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

For Canadian energy, we're finally turning on exports to countries other than the US (who always paid us at a discount). So now that we'll get a better price, Canadian energy is probably in for a better run than the world is. Canada enabled Putin 20 years ago, because we wouldn't build pipelines and he did.

For the TSX, recent moves are probably not due to earnings. The tariffs were a bit of a wakeup call. The headlines are pretty scary, but things may not be as bad as they looked at first blush. When you really look into it, MUSCA is still in place and protects about 85-90% of the trade we do with the US. 

Canada also has agency to start looking at better trade relations with Europe and Asia. We started shipping our LNG. He's actually fairly bullish on Canada.

They're kind of hurting themselves with these tariffs. He doesn't see the point of them. Lots of bluster and politics. Thinks there's enough pressure that tariffs won't be implemented in a meaningful way, and that's the optimistic part.

The pessimistic part is that he's concerned that maybe some of these tariffs will be worse. Some of the jobs data was pretty weak. That could be a leading indicator that the economy might be slowing down a bit.

Earnings have been coming in pretty strong, especially in tech and consumer discretionary. Some of the other areas haven't been as good. Healthcare keeps struggling.

Tariffs are still the #1 thing. He's never had to analyze so much politics in his life, and he's been doing this for quite a while. He'd like to see the rhetoric abate and actual deals get done. That would uncover the true impact. He'd also like to see the jobs data get a bit stronger.

There is an opening to lower interest rates now, as the latest jobs data gave the Fed a bit of a green light. Lower interest rates would mitigate tariffs somewhat.

His firm's approach is first as a fundamental/quant shop, and to look at the story after that. Their strength is in unwinding the accounting and financials.

The grid itself isn't built up enough regardless. Buildout of data centres is huge, representing a whole other layer of energy that we're going to need. 

There are a number of attractive companies that are involved in electrification, building the data centres, etc. ETN is one example, as is VRT. HVAC is integral, as these centres need to be kept cool. We saw META do a huge deal with CEG, which is unusual but shows how big the area is going to be. Stay away from the speculative companies.

Nuclear is also bubbling up. We're behind on supplying energy needs for this area, and that's why uranium stocks have been doing really well. He hasn't been able to find just the right opportunity to put money to work in the segment, but there are opportunities. CCO is a nice company, but doesn't screen particularly well. Investors have bid up the stock, as that's where the future looks to be heading. Engineering firms also play into the theme. EME is an example. 

Another beneficiary is AVGO. They don't make the chips that do the calculations, but the chips that move the data. Its stock's been doing phenomenally well, and that's all about the data centre buildout. MRVL also makes chips that move data.

Investing 101: If it sounds too good to be true, it could yield trouble

We have been watching with interest this year’s obsession with very-high-yield exchange-traded funds (ETFs). There are products out there, such as YieldMax MSTR Option Income Strategy ETF (symbol MSTY), that have an indicated yield of — wait for it — 72.91 per cent. This ETF uses a synthetic option strategy on a single stock, MicroStrategy Inc. to enhance yield, which is paid out to unitholders. MicroStrategy is among the largest corporate holders of bitcoin right now, and with bitcoin’s rally, the stock has done very well. But even with such a high yield the units of MSTY are down more than 20 per cent this year. ETF owners, attracted by the giant income, still haven’t made any real money, even though MicroStrategy stock itself is up about 36 per cent so far this year. Yet, this has not stopped investors from pouring money into the ETF, now at about US$5.6 billion in assets. And this is just one example. There are now many dozens of such super-high yielding ETFs. We think investors need to be careful here. In addition to getting seduced by high yields, investors could be in trouble in a different type of market, or if the derivative market seizes up, as it has done before.
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The Canadian market remains cheap compared to the US, and still offers excellent profit growth. Gold stocks have helped, but oil is weak. There's value in financials, railways and Loblaws and Dollarama. Diversified in Canada. The effect of tariffs haven't fully hit yet; consumers haven't felt it yet. US job growth and wage growth have been reasonable. Not yet, but for sure there will be an impact. Tariff policy in the US has been a yo-yo, but if there's too much of an impact on US consumers, he fully expects some tariff relief as we approach the US midterms 1 months from now. We can't invest based on what we think will happen with tariffs down the road, but rather look at the long-term value of companies. Things can change quickly. Corporate earnings have been strong and he expects this to continue. Also, we're seeing big capex from megetach on AI. Comapnies are re-shoring to the US. Tariffs have been a wake-up call to Canada, the EU, etc, and are now encouraging companies to invest domestically to improve productivity.

Don't buy long-duration bonds, not 30-year, but rather 1-5-years laddered.  Buy individual bonds in units of $10,000. Include provincial bonds for safety and some corporate ones. For lower amounts, buy a bond ETF.

