Break on Through (To the Lower Rates)

It seems as though, I should leave on vacation more frequently; since 2021, the markets have been up every single time that I am away for more than one week. While here we have a prime example of correlation but not causation, we will recap what has caused markets to inch higher since the end of May. That's not all, we also have some very important macro events to highlight, as we have seen our first rate cuts (albeit none in the United States).

Earnings and Splits

While we are out of earnings season (which is essentially a concentrated period of quarterly earnings results), there are many notable companies who share their results outside of the cluster period. The most high profile results came from Nvidia, whose results exceeded expectations, just as I crossed the security line at Pierre Elliott Trudeau airport. The company also announced a 10-for-1 share split (which although having no actually financial impact on the company, does make the shares more accessible to smaller investors). Since both announcements, share prices are up just over 35% ; for anyone of our clients who have been invested since January of this year or earlier, do expect a conversation assessing whether it is appropriate for us to trim our position; it is up 160% this year (after rising 250% last year) and while we are still keen on holding the stock, we must remain disciplined!

Nvidia was not the only chip stock (and core holding of ours) to report. Broadcom came up with strong results and announced a share split of their own, bringing their year to date performance to 50%. It is evident that our ‘chip mania’ thesis is playing out and we are firm believers that this is still a multi-year story but we also wish to remain level headed during this period. Again, expect conversations around rebalancing if you are long term holders of these types of companies. It’s not all sunshine and rainbows amongst our core holdings, however, as Lululemon also reported their quarterly results and while the results should have convinced investors that the recent sell-off is overdone, it was not immediately successful. Our worst performer of the year, we do not agree with the level of pessimism around the company, although we do agree that it is prudent to be cautious around retail companies as the consumer has shown a preference in service spending over product consumption over the last 18 months.

Canadian banks have also reported their quarterly earnings and here, we have seen a bit of a divergence in performance. While they all operate within the same industry, ‘the big five’ have different developments that are impacting their shorter term results: BMO has fully absorbed its Bank of West acquisition and now has the challenge of integration and cost efficiency; RBC has closed its HSBC Canada acquisition and will now seek to do the same, while TD has been impacted by some high profile legal issues in the United States and will need to address those deficiencies in order to reassure investors. Also in the news this week, National Bank (the sixth largest lender in Canada) announced its intention to acquire Canadian Western Bank; opinion here is that this is a smart move for the more ‘provincial’ lender to expand across country, however, it paid a very high premium to do so and we question how long it will take to show the financial benefits of such a move.

Central Banks and Rate Cuts

Both the Bank of Canada and the ECB (European Central Bank) cut interest rates by 25 bps (0.25%),? their first rate cuts since 2022. We are of the opinion that the rate cuts are justifiable in both regions as the higher interest rates have been successful at lowering inflation, but also, slowing economic activity. The ECB has projected real GDP growth at just 0.9% for 2024 (a small uptick from the 0.6% forecast in March but more in line with the December 2023 projection of 0.8%) with CPI forecasted to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. The Bank of Canada, the first G7 central bank to begin rate cuts, is dealing with a similar reality to its European counterpart. Rate increases have been successful at slowing down inflation with CPI readings at 1.3% in Q1 and expected to average 2.6% for all of 2024. Again, this deceleration in inflation has come at a price: real GDP growth was at 0.5% in Q1, the unemployment rate had recently surpassed 6% (while below 5% at the beginning of 2023) and housing starts (an important metric to follow as the country goes through a housing affordability crisis) have struggled to accelerate, currently trending below their 2023 pace (in spite of the efforts of Federal, Provincial and Municipal governments to cut back on bureaucracy as well as the slew of support programs that have been announced).

Bank of Canada Governor Tiff Macklem stressed that future rate cuts will be decided on a meeting-by-meeting basis, meaning that every single piece of data moving forth, will be scrutinized heavily. He articulated the Bank’s awareness that they want to respond to slowing inflation and weakening economic activity but that they also do not want to re-accelerate home prices to levels that would undercut their inflation reduction efforts. South of the border, the FOMC had its meeting on Wednesday and Chair Powell and Co. did not cut interest rates. Recent economic data has shown that employment is slowing (although still from a strong base level) and this week’s CPI inflation came in 0.1% below plan, however, it’s been a difficult task for the Fed to determine when to begin their rate cuts. Inflation has been running a little higher than expected throughout most of 2024 and economic activity has surprised on the upside (unlike in Canada and Europe), demonstrating an unmatched economic resilience.?The Federal government has also been the most generous at stimulating the economy post pandemic and elevated debt levels will have to be considered as a risk going forth.

If you were not overweight Canadian equities, your investment portfolio is looking good this year. We do have plenty to be enthusiastic about but these positive narratives are developing concurrently with elevated levels of geopolitical and political risk as well as the (poor) historical track record of central banks’ tightening cycles and their impact on the economy (they have never achieved a soft landing such as the one that they have been attempting over the last two years). In the weeks ahead, we will have our own balancing act that we want to achieve: this summer will be a period of activity across the portfolio, with profit taking, new private market opportunities and, as always, the discovery of underappreciated secular stories. We`ll be providing more details as we execute on these ideas; we already have our road map until August drawn out and while we will respond to news as it develops, we are quite keen on what comes next!??

Healthy Distraction

As I was on vacation, I could not come back without sharing at least a discovery or two from the trip.

Paris – Arts

Paris has no shortage of landmarks and museums; pick a street and you`ll find something worth learning about! That being said, as one of the most popular destinations for tourists, it can sometimes feel a little impersonal when taking in the sights. Famous museums such as the Louvre or landmarks such as the Eiffel Tower have long queues and even when you are at the site, you have a few hundred people around you trying to take a picture. If you have an appreciation for the Impressionists (as I do), I would strongly recommend visiting Musée Marmottan Monet. This house museum boasts the largest private collection of Claude Monet (his son donated most of these paintings himself) in a very intimate setting. At no point were there more than 10 people around us, as we stood eye to eye with some of Monet`s most beautiful works including many of his last paintings.

Athens- Food

Athens, like Paris, is an open air museum. There is so much history to take in, you would be missing out by just taking a picture without getting the full story. That being said, I live for food and I could not give recommendations without one being a restaurant. This establishment, which is owned by my wife`s friend, serves some of the best pasta that you`ll find outside of Italy. Set on a cozy street, Alex the Fresh Pasta Bar is a must for anyone who wants to take a break from spanakopita and gyro pita. Good prices and friendly staff complete the experience and if I can recommend one dish, it would be the “Castaway”; their take on carbonara that I am confident will not disappoint.

Have a great weekend!

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