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

Biotech tends to be a very binary business, boom or bust. He's not an expert in biotech, so is not comfortable participating. The pharma side has been subject to a lot of political noise.

That leaves medical devices as the one area he's been willing to be in. He likes ABT and ALC.

Strength in the Markets Despite Global Tensions: Earnings are Surprisingly Good

For this year, looking at S&P 500 earnings, just completed third-quarter earnings growth is projected at about eight per cent year-over-year, marking the ninth consecutive quarter of earnings growth for the index. For the full year, earnings growth is expected to be around 10.9 per cent to 11 per cent, with revenue growth of about 6.1 per cent. Looking out to next year, earnings growth is forecast to accelerate, with estimates around 13.8 per cent year-over-year, according to data firm FactSet Research Systems Inc. Revenue growth for 2026 is estimated around 6.6 per cent. Earnings truly drive the market, and the surprisingly robust showing — even in the face of tariffs and a possible recession — has made investors confident enough to spend their cash.
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We've seen ups and downs on the trade front since April, so it's hard not to look to that prior playbook and say that we're probably going to come up with some kind of solution. Natural to get volatility in periods like this, especially after hitting so many record highs over the last number of months. The S&P is almost positive again today, so things are settling out. Expectations that agreements will be reached on a lot of issues that are at the forefront. 

When you strip all that headline risk away, we're left with quite a healthy market. Earnings growth continues to accelerate. Jobs market is OK. Interest rates seem to be stabilizing and coming down. That sets up really well into the end of the year, and especially into Q1 of next year.

They're encouraging clients to stay invested during this period. Use it as a way to pick away at some of the underperforming sectors, or to add exposure to names you wanted before the selloff when things were going straight up.

He is seeing some of them revive, but there's still a plethora of opportunities out there. His firm spends a big chunk of time on small- and mid-caps. This environment sets up really well for the other 493 of the S&P 500. He's had no trouble finding undervalued names in both Canada and the US with lots of catalysts, including growth tailwinds and a stabilizing interest rate environment.

He likes high-quality equities. In Canada, the high-quality factor has had a pretty weak few quarters. So there are a lot of opportunities there.

We're seeing contract after contract. Maybe there's overbuilding there, but it's too early to say. Earnings growth has been quite robust in that sector. It's not something his team is afraid to be involved in via the NASDAQ, certain Canadian equities, or utilities and natural gas.

It's going to create a large tailwind, and there are many areas of the market you can get involved in. He's not chasing some of the big momentum names. Capex spending is real; it'll impact earnings growth in a positive way and should be good for the market as a whole.

We have a great industry for Canadian banks. Outlook in Canada is a bit rosier than it was 6 or 12 months ago. Some of the provisions for credit losses have started to come in, investment banking has picked up, lots of levers to pull to earn more capital. Expects all that to continue for the rest of the year. He'd continue to hold the banks.

Typically, if you buy the Canadian bank trading at the lowest multiple it will revert to the mean of all the banks. BNS is in that bucket right now as a relative underperformer.

His firm has a 5-10% weight in gold at the moment, depending on the risk tolerance of a client. Most of it is just owning GLD, but at a level certainly no more than 10%. For good portfolio management, you want more than just 3-4 names. You won't get hurt holding GLD, but individual mining names have run up and are primed to have some $$ taken off the table. Wouldn't be surprising for some bit of news over the next couple of months to knock the gold rally for a loop.

If you've held this sector since the beginning of the year, you're now in a really good position to rebalance. He's really bullish on the USD, so you could add some US exposure. If you're just starting out, stick to large ETFs.

As a technician he expected this, but you never know what's going to trigger it. It was sort of pre-ordained with the setup through August and September, and then we usually get a low in early October and one late October. Today, the driver is an announcement from a politician.

Thinks this correction will be well bid. So on any weakness, whatever the source (an announcement, bad economic news, geopolitical event), investors are probably going to step back in. Just as in April, the market will probably absorb this and move on, knowing that we're in a period of expected weakness anyway.

We'll need to wait a few more weeks, but we'll probably go through this quickly.

Technicals are very binary and clinical. So the setup is always there, but you don't know what the story is behind them. Trump is a bit of a wild card. But the underlying strength in the market (such as shown by the jobs numbers) means that investors are ready to buy on any weakness.

We've seen this a lot more with the Fed, where they're between a rock and a hard place. It was the last central bank to cut rates. The reason they dragged their feet, unlike Canada (which was one of the first of the G7 to lower rates), was concern that underlying strength of the US economy could come back to bite them.

In Canada, we may be less apt to lower if we see jobs continue to do well and GDP pick back up. If GDP starts to have some upward momentum, it'll put both central banks in a bit of a fix and we may not get those lower rates.

Looks good as a longer-term play, but it can be quite volatile. His team is now looking at positions and, for those that have done really well, deciding which ones to clip a bit to bring the position size back in line. Yesterday's pattern suggests further weakness to come, but it's not guaranteed.

Seeing a shorter-term reversal, where all the action of one day is encompassed by the next day's action. Yesterday it moved higher, but closed lower. Gold's up today because of the down market. No connection between safety and gold; biggest connection to gold is the USD.

While he may lighten up on the US dollar, he's not going to the ruble or the yuan. Chart on the USD starting to move up, and that's going to put some pressure on gold. Might see some people selling their gold and going back to the USD.

If you're gold's done well, maybe you clip some profits. But thematically, looks good long term. It's a balance of short term vs. long term.

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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