Investment Commentary and Outlook


As we exit the third quarter of 2022, fear has unfortunately gripped equity, bond and currency markets. Investor sentiment is squarely in negative territory and the magnitude and the speed of interest rates increases is unprecedented.

Inflation remains Public Enemy Number One for central banks around the world. Comments from leading bankers indicate they are willing to tolerate a recession as part of their battle to quell inflation. In the US, the 2-year and 10-year treasury yield curve inverted, suggesting that market participants are predicting higher interest rates in the near term, followed by an economic slowdown and lower rates in the future.

In this environment, both equity and fixed income products have been challenged, leaving investors with almost no place to hide in the short term. Public markets are clearly looking ahead towards a more difficult environment.

Already, valuations have contracted significantly as investors grapple with the risk of a new interest rate paradigm. What remains to be seen is the degree to which earnings will decline if the expected recession materializes. Growth stocks have been particularly weak after posting impressive returns from the onset of the pandemic to the end of 2021. The highly valued, unprofitable, and less proven businesses have seen their stock prices come under the most pressure.

Interestingly, many companies continue to post reasonable financial results. Demand for many products and services, from the information technology to consumer discretionary sectors, remains robust. In fact, supply chain challenges continue to mean that demand is outstripping supply in some areas of the economy, such as in the automotive sector.

The banking systems in Europe, the US, and Canada seem to be secure, and consumer balance sheets, notably in the US, are not overly stretched. Employment is strong, with many sectors struggling to find enough workers. Corporate balance sheets, especially within Pembroke’s portfolios, are also strong.

As uncertainty prevails, it is difficult to point to any sure-fire asset class or timing call. As a 54-year-old firm, Pembroke has seen these business cycles before. The depth and duration of the current downturn will only be known in hindsight.

Just as the market is pricing in worsening conditions now, it will likely begin to price in improving conditions even before the underlying economy bottoms. Perfectly timing this inflection point lies outside the firm’s – or maybe anyone’s – expertise.

The firm’s recommendations to our wealth management clients during this period of volatility remain consistent.

  1. Construct a balanced portfolio that helps you meet your long-term financial goals and takes your tolerance for risk and volatility into account
  2. Rebalance to your chosen asset allocation target on a predetermined basis. Rebalancing should be an exercise in discipline rather than an attempt to time public markets.
  3. Focus on the long-term. Each market downturn feels different and worse than the last. However, if your portfolios are made up of companies with strong franchises, a path to growth, and strong balance sheets, they will survive and compound capital on a multi-year basis.

Pembroke portfolio managers are in addition taking advantage of falling prices to buy companies that were too expensive in the run-up to the end of 2021, adding to positions in companies that became cheaper during the current sell-off, and selling holdings that are not meeting expectations as the pandemic-induced crisis wanes and economies reopen.

However, with most of the companies in the portfolio that are executing their business plans well, the best action is no action. In the cases where companies’ earnings are potentially more sensitive to an economic downturn, the investment team is focusing on balance sheet strength and ensuring that the long-term opportunities to grow and create shareholder wealth remain intact.

While Pembroke recognizes short-term pressures on earnings might create ongoing volatility, the prices of many stocks have fallen to levels that take a possible downturn into account, which sets up an opportunity for patient investors.

As always, patience, quality discipline, and portfolio balance remain key elements of a rational approach to wealth management.


Back to Top of Page


Other Articles Of Interest


This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.