In this quarter’s letter we will discuss how we see these challenges playing out and what we are doing about it within Avenue’s fixed income and equity portfolios.

In the first quarter, Avenue’s Equity Portfolio experienced its first decline since January of 2016. The Avenue bond portfolio’s performance also had a small decline.  Both portfolios were affected by the market’s reaction to rising inflation expectations as interest rates rose and the added new risk of a global trade war reduced the outlook for corporate profits. We were conservatively positioned ahead of this market move and we argue that a significant amount of the correction has already taken place.