He is a bit surprised by the rates of 15% on average across the board, as they're a lot lower than what first came out on "liberation day" April 2. And the markets are acting accordingly. Markets have done quite well over the last couple of weeks, but tariffs have brought it back down a bit. Could be a buying opportunity. 

For those more sanctioned nations, they're seeing 35-40%. Canada is a big surprise with the rate going higher. Surprised we haven't been able to hash out a deal. We should really get rid of the slogan "Elbows up" and just get back to the negotiating table. It's worked well for the EU, Japan, and the UK, and we can live with 10-15%.

The rise to 35% isn't going to bode too well for Canadian equities. Trump continues to say that the issue is fentanyl at the border, but there's also the matter of Canada recognizing the Palestinian state. No tariffs were announced on China or Mexico because they're still negotiating. How could we not have achieved the same level of consideration? Suspects there are more issues underlying the US-Canada relationship than we're aware of.

Talking to colleagues around the office, it's a buying opportunity. The market's done so well since we got over the hump of "liberation day". Now you're seeing it pull back 1-2%. 

Tariffs are being announced across the globe, and it's good to get a settlement and finalization of the numbers. As long as you have a number, then you can work around that. 

There are 4 main asset class categories:  cash, fixed income or bonds, equities/stocks, and alternatives. Knowing how much to put in each one for your investment portfolio means that you've achieved your target asset allocation. 

If your investments are for the long term and you have regular income, you can continue paying down any debt and potentially take on a bit more risk. So you want a bit more in the equities and alternatives portion of your portfolio. But to understand how much to allocate among the 4 classes, you need a good understanding of your risk profile.

One risk factor his firm tends to focus on is maximum loss. In the 2008 financial crisis, markets dropped 50% in 6 months. How would you react if your portfolio did that? Or 25%, or 20%? At what point can you not take it anymore and want to sell everything? You never want to reach that point.

A low-risk investor is one who can stomach only a 10-15% drawdown. A moderate investor can handle 20%. 

If you're retiring in a couple of years, it depends on whether you need your portfolio to drive your income. If so, you probably want to be in the moderate range. If you have enough assets built up and there are more for the next generation, then you can have more in equities and alternatives giving you more of a growth profile.

If you're a newbie investor, what's key are investment knowledge and experience. He'd recommend a more aggressive portfolio because you have the time to ride the ups and downs. Make sure you partner up with an investment advisor who can explain the risks, someone who can "hold your hand" when markets do what they're doing today to make sure you don't sell out too early. You need to stay for the long run to see your investments through.

Many people think that the younger you are, the more risk you should take on. But it depends on the size of your investment portfolio. Very wealthy people can take on a bit more risk because they want to grow their investments over a very long time horizon. It always depends on the time horizon and what the goal is for your money. If it's to sustain your lifestyle, and you're close to retirement, perhaps a more balanced and conservative approach is best. But if there's more money than you need, then you can consider more growth so your investments keep growing down the road.

Again, his team is advising on asset allocation. A properly defined portfolio lets an investor ride the ups and downs. When a new client comes in, they don't put all the money to work at once. Stage it out over the next several months, taking advantage of buying opportunities as we're seeing today.

Thinks it's primed to go higher because of energy demands globally. AI alone requires more energy. Even though OPEC's turning on the taps, there will still be geopolitical concerns (such as Iran-Israel conflict in June) that can spike the price of oil.

Investing 101: The Impacts of Inflation

Starting with cash, which in a savings or GIC accounts, can be termed as short-term interest-bearing instruments. As short-term interest rates adjust with expected inflation, such securities can earn a floating real rate. Such-term interest-bearing instruments are considered zero-duration and inflation-protected assets, and therefore are attractive in a rising rate environment.

Moving on to bonds; rising inflation leads to capital losses as bond prices decline. If inflation remains within an expected range, short-term yields rise/fall more than longer-term yields. However, if inflation moves out of the expected range, longer-term yields rise/fall more sharply. The inflation jump recently seen was out of the expected range, but expectations have adjusted quickly.

Coming to our favorite asset class, equities; if inflation stays within the expected cyclical range, there is little effect on stocks as the market prices in expectations fairly quickly and companies can raise prices in-line with inflation to some degree. Unexpectedly high inflation might make central banks take action to slow down the economy by raising interest rates, which is what affects valuations of high-growth and highly leveraged companies. High inflation benefits those companies that can pass on inflation, which generally tend to be of consumer staples, financial and industrial sectors.

Lastly, for real estate assets, if inflation stays within an expected range, rental income and property values rise with inflation. On a positive note, higher than expected inflation leads to high demand for real estate, and vice versa when deflation occurs (opposite of inflation).
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