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

Pros of the Canadian Stock Market:

1. Stability and Safety:

The Canadian market is known for its stability and resilience during economic downturns. During the Global Financial Crisis of 2008, the Canadian markets, TSX, saw a maximum drawdown less than the US markets, the S&P 500. Canada’s strong regulatory oversight and well-capitalized banks help to contribute to the overall stability of its financial markets.

2. Resource-Rich Economy:

Canada is rich in natural resources, including oil, minerals, and timber. It boasts vast oil and gas reserves, making it one of the world’s leading producers and exporters. Canada is also rich in minerals such as gold, nickel, copper, zinc, iron, and others, which date back to some of Canada’s earliest industries. Investing in resource-based companies can provide diversification, and this can help investors gain exposure to traditional sectors like oil and gas and metals and mining.

3. Dividend Stocks:

Many Canadian companies have a strong tradition of paying consistent dividends. This can be appealing for investors seeking a steady income stream.
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His team has been focused on the sustainability of the rally. It's been a pretty amazing Q1, so they're trying to see what's ahead. We're well ahead of the typical election-year cycle, so that would indicate that perhaps we consolidate a bit. He's micro-focused on earnings growth, and that's coming through.

When we think about the M7 and the S&P 493, until recently all the earnings growth was coming from the 7 companies. So last year, people were complaining that the breadth was narrow, that those 7 companies were lifting all boats. But it was grounded in fundamentals.

Now we're seeing growth outside of the M7, which should lead to a continuation of the broadening out we've seen. That's healthy. We want more participation in the market.

The difficulty with the US, in particular, is that it always trades at a premium. And that's justified by its really good businesses. He thinks there's a lot of potential in Canada and Europe -- regions that are tilted less toward tech, and more toward cyclical/value like financials, energy, and whatnot. Those areas can benefit.

He's been seeing strength in Japan for a long time, which could be due to people avoiding China, so there could be some push/pull there. Definitely seeing opportunities across the globe.

For his core positions, you want to trade around them. If the thesis hasn't changed, story not broken, you want to maintain the core position. But if it gets expensive in absolute terms relative to itself or to peers, then you can take some off the table and recycle proceeds into a competitor or an undervalued peer. 

This is a good way to protect yourself and to have some discipline around the valuation.

Solid performance this year. Miners have lagged, people have been waiting for a revival, and this could be it. He's worried about what gold is telling us, why is it rallying so much? Combination of concerns about resurgence in inflation, along with government balance sheets still elevated. So people are trying to diversify.

He doesn't use them. Have to think about fees and volume. Same dynamics you'd think about with a stock listed on a foreign exchange vs. its ADR.

Industrial technology is going to become more and more important. Factory automation, sensors, internet of things. AI is really about productivity. These are productivity and cost-saving engines, increasing uptime. For example, by attaching sensors to a turbine, you can get ahead of maintenance before it becomes urgent.

His view is that since the generational low in rates in the early part of 2020, everything has changed. For 40 years, the power was in the hands of the borrower, and we went to a world where the power is in the hands of the lender. The economy is likely a lot more resilient in the face of inflation or higher interest rates.

It means that the things that benefited from falling rates, which are pretty over-owned, are not likely the places where you'll make money. Things like high-dividend-paying stocks, with lots of leverage and that generate a relatively small but steady return on capital, are not as attractive. Because as the cost of capital goes up, they're not going to grow their dividends. This includes utilities, REITs, telecoms, staples.

On the other hand, companies that have the ability to set price, and generate lots of excess cash, are more likely to return it to shareholders in the form of a rising stream of dividends. There's no question that we're going to have a higher cost of living, and so we need a rising stream of dividends. There are very specific companies and industries that are really well suited to that. You just have to get your head around the fact that the world is just a different place than it was before 2020.

People have been waiting for this recession, and piled into defensive sectors, but they're just not working and are now over-owned. Sectors that didn't do well for a decade, like financials in the US and around the world, as well as energy, materials, industrials, are all under-owned and unloved. But that's where the relative strength is. 

If you look at a chart that depicts results from a Fund Manager Survey, you can see where investors are overweight. Bonds, in particular, are overweight, as investors talk about bond prices going higher when rates go lower. The truth is that other things will add more value. For example, in the last 12 months the aggregate US bond index has been up 1.7%, but the world of dividend growth stocks is up 24-25%. 

We're in a different world, and both institutional and individual investors need to do some repositioning.

For a year now, he's been talking about buying large, cashflow-producing, resource producers. Names like CNQ and TECK.B. They represent one important component where we can get inflation protection.

People think about risk as prices fall. You have to remember that risk is also inflation eating your money. So you need to own things that protect you from that risk, and it's something we haven't had to think of much for the last 15 years.

Tech is not the only place to be. A lot of people are really overweight. He has about a 50% weighting. There's been some deterioration under the surface in some of the weaker companies. Just know that there are other things you can do.

Yes, but relative strength has been weakening since December for the group. His firm is about a 1/3 weight in healthcare, so pretty underweight. He often finds that if a company has a questionable technical setup, a little bit of bad news goes a long way.

In a world where there's lots of choice and you only need 20 names to build a portfolio, perhaps you don't need to focus in this sector right now.