A Comment -- General Comments From an Expert (A Commentary)

Investing Theme To Consider: Longevity

This theme is not exactly new, but we think it will get much more traction. Consumers want to live longer and better. Already, there are drug companies extending the life of dogs, and we wonder how long it will take to get to human trials. We know of more than 20 companies already working on life-extending products in such areas as cellular reprogramming, body part replacement, young blood injection, cloning and genetic editing.

There are hundreds of snake-oil companies looking to make a quick buck from boomers seeking to extend life. But there are also real companies, backed by billionaires, doing real research and starting to see breakthroughs. This will become a much bigger industry — and investment theme — over the next 50 years.
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All technical aspects of the markets look good - markets at all time high. Technical signals all pointing to favorable outlook. Does not have much cash - has invested heavily into the markets. Strength of markets appears favorable. Rally appears to be diversified - strength in broader section of the markets - not just "Mag 7". China and commodities appear to be presenting value. Chinese economy appears to be recovering from recent weakness, and is breaking out. 

Investing Theme to Watch:

Artificial intelligence

We know you are saying, “That’s a current trend,” and, yes, it is, but we think it is absolutely here to stay. It has probably barely started.

Like the internet in 1997, we do not really know where AI is going to take the world. It may be very helpful or it could be very disruptive. Entire industries could be replaced. Companies that properly utilize it might see profit margins soar and stock prices surge, too. Companies that miss the boat might go out of business.

At some point, companies will need to decide if the money spent on AI was worth it. We think, in most cases, it will be. Better productivity and higher profit margins will be powerful drivers for companies.

For stock pickers, there will be losers and winners in the AI game. The hardware sector has run already. Software and data analytic stocks might be next. After that, who really knows? Certainly, cybersecurity stocks could be winners. AI likely makes it far easier for scammers, so security is going to be a very big concern down the road.
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Good times for equity investors. And for bond market investors as well, after 1-3 difficult years in the bond market. We can chalk it up to a Goldilocks scenario in the minds of investors. 

The BOC was ahead of the Fed with rate cuts, and continued with another one this month. And then with the Fed, the long-awaited, pined-for, initial rate cut came last week, and it was a doozy. A double, so to speak, at 50 bps. Investors have developed some conviction that we're going to get some relief in the rate-sensitive segments of the market.

Despite the fact that we're seeing tentative signs of weakness in the labour market, there's a jelling consensus that the Fed might be able to stick a soft landing and avoid a recession. He's in that camp. There have been a lot of naysayers anticipating a recession, going back to 2022, and there were some compelling arguments for that.

But fiscal largesse allowed us to stick-handle our way through what many thought would be a recession in 2022-23. He's cautiously optimistic that we'll avoid one in 2024-25 as well.

A lot of factors at play to explain these moves.

Yes, they are defensive sectors, but not solely. Real estate is a value play, and perhaps an emerging view that offices are going to start filling up again. And with the loosening conditions in the labour market, the balance of power might start shifting away from employees (who have enjoyed working in their pyjamas and Lulus the last 4 years) and back toward employers.

Utilities are defensive, regulated, and defensive, and there's going to be a secular increase in power demand as we move to a greener economy. But it's also a second derivative trade on the AI mania that's swept the market for the last 2 years. Data centres and the AI chips use a tremendous amount of power.

It certainly helps out on the software side, because they're more leveraged. 

Imagine a chart set up like the rings on a dartboard. It will depict the infrastructure that's been built out over the last couple of years.

In the middle, the bull's eye, is the power grid. It provides the power for everything else that's going to happen. Names like NRG, PPL Corp, DUK, SO. A lot of US names. Interestingly, the utilities side is up 25-27% YTD.

Moving to the second ring, there lie the data centres. All the way from the hyperscalers like AWS and Azure to EQIX and DLR. That's the backbone of the AI stack.

The third ring is communication infrastructure. Boring, but essential. 5G. Names like VZ, CSCO, and JNPR.

On the outer ring, you find the semiconductors. From NVDA to ARMH. Designers, foundries, equipment suppliers, to manufacturers.

Right now, you definitely want to be invested in the semiconductors, because we're still only second or third inning. Data centres are also attractive. As well, good dividends come out of the communications area. Really, anything except utilities (though they're up a lot this year). 

