Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Sep 23, 2024

It's been the same themes all year long. If you look at the core sector leadership groups, it's been financials, industrials, and materials really driving the bus. Materials have been exceedingly strong.

There's been continued hedging in portfolios against inflation. Inflation is sticky. While the Fed is now cutting rates, it probably increases the longer-run chances for inflation. You can see that in the long-term treasury bonds.

The TSX is benefiting because the sector makeup in our market is a more inflation-oriented index.

The problem with market-cap-weighted indices is that they can become exceedingly overweight certain sectors. 

So if you look at the S&P, it's underperforming almost all global markets YTD. It's a very growthy index, and some of the sectors that are really working are very small pieces of the S&P. For instance, materials make up ~3%. Whereas in the TSX, the materials sector is a much larger piece (in the teens). 

In a market right now that's uncorrelated, it means that there are haves and have-nots. For active portfolio managers, it means there's an opportunity to add value.

From 2007-2024, the all-world index (ex-US) had almost no return. Whether you were looking at Europe, South America, or Asia. Japan had 33 years of no return.

But in the last 18 months, international equities are outperforming the US. Part of that has to do with ~31-32% of the all-world index being financials, and financials have been very steady. Materials is a much larger piece of the global index. There are also a lot of great industrial companies. 

International investors wound up very focused in the US because it was the only game in town. But now their markets and their currencies are doing a little better, and so we're seeing capital rotate back to international stocks.

Inflation is stickier than the market is picking up on. Things that do well in an inflation-oriented environment are what's leading the market. US jobs date is weakening. If you're a consumer who has assets, the world we're living in right now is great. If you're a consumer living month-to-month on your wages, life is getting more expensive, and wages aren't keeping up.

When he looks at the consumer sector, the breadth of the advance (stocks performing well) of stocks in that sector has been steadily weakening. Tells you that that risk/reward in that group is not in your favour.

TSX is largely gold, so that's what's driving the bus. It's the only sector outperforming the index this year, and it's outperforming by so much that it's raised the average of everything else.

Under the surface, the infrastructure stocks they own are doing pretty well. So he's happy with where things stand.

We're in some sort of changing of the world order. US government taking positions in private companies. Ongoing trade war which escalates and de-escalates day by day. A lot of that is filtering into gold. His firm is a bystander in  this. They own a bit, but not a lot. 

He's been watching the dichotomy between gold and Bitcoin. Bitcoin is supposed to be digital gold and better because it's portable and costs less to store. But it's not performing the same way gold is. That tells him that adoption isn't there yet. As well, when the person on the street is chatting about gold, that's a warning sign of bubble-like behaviour.

The changes we're seeing in the US treasury market and in many countries makes it hard to tell exactly where assets should be valued. Assets are valued relative to each other. A year ago, gold was clearly undervalued relative to other assets, and now that's changed.

You can make logical arguments both that there's room to run higher, as well as that we're overheated here and due for a pullback.

Some investors like the entertainment and streaming segments, but his firm doesn't find those areas durable enough for their client. That world just moves too fast for them.

Just this morning, he had a discussion with a client who'd retiring at the end of this year. She's 58 and has worked for the same company for 30 years. So it's not as though she's retiring with a massive portfolio, but it's enough for her to live off of. This portfolio has to take her to 98 years old, that's 40 years. She needs something that's very durable and will last that length of time. Produce income for her to spend, protect the downside, and provide some upside if there are worries about inflation or currency debasement.

Interestingly, whole Canadian energy space has been pretty resilient. Gradually people are returning to Canada on the basis of our lower decline rates, better prospects for transporting oil out of the country, and a government that might support further investment. Good case to be made that oil prices could rally from here. 

In 2026, you'll really want to watch drilling plans for US shale drillers. If they're not drilling, that could set the stage for a pretty good environment in Canada.

He's underweight, and has been for some time. His portfolio position on banks is ~15%, compared to 20-25% of the index. It's not a market-timing call, but more of a long-term structural call. Better places to put $$. For individual clients, he doesn't mind selling some bank stocks to fund expenses. Otherwise, he's happy to hold and collect the dividends. 

All of them are quite rich, he's not buying right now. And we're still not at peak reset for Canadian home mortgages, which will be end of this year and into next. He'll be watching that.