Brent Cook A Comment -- General Comments From an Expert A Commentary COMMENT Mar 06, 2018

The tech sector is driving things and, more specifically, it's really by the AI-related companies and the perceived AI winners. It tends to be like a gravitational force, where all the money gets sucked into the NVDAs, MSFTs, and ORCLs of the world and then also into the derivative plays. It means there aren't a lot of funds left over for consumer packaged goods companies, international insurance, etc. 

This is very much a US trend, as well as a global trend. So it's a tale of Haves and Have Nots, led by AI.

When it comes to perceived AI losers, or what's left behind, the market tends to be overly focused on certain areas of growth. The economy appears to be imbalanced at all times in certain areas. He doesn't mean this in a negative connotation.

For example, there's market leadership in terms of industrial production. For a while it was automation, then it was electrification. Now it's the industrial renaissance because the data centre is the new form of compute and intelligence. That type of coalescing around one theme just means that everything else gets left in the dust.

On the Canadian market, this will be good news for all the gold bugs out there. If we're being fully honest with ourselves, inflation hasn't really been conquered as a risk to the Fed's inflation mandate or to the BOC's focus on jobs. It's a nice way of saying let's go back to negative real rates.

The reason the BOC is more dovish, and needs to be, is because we have a housing financialization dynamic on the other end. The housing markets anywhere in the GTA and parts of BC are starting to see illiquidity and rising losses at the margin.

As for the Federal Reserve, they're looking at inflation and saying that's yesterday's problem (even though it's not). They're looking at unemployment, which is loosening at the margin from record generational highs, and saying that this is the big problem we have to solve.

Negative real rates, within reason, will be good for equities across the board. Also good for gold. And AI is the big conversation within equities.

This speaks to large catastrophe events, which typically go to the reinsurance market. If it's a really esoteric risk, such as piracy risk off the coast of Somalia, that goes to what's call the "excess and surplus" market, which then goes to Lloyd's of London.

These catastrophic risks will get more and more expensive as time goes on. Katrina in 2006 was the high-water mark for this. It's been pretty decent since then. So the reinsurance market has actually been one of the weakest, lowest-margin, competitive segments. A company like CB actually takes some of their risk and offloads it onto reinsurance.

His firm focuses on the stock itself. There's no need to add on a management fee to your holding. Foreign exchange considerations may offset the MER, but it's best to keep it as simple as you can. Single-stock ETFs tend to become vehicles for more leverage of 2x or 3x and so on, and you need to be very cautious of those.

The best tech companies in the world are most certainly not in Canada, as much as he wishes they were. If you're looking for technology, please don't start in the Canadian market. Look to Canada last.

Best tech company in Canada, far and away, is SHOP. It's a small- and medium-business e-commerce enablement platform. Not really AI. The other company that's closest to AI is CLS, but it's vulnerable in the AI value chain compared to a TSM, NVDA, MSFT, or anything else available in the USA.

We have these mega-gains. Both September and now going into October are the seasonally weak periods. Big investment houses like GS are saying that we've had so many good returns for so long, there has to be a regression to the mean for US equities. They say 30% odds of a recession and that the next 10 years aren't going to be as good. So that's one thing.

But on the other hand you have very powerful tailwinds. The "big, beautiful bill" has been passed and is very stimulative. One interest rate cut already, probably 2 more this year, and more next year. Those are also very stimultive. And we have all this AI technology that's proliferating -- delivering a lot of spending, a lot of demand, and a lot of productivity gains eventually.

You have these 2 things going on at the same time. But the question is valuations. Parts of the US have gotten very expensive, such as AI-related stuff and the Mag 7. People have been saying for a very long time that it's a very narrow trade and to be careful. But that didn't mean that they weren't going higher and that there wasn't value there.

We're at a point now where certain names still make sense, such as NVDA and AMZN. The other 5 are getting a bit pricey and over their skis. But there are other pockets that are still very investable. 

The Mag 7 are starting to look a bit tired and showing some signs of exhaustion. 

Financials are on fire; they have deregulation behind them, an upward-sloping yield curve, and strong capital markets activity. Aerospace and defense are global themes attracting a lot of spending to meet targets. If the price of gold bullion stays where it is, gold equities are trading a lot cheaper than they ought to be.

Small caps is another area he likes. There are 10k companies, and a lot of them are interest-rate sensitive. With lower rates and a better economy (we just had a 3.4% GDP print), there are some really strong tailwinds for them as well.

He's not as much a fan of oil stocks, as the price of oil is manipulated by OPEC. And you always have geopolitical issues, as with Russia. Harder to predict the price of oil. 

Whereas natural gas is an enduring theme that will very much help investors over the next 5 years. Canadian government's finally helping the sector after many years of not being helped; that's really good for the sector (and for investors).