If infrastructure is what's been built out, the stack is where we're going.

Imagine another bull's eye chart setup. In the middle, you have all the cloud storage. 

Around that, you have the data analytics. Here you'll find DDOG, MDB, and the like.

Third ring is what's happening right now, which is machine-learning models. Gemini from GOOG, Watson from IBM, Claude from Anthropic. All the algorithms are here, processing everything to get to the outer circle. 

Outer circle involves the applications. He thinks this is where the puck is going over the next year. It can be very broad, or industry- and company-specific. NFLX, SNAP, ADBE, CRM. Happening in education with DUOL. A good point to note is that model training could actually eat the lunch of some of these applications.

He likes to spread his investment across the whole chip sector. There are 4 areas: foundries, manufacturers, equipment suppliers (see his Past Top Picks), designers.

Foundries are agnostic; he'd probably pick TSM. In the manufacturers, he'd pick MU, as it both designs and manufacturers. For the designers, he'd definitely pick NVDA.

Investing in Dollar Stores

While dollar stores are not the most exciting equity investment, in both the Canadian and US markets, they have a strong history of generating returns. They operate as consumer staples businesses typically seen as ‘defensive’ investments. A defensive investment is one that should have consistent earnings and revenue growth irrespective of the market conditions. During times of recessions and high inflationary periods, these investments tend to perform well compared to higher growth stocks. Given the economic landscape in both US and Canadian markets, investing in dollar stores has made plenty of sense recently. Recessionary fears and inflation have both been high, prompting greater attention to dollar stores. Investors have been hoping for increased growth amidst potential economic uncertainty from these discount retailers.

Outlook on Dollarama (DOL)

The weakness in two comparable companies may sound some alarm bells for DOL, but we would not be so worried. While DOL, DG, and DLTR are all discount retailers, competitive positioning is the key factor here. DOL is almost a monopoly in the Canadian market for discount retailers while DG and DLTR’s primary market in the United States is much more saturated. DOL has not reported any significant consumer slowdown affecting them and same-store sales-growth was 4.5% in recent quarterly results. DOL is also expanding into Mexico which is further aiding its growth.
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Global markets are up mainly on the Magnificent 7, but the breadth is widening. he's very bullish stocks and bonds. Inflation ahs fallen to normal levels as central bank cut rates, rocket fuel for bonds as well as stocks. But the slowing economy and rising unemployment means pic your spots, avoiding sectors too dependent on the consumer. The Canadian market is driven by gold/minerals and energy and financials. The breadth is narrow here, but widening. He sees a soft landing of disinflation and deflation where CPI in Canada was recently negative. Overall, it's good for stocks and bonds. He doesn't touch commodities-- too volatile and can't control prices. China is in big trouble with the consumer losing in their real estate holdings and the consumer is hoarding cash. Today saw China's government issuing stimulus which gives short-term boost.

Powell didn't put it that way in his press conference, but that's the inference. Equity markets are looking at it a completely different way than the bond market. We saw the long end of the bond market sell off a bit after the rate cut.

If we were going to get a very hard economic landing, theoretically you'd see a demand for duration. But that demand for duration would come out of selling equities. So you have a bid for equities and for the front end of the curve, but in the bond market you have what's called a "bearish steeping". And that's not a bullish underlying story.

A lot of things are just not lining up for him. Is the bond market right about the outcome, or is the stock market right? When the Fed did its summary of economic projections for unemployment, inflation, dot plots, etc., the front end of the market (short-term interest rates) is pricing in a much more aggressive path of rate cuts. This tells him that the bond market's looking for a harder landing than the stock market. Both can't be right. Right now, the stock market continues to win that debate.

All kinds of reasons why the path of Fed rate cuts might be slower. But the market's pricing in way more than the Fed's telling us it's going to do. The market is a better discounting mechanism than any one individual. But at the same time, the stock market's at all-time highs. That tells you we have a stronger economy. In a stronger economy, the bond market's not going to be good. That's why we've seen pressure on the long end, yields rising and bonds selling off.

If the bond market was saying OK, hard landing, that would imply the Fed's going to cut more. There's a lot that doesn't add up, and when that happens, you want dry powder to take advantage of opportunities in any market surprises. A bit of cash right now is not a bad thing.