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David Driscoll A Comment -- General Comments From an Expert A Commentary COMMENT Jun 02, 2025
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The Canadian market remains cheap compared to the US, and still offers excellent profit growth. Gold stocks have helped, but oil is weak. There's value in financials, railways and Loblaws and Dollarama. Diversified in Canada. The effect of tariffs haven't fully hit yet; consumers haven't felt it yet. US job growth and wage growth have been reasonable. Not yet, but for sure there will be an impact. Tariff policy in the US has been a yo-yo, but if there's too much of an impact on US consumers, he fully expects some tariff relief as we approach the US midterms 1 months from now. We can't invest based on what we think will happen with tariffs down the road, but rather look at the long-term value of companies. Things can change quickly. Corporate earnings have been strong and he expects this to continue. Also, we're seeing big capex from megetach on AI. Comapnies are re-shoring to the US. Tariffs have been a wake-up call to Canada, the EU, etc, and are now encouraging companies to invest domestically to improve productivity.
For the TSX, recent moves are probably not due to earnings. The tariffs were a bit of a wakeup call. The headlines are pretty scary, but things may not be as bad as they looked at first blush. When you really look into it, MUSCA is still in place and protects about 85-90% of the trade we do with the US.
Canada also has agency to start looking at better trade relations with Europe and Asia. We started shipping our LNG. He's actually fairly bullish on Canada.
They're kind of hurting themselves with these tariffs. He doesn't see the point of them. Lots of bluster and politics. Thinks there's enough pressure that tariffs won't be implemented in a meaningful way, and that's the optimistic part.
The pessimistic part is that he's concerned that maybe some of these tariffs will be worse. Some of the jobs data was pretty weak. That could be a leading indicator that the economy might be slowing down a bit.
Earnings have been coming in pretty strong, especially in tech and consumer discretionary. Some of the other areas haven't been as good. Healthcare keeps struggling.
Tariffs are still the #1 thing. He's never had to analyze so much politics in his life, and he's been doing this for quite a while. He'd like to see the rhetoric abate and actual deals get done. That would uncover the true impact. He'd also like to see the jobs data get a bit stronger.
There is an opening to lower interest rates now, as the latest jobs data gave the Fed a bit of a green light. Lower interest rates would mitigate tariffs somewhat.
The grid itself isn't built up enough regardless. Buildout of data centres is huge, representing a whole other layer of energy that we're going to need.
There are a number of attractive companies that are involved in electrification, building the data centres, etc. ETN is one example, as is VRT. HVAC is integral, as these centres need to be kept cool. We saw META do a huge deal with CEG, which is unusual but shows how big the area is going to be. Stay away from the speculative companies.
Nuclear is also bubbling up. We're behind on supplying energy needs for this area, and that's why uranium stocks have been doing really well. He hasn't been able to find just the right opportunity to put money to work in the segment, but there are opportunities. CCO is a nice company, but doesn't screen particularly well. Investors have bid up the stock, as that's where the future looks to be heading. Engineering firms also play into the theme. EME is an example.
Another beneficiary is AVGO. They don't make the chips that do the calculations, but the chips that move the data. Its stock's been doing phenomenally well, and that's all about the data centre buildout. MRVL also makes chips that move data.
Investing 101: If it sounds too good to be true, it could yield trouble
We have been watching with interest this year’s obsession with very-high-yield exchange-traded funds (ETFs). There are products out there, such as YieldMax MSTR Option Income Strategy ETF (symbol MSTY), that have an indicated yield of — wait for it — 72.91 per cent. This ETF uses a synthetic option strategy on a single stock, MicroStrategy Inc. to enhance yield, which is paid out to unitholders. MicroStrategy is among the largest corporate holders of bitcoin right now, and with bitcoin’s rally, the stock has done very well. But even with such a high yield the units of MSTY are down more than 20 per cent this year. ETF owners, attracted by the giant income, still haven’t made any real money, even though MicroStrategy stock itself is up about 36 per cent so far this year. Yet, this has not stopped investors from pouring money into the ETF, now at about US$5.6 billion in assets. And this is just one example. There are now many dozens of such super-high yielding ETFs. We think investors need to be careful here. In addition to getting seduced by high yields, investors could be in trouble in a different type of market, or if the derivative market seizes up, as it has done before.
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Believes momentum will continue. What's holding us back are Donald Trump's tariffs, which are very specific. About 90% of goods are moving across the border tariff-free under USMCA. It's a very complicated setup.
On the other hand, our economy's been "liberated" by turning on a big gas and a big oil export facility on the West Coast. These have pumped a lot of $$ into the Canadian economy. Gold production with the price rising has also added a lot.
The pessimism around Trump's noise has flattened the housing market. But we are going to get rate cuts, which should hopefully rekindle that market. Bruce's wife is in real estate, and so he's had feedback that housing is starting to pick up a bit.
The TACO part of Trump is coming through, and people are starting to ignore Trump and just get on with their lives. The outlook looks very good.
Canada has lots of technology expertise, so we're well-equipped for the AI revolution and will benefit from that.
For Canadian energy, we're finally turning on exports to countries other than the US (who always paid us at a discount). So now that we'll get a better price, Canadian energy is probably in for a better run than the world is. Canada enabled Putin 20 years ago, because we wouldn't build pipelines and he did.
His team sets a plan and sticks to it. In a 30-stock portfolio, he'd have about 4 Canadian, 13 US, and 13 international. It's not where the companies are domiciled, it's about where the revenue streams are coming from.
He's gotten emails over the past weeks about the CAD vs. USD. Important to understand that currency risk becomes benign over a 10 to 20-year time horizon. If you think about the USD vs. CAD, the annual change over 25 years has been 0.2%. With Europe, it's been 0.6%. So don't fret.
His approach is to have a list of stocks, and each client's portfolio is customized with 30 names. They look at the percent weightings in the portfolio. When it comes time to do some buying, they look at the ones with the lightest weight because those are the ones that are down the most. The expectation is that, at some point in time, profits will return and stock prices will turn around and start to go up again.
Stay in the game. Protecting your losses is much more important than how much you make.