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

It's all about interest rates. When the Bank of Canada recently cut rates, bond prices started to rise in Canada. Since November, when the US Fed announced it will stop raising interest rates, Wall Street cheered, expecting six rates, which have not happened. Mega tech stocks continue to rule because the hedge funds have piled into the AI trade. When Powell last month said that inflation is still a concern, the hedge funds started migrating out of megatech and the market has done sideways. Earnings are at the end of this month; this is the worst quarter of the year, so expect things to stay sideways. The US dollar is artificially high, because foreign investors must buy US bonds in USD, and the US has the highest interest rates in the G7. The strong USD is hurting emerging markets. He's holding both stocks and bonds. 70% Canada's stocks amount to financials and resources, so you need to look abroad to diversify. The mismatch in interest rates between Canada and the US means a weaker Canadian dollar. China is not attractive given its aging population and economic problems.

In AI, software has taken over from the chips, because of valuation. Semis have run up recently and now investors are locking in some gains (but still in tech). Therefore old tech and software are benefiting now. 

Company Highlight: Brookfield Renewable Partners (BEP.UN)

The top performer of May was Brookfield Renewable Partners whose stock price rose 32% on the month, 9% year-to-date, but was still down 7% from the year prior. One year ago, at the end of May 2023, BEP.UN stock’s price had unknowingly been peak trading at $38.89, just shy of 52-week high levels of $39.90 which were achieved in June 2023. Things have been up and down since, with the stock hitting a 52-weeek low of $27.43 in October 2023 but the recent recovery bodes well.

BEP.UN is one of the largest pure play renewables companies in the world. BEP.UN has a 23-year history as a publicly traded operator and investor in renewable power and sustainable solution assets, currently employing approximately 4,770 workers. BEP.UN’s portfolio of assets spans hydroelectric, wind, utility-scale solar, and other sustainable solutions assets, including distributed generation solar and storage. BEP.UN’s portfolio of sustainable solutions assets includes investments in Westinghouse (a leading global nuclear services business), investments in an operating portfolio of carbon capture storage (CCS), renewable natural gas, and over one million tons of recycled materials annually.

The big pop in share price was driven by news that BEP.UN had entered into a contract with Microsoft as their renewable partner. BEP.UN will deliver an incremental ~5,200 GW hours per year of generation under the finalized partnership with Microsoft to deliver over 10,500 MW of renewable capacity between 2026 and 2030. First quarter earnings also came in in May which were decent and pointed to potential fundamental changes with positive tailwinds from electrification and data center demand trends. The company also increased its distribution by 5%.
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In first-half 2024, the S&P is up 15.5%, the Nasdaq 20% and the Dow 4.5%. She expects gains in the second half, though lower. It's prudent to take profits after a strong 18 months. The economy will remain strong. The rally will broaden. We will definitely see a soft landing. Companies like General Mills are actually lowering prices to help a sold consumer. She projects 8-10% corporate earnings growth.

It's time to tap the brakes after a strong first half 2024, led by tech and telecommunications. But other sectors are declining, not merely trailing, led by materials, staples, energy and industrials. Shares are priced to perfection. He expects a pullback coming.

US political situation not a major concern for investors - retail investors should focus on buying quality companies. Cooling inflation numbers pointing towards strength in the markets. Overall, markets are pointing towards strength. However, there are some weak spots in the market with recent weakness in retail companies like Nike. Without strength in "Big Tech" names, could be weakness in the US Economy for the second half of the year. Consumers are facing headwinds even with cooling inflation numbers - will be interesting to see how this plays out. Bankruptcies and credit card defaults are up which is another sign that points to weakness. Expecting strength in under valued sectors like energy in the not too distant future. Will see broader market strength at some point in the future - especially with falling interest rates. 

The Rationale for Investing in the Canadian Market:

1.   Owning the TSX is similar to buying insurance for the portfolio against a market downturn. This is because the Canadian market is heavily dominated by defensive sectors which could act as a hedge against market downturn.

2.   Discrepancy between the two markets has never been wider than before. For example, the TSX is trading in the range of 17x – 19x multiples, the S&P 500 is trading in the range of 25x – 27x multiples.

3.   The opportunities set for Canadian investors are even more attractive in the small and mid-cap space, where we think there are tremendous opportunities for undervalued long-term compounders that if being traded in the US market would see a much higher multiple.
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It's really been a tale of two markets. Large-cap tech stocks are dominating everything, and investors have completely forgotten about 95% of the S&P 500.

We've seen this before, where diversification has become a dirty word -- "Just give me more NVDA." Even though markets are at all-time highs, there are so many great companies that have lagged badly over the last number of years and that offer compelling value.

The message is very simple, and he's been doing this for 35 years. Nothing stays cheap forever, and nothing stays expensive forever. If investors forget about earnings, cashflow and so on, and simply buy what's going up, it usually does not end well.

This is not to suggest that MSFT and NVDA and others are not phenomenal, free-cash flowing businesses. It's just that a lot of them are priced for perfection and don't offer the same value they did several years ago.

His answer is that people need to be long-term investors. Warren Buffett has said that even if he knew there was going to be a recession tomorrow, he wouldn't sell anything that he has. These companies have been around for so many years. If you bought them years ago, you'd have had great performance, growing dividends.

That's always been the message. If you wait until the first rate cut happens in the States, if you wait until things turn around, these stocks have already rallied.

He's been buying. His focus has been trimming things that have been doing extremely well and aren't as cheap as they were. He's always looking for great companies on sale.

Sure, and the host works for one of those companies, because BCE is up there. His view is very simple. Interest rates will soften up, though they'll never go back to levels we saw before. 

The economy is slowing, consumers are reacting to higher interest rates, so rates will be cut a few times. Once again, investors will say, "Hey, what about dividends? I'd forgotten about those over the last few years." He expects to see a rally -- certainly in Canada which is more interest-rate sensitive with banks, telcos, etc, and even south of the border.

One of the things he looks at is sustainability of dividends. Are you paying your dividends through free cashflow? WBA cut its dividend not that long ago, and they've struggled ever since acquiring Boots in the UK a decade ago.

Need to focus on those businesses that still have growth, generating consistent free cashflow, and covering dividends through free excess cashflow and not getting themselves into trouble.

He owns Loblaw, which owns Shoppers, and that's one of the reasons he likes it so much. The US is such a different market. He owns CVS, which is much more broadly diversified than Walgreens. The business is being transformed all over NA, because after Covid they found it was so much cheaper to send you to get a vaccine at a pharmacy than to go to a hospital.

US is a tough place for retail, brutally competitive. Some of these stores are in tough locations and it's likely that the company hasn't put enough money into them.