As the investment climate evolves, and we are now midway through the year, clients have expressed interest in our outlook and portfolio positioning. Our current views remain similar to our views in past instalments, with most investors now realizing that the outlook has meaningfully improved. To summarize some of the constructive factors influencing these developments: 1) We remain in a slow growth and low inflation environment that portends well for equities; 2) The economic re-openings we see around the world are supported by higher GDP revisions, and 3) The consumer is in a healthier place as a result of outsized savings rates during the pandemic (which have now been used to pay down short term debt). From a corporate earnings perspective, we are witnessing a recovery and normalization in corporate profits, resulting in higher earnings revisions and less leverage among S&P 500 companies. In fact, on 2022 S&P 500 estimated earnings per share, a measure of overall profitability, forecasted expectations are for corporate profitability to exceed 2019 pre-pandemic levels. These factors all suggest sustained S&P 500 returns and a healthy market backdrop.

More importantly, in developing our longer term outlook, we would like to direct clients’ attention to the following quote by Canadian-made, the greatest hockey player of all time, Wayne Gretzky: “I skate to where the puck is going, not where it has been.” A good hockey player plays to where the puck is. A great hockey player plays to where the puck is going to be. Similarly, as investors, we ask ourselves “How can the past be different from the future?” This may at times lead to an investment conclusion that is different from conventional expectations. For example, semiconductor companies have historically been highly cyclical due to fluctuating capital investments and variability in purchase behaviours. However, now with the advent of big data, greater complexity required in computing, and manufacturing best practices that emphasize quality and performance, we see the industry shifting into a more sustained secular growth oriented backdrop with revenues that have become more recurring. This is an example of an investment thesis in which a company’s forward looking earnings projection is different from the past, and one that we believe is still gaining investor recognition.

Finally, we would like to remind clients that risk is not the same as volatility. We have been using volatility, which is often fleeting, to add to positions which have not been amply rewarded for strong earnings delivery. These include companies which have exceeded expectations in their earnings delivery, yet have had a muted stock price response. We have used these opportunities to increase our positions in companies that benefit from an early cycle GDP recovery in the economy, particularly in select areas of the consumer and real estate. These areas are often inflation resilient, as they can pass on the influences of higher inflation to a relatively robust consumer.

In conclusion, a constructive investment backdrop is supported by numerous factors – the earnings picture is swiftly recovering, corporate profits are being revised higher, the economic climate of slow growth and low inflation supports robust equity prices, and an early cycle normalization of economic activity will likely have greater longevity supporting an equity investor-friendly environment.

We wish you well, and please feel free to reach out with any questions or comments.

Warmest regards,

Grace, Sam, Leslie and Jennifer