2023 exceeded the expectations of even the most optimistic investors, with the U.S. market rebounding by 24% thanks to the technology sector, and the Canadian market by 8%. Most of the growth has occurred in the last two months, fueled by hopes that interest rates will fall sharply in 2024, avoiding a recession that was previously thought to be inevitable.
Our portfolios outperformed their respective indices for the third consecutive year. Our performance in 2023 may seem quite surprising, as our portfolios are built to preserve capital during market downturns and are expected to go up less than their indices when the market rises sharply. Our results can be explained by our accurate anticipation of the trends we saw in 2023, a decline in inflation in the 1st half of the year and a slowdown of the economy in the 2nd. In addition, our security selection added significant value. Quality stocks outperformed in 2023, being less leveraged.
Equity markets battled several headwinds over the course of the year to achieve this result, including higher-than-expected interest rates, a crisis amongst U.S. regional banks, and a deteriorating geopolitical situation. In addition, the average consumer faces big challenges. This proves that it is often necessary to be a contrarian investor, as investment sentiment was very negative at the beginning of the year.
The bond market, after falling by 20% in 3 years, has rebounded by almost 6% in the last 2 months thanks to the anticipated rate cuts. 10-year bond yields have shrunk from more than 5% to less than 4%. We published a comment on this topic in November after positioning ourselves accordingly. This opportunity has already faded in large part, and caution is warranted in this sector again. All of this demonstrates that one must be active in today's markets.
Expected Interest Rate Cuts
The star of the year was undoubtedly the American consumer. Despite rising interest rates, consumption remained resilient. This is due to high job creation, excess reserves built up during the pandemic and wage growth outpacing inflation.
In Canada, the situation is more difficult. Canada's GDP per capita has been declining for 5 consecutive quarters, with immigration masking major structural problems. Elevated interest rates affect Canadians more as we are more indebted and have shorter mortgage maturities. Today, Canadians pay on average 50% more interest than Americans, a gap that will widen in the next three years.
In theory, we should therefore expect Canada to cut rates before the U.S., but that would be doubtful because we are facing higher inflation in key sectors. Even though employment is lower in Canada, wages are rising, and our productivity is much lower. In addition, rent, the largest component of inflation, is now declining in the U.S. but continues to accelerate in Canada. Under these conditions, Canada cannot afford to lower rates before the U.S. even though our economy is weaker, which does not bode well for the Canadian consumer in the short term.
Even though inflation has decreased sharply to 3%, we are still not convinced that it will reach the 2% mark in the long run. There are still housing, labor and resource shortages, not to mention the issue of deglobalization. The market is pricing in 6 rate cuts in the U.S. and 5 in Canada by the end of 2024, starting in March. We believe this is unrealistic, as there is still high levels of uncertainty. Moreover, central bank commentaries do not point to such rate cuts so quickly.
Market outlook for 2024
We believe we should have an overall positive year as businesses are healthy, unemployment remains low, and investors are cash heavy. There are nearly 6 trillion dollars in money markets in the U.S., up from $4.73 trillion a year ago.
That being said, we prefer to remain cautious for the first few months of the year and have already positioned ourselves accordingly. As noted above, we believe that the market's expectation of 6 rate cuts whilst avoiding an economic slowdown is unrealistic.
Investors are now very positive and are not discounting enough recession, political and geopolitical risks. The first half of a U.S. election year is often a difficult one for markets, as this one carries a lot of risk. Moreover, the world has never faced so many geopolitical challenges since the end of the Cold War.
Investors estimate that corporate profits will increase by 12% in 2024, and we believe these forecasts will decrease in upcoming months. Businesses continue to face margin pressures as most consumers have already spent their excess savings acquired during the pandemic and are now affected by inflation and rising rates. We believe technology will no longer be the largest contributor to the market and the returns of all sectors will be better distributed, which has already started 2 months ago.
As in the past, we will favor stocks that are easy to understand, leaders in their industry, have good profit margins and will be able to maintain them. We will remain very active to adapt to changing market conditions.
Here is a breakdown of our current positioning.
