Opinions Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTOct 10, 2025
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The message, loud and clear, in recent weeks of earnings is the market is becoming more selective. Companies that delivered that earnings that would have been exceptional a year ago, are now facing pressure--strong earnings are no longer enough, but also need to justify high valuations, sustainable profitable, and a tangible return on AI. That enthusiasm about AI has shifted to seeing returns on investment and cash flows. This is healthy for the broader market, happening during surprising resilient economic growth. However, there's rising inflation above the US's 2% target. She's looking at companies' underlying cash flow and watching the bond market. Overall, the market looks constructive and you don't need to be defensive.
Based on polls, it looks like Trump will lose the House which will turn him into a lame duck president, then he will default to more executive orders. Meanwhile, central banks will keep raising interest rates. Yesterday, Google got hit, so the market is asking who will pay for AI. Overall, he's trimming and pull back, including Google after more than doubling, energy and precious metal.
For new money, telcos (as well as REITs and other sectors) have been hit as interest rates keep rising. The telcos, though, have aleady cut dividends, so they are relatively defensive. Getting more income into your portfolio now makes sense. So these sectors act like a bond proxy, which are buys.
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The market expected today's Bank of Canada interest rate hike to 2.5%, given rising inflation fueled by rising energy prices from the U.S.-Iran war. It probably won't impact the TSX much because the index is heavily weighted in commodities and financials, which may actually benefit from higher rates. The hike follows the U.S. one. AI stocks are driving the market and there's a lack of market breadth. About half the S&P is tied to AI and data centres. But two-thirds of the S&P are trading below their 50-day moving average, mostly those not linked to AI, but that's where opportunities lie. He also likes energy.
The market is volatile. Everyday there is a sector or theme that works: one day AI works, the next AI isn't working, then it's energy or the hyperscalers, then not. We're all slaves to the algo trading and causes people to lose focus on long-term investing. He doesn't trade every two seconds; he focuses on the fundamentals, on quality businesses, over 3-5 years, companies that can grow EPS 10% annually and cash flow. He won't overpay for the enthusiasm for potential AI growth. He's attracted to niche US software and IT now, and the hyperscalers.
There's still room to run in global stocks in this rotation period, shifting away from U.S. tech, because investors are adding up the costs and returns in tech--and it isn't adding up. So, the shift has been to the opposite: energy, just energy thrived in the sluggish 70s. Washington: How lame duck is Trump? We'll likely see a Democrat Congress, though who knows what will happen to the Senate? Probably, we'll see gridlock, which markets like. Markets would be more bearish if things shifted entirely to the left, because of tax policy. Trump lowered corporate taxes, but there won't be tax changes for at least 6 months.
Anthropic IPO: Few surprises in today's prospectus and so far, so good. US Midterms: Historically, gridlock is good for stock markets, but what's different now is the colossal amount of US debt. Expect a shutdown in the first few months, but he hopes it won't be too disruptive. AI: Democratic states don't want new data centres in their backyard (NIMBY), which will force companies to adjust their building plans. This week, the Bank of Canada is expected to raise interest rate to keep pace with other central banks, given inflation. The world needs more housing supply and for wars to end.
Anthropic will IPO next month. Revenue growth per employee is far higher in the Mag 7 then the rest of the S&P 500, which has flatlined for the last 7 years. A chart of profit margins over that span is the same, with Mag 7 far outperforming the S&P 493. Anthropic touts AI is the most important tech to ever hit the planet given better productivity. Among the AI ETFs, AIQ is the passive way which outperforms when things are bad, but BAI outperforms when things are good. Both ETFs are the same now, and they both include SpaceX. Like SpaceX, he expects huge volatility from Anthropic, but buy the dips for a long-term hold.
It's a day-by-day thing: one day, tech rotates in, another day it rotates out. We haven't seen a full rotation though, because AI remains a dominant theme, but investors are asking when and what the returns will be, and when the capex spending will end. Who knows? Capex is massive, not since the railroads of the 1800s. He solds some Meta, Alphabet and Microsoft which he entered last spring. A lot of businesses are sitting on their hands, uncertain, like the car and steel sectors. We will feel this impact in the next few quarters.
Until very recently the market became very narrow, with only the largest of large-cap tech hanging in. As of this week, about 45% of companies in the S&P 500 are down more than 30%. With 60% down over 20%, 80% down over 10%.
The index has been looking pretty resilient, but there's a lot of weakness under the surface. Part of that has been from companies hurt by rising rates (defensive assets such as staples, utilities, etc). For companies that borrow fairly heavily, their borrowing costs have been going up.
In particular, the strength has been from companies generating lots of free cashflow and showing pretty steady dividend growth. Those have been his firm's focus.
Investing 101: Canadian Depositary Receipts (CDRs):
Canadian Depositary Receipts (CDRs) are a relatively new concept that has been introduced in recent years to help Canadians gain access to U.S. blue-chip stocks in a simplified, low-cost manner.
Canadian Depositary Receipts (CDRs) are securities that trade on the NEO Exchange in Canada, and the concepts are essentially similar to American Depository Receipts (ADRs) that are listed on American exchanges. CDRs give Canadians access to some of the largest US companies listed on NYSE and NASDAQ through a Canadian exchange in Canadian dollars. CDRs are issued and managed by the Canadian Imperial Bank of Commerce (CIBC). There are no management fees, so the main cost that investors will incur is the buy/sell commission on trades.
PROS:
Accessibility in registered accounts: CDRs can be held within registered accounts, similar to other Canadian-listed securities. We think CDRs can fit in any account, but generally, growth investments are usually better in a TFSA.
Currency-hedge feature: There is a currency-hedge built into the shares. That said, the built-in currency hedge has a certain cost and may not perfectly track changes in track exchange rate. There are no management fees associated with CDRs, but CIBC does make money on the currency hedge. While investors do not see this as a charge, it does impact net asset value. This cost is estimated to be about 0.50% annually.
The benefit of currency hedging could be explained through this example. For instance, if the Canadian dollar strengthens relative to the US dollar, then that investment will lag behind the equivalent US stock, and vice versa, if the US dollar appreciates, the CDR will appreciate more than the US equivalent. As investors might expect, this is simply a currency call.
Fractional ownership: One of the key advantages of CDRs is a lower share price. CDRs are structured so that the price per share always starts at $20, giving a wider array of investors access to these global companies. In simple terms, CDRs represent fractional interest in the underlying US shares.
CONS:
Illiquidity: The primary disadvantage of owning CDRs is their lower liquidity than the US shares. Consequently, a wider bid-ask spread could result in a higher cost when buying/selling for investors.
Withholding taxes still apply: Despite trading on Canadian exchanges, the underlying assets are still U.S. shares, which are subject to withholding taxes for dividends received (except in an RRSP account).
Limited selection: Since the product is still new, only a handful of well-known U.S. mega-cap stocks are currently available. Most small- and mid-cap U.S. companies are not yet offered as CDRs.
Conclusion
Overall, we are comfortable with CDRs for investors who want lower-priced exposure to U.S. securities with a built-in Canadian hedge. They are not fundamentally different from owning the underlying shares, aside from their price, the currency hedge, and where they trade. The underlying U.S. shares are held by CIBC, which issues the CDRs.
We generally prefer non-hedged products and would favour owning the U.S. shares directly if investors have the capital available and are comfortable with currency exposure. That said, we view CDRs as a good complementary option within a portfolio, and we would be comfortable buying them for U.S. company exposure.
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