Opinions
Stockchase Insights A Comment -- General Comments From an Expert A Commentary COMMENT Jan 20, 2025
You might be interested:
Yes. The Fed is always late; that's not a fault, it's the result of the process. Only the history books will tell us whether they've been too late. Too late means that they don't act until there's an event that they could have prevented if they'd acted earlier.
He can't see any indications showing that the US economy is in the path of harm. But these things can happen fairly quickly. There's no question that the labour markets are weakening, but "weakening" is a lot different from "weak". Fed Chair Powell has been very fond of saying that they're "data dependent". They have to wait until they see something before they act, can't just act on an idea.
It's a serious issue, they have to be measured, and they're doing that.
He expects 25 bps. Could easily do 50, but that might send the wrong message. If the market senses that the Fed is lowering rates because they're fearful of a weak economy, it will react very poorly. The Fed doesn't want to upset the markets, they want to be benign as they relate to the market.
It's not a very well hidden fact that this is just the start. He fully expects that before this cycle is finished, we'll see at least 100 bps drop in rates (even if that moves into 2026).
It'll be interesting to see how the markets do react to this afternoon's press conference. It's not the 25 bps that markets will react to. He's waiting to see if the tone is dovish or hawkish, how many dissents on the board there are, and how many board members would have actually preferred 50 bps. He'll be watching how the market grapples with the message from the written side (decision itself, dissents, dot plots) and from the nuances (how Powell answers questions).
Premium contentBOC and the Fed both cut by 25 bps yesterday. Broadly speaking, that's good for the valuation of all risky assets because risk-free rates are the foundation of the cost of capital for companies. Lower rates tend to lead to a re-rating, and we've seen that today.
His team focuses on two long, North American, high-conviction, best-in-breed portfolios. One mandate looks for companies that have a demonstrated history of growing dividends, underpinned by a strong competitive moat. The other, more aggressive, mandate looks for companies with very strong fundamental momentum.
It's a 2-speed economy. The job market isn't terribly healthy in either US or Canada. The experience of the median household in the street is not all sunshine and roses. Yet we have corporate profits and equity indices at or near all-time highs.
To capitalize on that, their portfolios remain predominantly invested in mid-cap, and especially large-cap, enterprises. These tend to have more resilience, more robust structural profitability, and (crucially) a more global orientation.
Likes them. About 10% of his firm's dividend growers mandate is invested in them. A leveraged play on the economic growth of the regions they operate in. Economic growth has been tepid and lacklustre, Canada's GDP print for G2 was negative.
But market's forward looking, and bank prices reflect that we're likely to see an acceleration in the economy. BOC rate cuts set that in motion and added fuel to the fire yesterday. The Major Projects Office policy thrust is very encouraging. We're going to cut red tape and build things. A game changer. These projects will be debt-financed, which should be growth-positive for the banks' lending books.
Stable, well-governed, well-managed, tight oligopoly. Must-have for businesses and individuals. His portfolios are long and strong this area. Prefers the larger banks, smaller ones just don't have the scale.
Note that EQB has had some tragic turnover in the C-suite, and LB is broken.
Absolutely. Investors have a lot of money on the sidelines, just waiting for a buy signal. Ironic in that people wait to buy when everything's up. But it really does work that way psychologically. With the market going up, people are confident. And with interest rates going down, GICs and such aren't looking so good. It starts a slow wave of $$ coming back into the market.
That usually continues until something goes wrong. And you never know what black swan event is going to happen. Right now, the confidence and the interest rate movement are really positive for equities in general.
Yesterday was great. We've had some really big moves and are starting to see some M&A activity. Market confidence has to last for a period of time before people say it's time to buy the small companies. They will move and be volatile, but we've had 4 or 5 false starts to a small-cap rally in the last 3 years.
Any time inflation picks up, small caps get a hiccup because they're quite sensitive to rising rates. There's no one indicator that signals a small-cap rally. Things just slowly build until investors get more confident and willing to take more risk.
When people talk about risk in small caps, what they really mean is price volatility. But there are lots of small caps out there sitting on $100s of millions of dollars in cash, and their fundamental risk is not that big. But some of them are much less risky than a large cap sitting on $100s of billions of debt, which will get hit if interest rates go the wrong way.
In Canada, small-cap golds are up 60-70%. Just ridiculous in terms of how well they've done. Starting to see some industrials move.