Financials
The largest sector in Canada yet the one for which we remain the most underweight in. We hold less than 10% of our Equity exposure here, while our benchmark is at 25%. Banks are difficult to analyze and have taken a lot of risk in recent years. They have underperformed the rest of the market for the past 15 years. 2023 has been no different even if they have rebounded in the last 2 months, thanks to the anticipation of lower interest rates. Historically, the time to buy them has been when their bad loans are at their peak. We expect this level to be reached in the coming months.
Our top 4 positions in the sector, Manulife, our 3rd largest position in Canada, Wells Fargo, Square and Itaú Unibanco. went up by more than 20% each, much better than the rest of the sector: The latter, the largest bank in Latin America, jumping by 49%.
Energy & Materials
Despite OPEC production cuts and geopolitical tensions in the world's 2 largest export regions, Russia and the Middle East, oil prices fell by 11% in 2023 and by 21% in Q4. Demand continued to rise, but production in some countries (U.S., Canada, Brazil) was stronger.
After being the only positive sector in 2022, oil underperformed in 2023. Our exposure to it is similar to our benchmark’s. Our largest position, Canadian Natural Resources, rose 20%, outperforming its competitors. After taking profits at the beginning of the year, we started buying in again towards the end of the year. The demand for Canadian oil is increasing due to geopolitical issues and the opening of new pipelines. We believe that Canadian energy companies have an excellent outlook thanks to lower debt levels and staggering cash flows.
As for materials, our 2 largest positions in the sector, Nutrien in agriculture and Canfor in lumber, faced a drop in demand and fell by nearly 20%. We continue to like their long-term outlook. We sold our base metals position, Teck Resources, in April. It is worth noting the resurgence of gold in the last few months and we hold 3 small positions there.
Industrials & Consumer Discretionary
At the beginning of the year, Industrials was the sector in which we were most overweight in. We were counting on a rebound, especially from travel, which worked well for us. Our 2nd and 3rd positions outside of Canada, Boeing, and Uber, first purchased during the pandemic, rose by 49% and 149% respectively in 2023. We added to our positions in the spring and continue to believe in our long-term forecast for them. Air Canada, our 4th largest position at the start of the year, declined by 4% in 2023 but contributed positively to our performance regardless. We doubled our position in May at $19 before selling most of our shares at $26 in July. We exited several positions in the sector, including Transforce, Stantec and SNC-Lavalin.
We reduced our exposure to Consumer Discretionary by selling Canadian Tire, Stellantis et Wynn Resort with big gains. We will wait until the consumer is in a better position before revisiting this sector.
Consumer Staples & Healthcare
These two sectors, considered defensive, did not do much in 2023, which is to be expected in a year of strong growth.
Two of our top 10 holdings are in Consumer Staples, which is why the sector is the one where we are most overweight. These 2 companies that we have owned for nearly 10 years are Alimentation Couche-Tard and Costco. They've gone up 32% and 45% in 2023, respectively, and we still like their long-term model.
Healthcare has been a disappointment in 2023, and often declines before the U.S. election, before rising soon after. We believe it will be no different this time. No other sector is as stable, while generating strong cash flows. It is therefore at the heart of our global value models. During the year, we sold Novartis at a good profit, and initiated two large positions in GSK and United Health over the summer. These 2 stocks have risen by almost 20% since.
Technology
After falling by almost 40% in 2022, this sector soared by more than 50% in 2023. This increase can be explained by the performance of 7 major technology companies and the frenzy linked to artificial intelligence. This may seem surprising because these companies showed very weak revenue and profit growth in 2023.
Even though we did not anticipate this increase, this sector contributed more to our performance than the indices. We achieved this by increasing our exposure to the sector at the end of 2022 and because the stocks we selected soared more than the rest of the sector. Our largest position outside of Canada, Salesforce, jumped 98%. Our next three largest stocks Marvell Tech, Constellation Software and Palo Networks, rose 63%, 49% and 111%, respectively.
We took profits at the end of the year and ended the period with 12% exposure. We would be very surprised if this outperformance is repeated in 2024. Historically, the largest companies in the world underperform the rest of the market.
Real Estate, Telecoms & Utilities
As expected, these three sectors underperformed because they are made up of companies with high levels of debt affected by inflation and rising interest rates and whose revenues are often negotiated in advance.
During the 2nd half of the year, we bought back Rogers and TC Energy, 25% lower than the price we sold them for at the start of 2022. They have risen by around 10% since.