Highlights
- Current Economic Outlook
- Our investment strategy
- Overview of some recent transactions
Current Economic Outlook
North American equity markets continue to push to record highs, bolstered by a promising start to the U.S. third-quarter earnings season. The results from major banks signal a healthy U.S. consumer, with spending supported by a resilient labour market, despite some softness among lower-income households. Historically, periods of declining interest rates – especially amid a “soft landing” scenario where the economy continues to grow – create favourable conditions for investment returns. Below, we discuss the potential for a more meaningful divergence in the path of interest rates in Canada and the U.S., with implications for the Canadian dollar.
Canada’s inflation report for September was released during the past week, and it decelerated more than expected, with the overall Consumer Price Index (CPI) dipping below the Bank of Canada’s 2% target for the first time since early 2021. Falling gasoline prices contributed to much of the decline, so the “core” inflation measure, which removes more volatile categories such as energy and food, held steady above 2%. Meanwhile, housing-related categories remained the largest contributors to inflation, but mortgage interest costs and rent pressures also continued to recede from high levels. Also encouraging, the breadth of inflation narrowed further towards pre-pandemic norms, suggesting that an increasing amount of every-day goods and services are seeing less intense pricing pressures.
The Bank of Canada delivered an interest rate cut of 50 basis points (0.50%) at its recent meeting,
following three consecutive 25 basis points (0.25%) cuts, bringing the overnight rate down to 3.75% from 5% prior to the onset of the rate-cut cycle. The Bank of Canada has revised down its Q3 GDP growth forecast to 1.5% annualized from 2.8%, but expects a slight uptick in Q4 to 2% growth followed by 2.1% in 2025. The bottom line is that we expect the rate-cutting cycle to continue in a bid to spur the domestic economy towards stronger GDP growth.
Our investment strategy
On the geopolitical front, the American election is fast approaching. Although the two parties have regularly traded power in the United States for decades, the market impact has been relatively negligible. In fact, both parties have led the country throughout various economic cycles and statistics do not seem to conclusively prove any trend.
Despite the attention generated by these elections, it is important not to lose sight of what really matters in the long term. Ultimately, it is profitability (and not politics?) which directly influences both individual stock prices and the market as a whole. It always has been and always will be. Nevertheless, we will remain curious and attentive in order to take advantage of any opportunities that may present themselves.
That said, markets are currently near all-time highs. Of course, without presuming to anticipate the market, we will continue to prioritize the protection of our clients’ capital. This is why we have chosen to reduce certain positions and dispose of a few securities. The cash generated will be used to seize purchasing opportunities during any potential future market downturn.
Our strategy for selecting our portfolio securities does not change. We are always looking for high quality titles with the following attributes:
- Leader status in their field or industry
- A healthy financial balance sheet
- Excellent long-term growth potential
- A commitment to shareholders through the payment of increasing dividends and/or share buybacks.
Overview of some recent transactions
Recently, we made some changes to our portfolios. Specifically, we have focused our attention on defensive sectors such as healthcare and consumer staples. As their valuation is currently more attractive than that of other industries, we have chosen to be overweight in stocks such as Nestlé SA ADR (NSRGY-OTC), Merck & Co Inc. (MRK-NYSE) and Johnson & Johnson (JNJ-NYSE).
In Canada, owing to their long-term potential, we have continued to accumulate stocks such as Alimentation Couche-Tard Inc. (ATD.B-TSX), Canadian National Railway (CNR-TSX) and Canadian Pacific Kansas City (CPKC-TSX).
Finally, as always, we will maintain our investment discipline based on facts and time-tested strategies with historical quantitative data.
Our priority is to preserve your capital over the long term, while remaining well-positioned to benefit from sufficient returns to meet your personal objectives, and without taking unnecessary risk.
« Wealth, your financial health, is not a matter of intelligence,
it’s a matter of arithmetic. »
- Thomas J. Stanley, Author of The Millionaire Next Door and The Millionaire Mind.
As always, we are available to answer your questions.
Benoit Legros, B.A.A., CIM, FCSI
Senior Portfolio Manager and Wealth Advisor