How good have the markets been? Pretty good indeed.

 

Over the past few months, we’ve experienced a slow return to life as we used to know it. I hope that you have been able to reconnect with friends and family.

 

Equity markets have been good over the summer months, despite renewed uncertainties surrounding a fourth (and in some countries fifth) wave of COVID-19, as well as political and geopolitical uncertainty. How good have the markets been? The U.S.'s S&P500 has not seen a 5% drawdown since October of last year, its longest streak since 2018.

 

Our longer term view continues to be that we are in the early stages of a new business cycle. Last week, U.S. Federal Reserve Chair, J. Powell essentially committed to keeping interest rates low through 2022. While we are keenly watching to see if inflationary pressures mount, we believe that the these low interest rates, pent up consumer demand and government infrastructure spending will continue to drive economic growth over the coming years. Further, business spending in Canada and other first world economies has continued to expand as companies shift their operations to meet the demands of this new environment.

 

On the backdrop of strong performance in equities, we have taken the opportunity to rebalance your portfolio, taking profits in sectors which have performed strongly in the past year. Beyond portfolio rebalancing, our team’s “sell discipline” has us constantly monitoring the businesses that we own in your portfolio. We continually ask ourselves: Has something fundamentally changed with our investment thesis? Has the economy changed in a way that might negatively impact a business’s ability to grow? Does management of that business have the ability to pass along inflationary pressures to its consumers? Are we simply paying too much for this business?

 

We thought to highlight an example of the latter. We recently sold your position in Xylem which has been an excellent performer. While we still feel that the company is a good business, the share price - in our assessment - reached a point where expectations being built into the share price exceeded our valuation target for the future earnings potential for the company. We felt the share price had become too expensive to justify holding the company; we will seek to redeploy this capital into an area where we see a better opportunity for capital appreciation.

 

Heading into the fall, our plan is to increase your exposure in the infrastructure sector as the recent passing of the U.S. Infrastructure Bill should create a positive tailwind for the sector. We anticipate similar government expenditures here in Canada, regardless of the outcome of the upcoming Federal election.

 

As for the team, I'm pleased to report that we were able to return to the office in July, and while we are operating in the "new normal" of office restrictions and COVID protocols, it’s been great to reconnect with colleagues in person and begin a return to the collaborative team environment that we have all missed over the past year and a half.