Starting to see small caps transition into big caps, and CLS is the best example of that. It went from a dopey little company 5 years ago to today's $30B market cap. ATZ is another example. That's what small-cap investors want to see.
In general, people are still gravitating toward $2-3B companies rather than $500M companies.
Doesn't think it will get eaten, but a lot of software companies need to adapt. They can either make acquisitions to make themselves more competitive, or hire smart developers to create in-house AI solutions. There will be a lot of angst and a lot of investor uncertainty.
Some will suffer, but others will adapt and prosper.
The Risks of Penny Stocks 101: High Volatility and Illiquidity
Penny stocks have low trading volumes and liquidity. Often, controlling shareholders own 90 per cent of the stock’s float, so that any buyers have to pay ever-increasing prices to establish a stock position. This means that even small trades can have large effects on the stock price, making them extremely volatile and difficult to buy at a decent price.
Even worse, of course, illiquidity makes it even harder to sell at a desired price. And, trust us, if you find yourself owning one of these penny stocks, you are going to want to get out at some point. Movements of 50 per cent or more can be common occurrences. Investors may find themselves completely unable to exit positions without accepting a steep loss or may be stuck holding the bag if buyers suddenly disappear.
Unlock Premium - Try 5i Free
Advantages of ETF's for Investors:
They are a great tool for investors transitioning from passive to DIY
In investing, there is no need to choose between being an exclusively passive ETF investor or a DIY stock investor. There’s certainly room for investors to do both and create their own hybrid strategy. Investors who want to make the gradual switch to DIY stock investing can also take a hybrid approach by starting with broader market exposure through ETFs as core holdings, then selecting individual stocks as “satellite” holdings. As one gets more comfortable with the risks and concentration of owning individual names and develops a more refined strategy, an investor can slowly sell off units of core ETF holdings (or take new cash that come into the portfolio) and move more towards individual names.
There are many ETFs with niche exposures that allow you to differentiate from the market
There are enough ETFs and variety out there for an investor to create a portfolio of ETFs that he or she views as more optimal than the broad market. An example we often use is owning a TSX ETF which would be overweight in financials, materials and energy. A more optimal allocation may include increased exposure to technology, industrials and other cyclicals for investors looking for growth or utilities and REITs if one is looking for a higher yield than TSX. These adjustments can be achieved via specific sector ETFs. One can also tilt their portfolio towards smaller market cap ETFs that may have higher growth potential and are not well represented in market-cap weighted indices.
Why buy one or two stocks when you can buy the sector?
While this sounds like a rhetorical question, there is an actual reason for this: superior returns by being concentrated in a winning stock of course! But the trick is getting to a level of conviction where one can believe the particular stock is a winner in a specific indsutry. Of course, this can require a lot of time and energy researching a company and its competitors. Meanwhile, one may want exposure to this sector until deciding which name(s) to be more concentrated in. The solution: ETFs. For example, you want exposure to the cybersecurity space and are bullish on the sector in general. To not rush the decision of which cybersecurity stock(s) to pick while getting exposure one can purchase an ETF like the First Trust NASDAQ Cybersecurity ETF (ticker: CIBR) or ETFMG Prime Cyber Security ETF (ticker: HACK) to benefit from industry tailwinds and ultimately let the market decide which individual companies get a higher weighting in the ETF (assuming a market-cap weighting).
Low knowledge areas
Related to the point above, another benefit to ETFs is that they give investors access to instant diversification in areas that are far out of an investor’s realm of knowledge. For example, an investor may want emerging market exposure in their portfolio for geographic diversification. If one knows barely anything about emerging markets, it can be a daunting task to learn the ins and outs of companies in foreign countries that have very different economic cycles, regulatory and competitive. Many investors may not even want to own individual securities outside of North America and this is understandable. Again, ETFs offer a solution to gain this exposure of broader regions or specific countries. Of course, low knowledge areas for an investor can also be specific sectors in local or North American markets.
Final Thoughts
ETFs have many other uses that we can on and on about such as hedging a portfolio’s broad market exposure through inverse ETFs, getting exposure to commodities, currencies and precious metals or even using as a proxy for exposure for the 30-day period one needs to wait before buying back a stock sold as part of a tax-loss selling strategy. The point is, given how easy ETF make it for an investor to customize a portfolio and quickly gain diversified exposure, ETFs can find a place even the most active investor’s portfolio.
Unlock Premium - Try 5i Free