“Without deviation from the norm, progress is not possible” Frank Zappa

Good morning & happy Monday,

After receiving our vaccines yesterday, it’s amazing to think about the word “progress” and wild to imagine how much progress and pressure our scientific community have been immersed in over the last 14 months. I do feel like I’ve been hit by the proverbial “bus” this morning, but I feel grateful and optimistic of the path we are on for progress and change.

On the theme of advancement, I thought it worth highlighting advancements we are making on the impact investing front, and take some time to explain something that is inherent in how we invest with our clients -- ESG

“Scientific progress makes moral progress a necessity; for if our power is increased, the checks that restrain us from abusing it must be strengthened.” Madame de Stael

Environmental, Social & Governance (ESG) is evolving as a strategic business imperative. Global markets are taking a deeper look at what drives long-term value creation in a business, using metrics not typically found on a balance sheet to more precisely measure and communicate a company’s value.

As investors, our view ESG matters as a critical element to building a more sustainable business that can adapt to industry, regulatory and market shifts, such as the evolution of technology, climate change, social equity, diversity and inclusion, and black swan events like COVID-19.

ESG ratings are one of the best tools available for us investors who want to understand sustainable investing and the sustainability levels of the companies they invest in. In the rapidly evolving world of environmental, social and governance (ESG) investing, these ratings are an easy way for you to assess a company’s environmental and societal impact. Meaningful ESG assessment requires a deep understanding of the company’s business operations and management track record. There are typically four things in particular to look for: awareness, action, results and direction of change. That means we’re concerned with a company’s future ambitions just as much as its past action. It’s important for us to know whether a company is heading in a “stable,” “improving” or “deteriorating” direction.

We thought this high-level overview will help understand much of the thematic progress the global investment community is making towards something we firmly believe in….investing with impact. Remember, if you want to experience significant progress toward your goal, you need to be intentional about the work you’re doing and the difference you are making in this world, every day.

“Little progress every day adds up to big results.” Satya

And now…to the markets

It was another relatively calm week for global equity markets with many oscillating near all-time highs. The U.S. central bank – known as the “Fed” – provided an update on its outlook. Its messaging around inflation and approach to monetary policy was largely consistent with what it has been telegraphing for some time. This stood in contrast to the Bank of Canada, which just last week indicated it would begin to incrementally withdraw some stimulus by reducing its purchases of government bonds. As a result of the divergence between the two central banks, the Canadian dollar has been notably strong of late, reaching a three-year high. Below, we provide an update on the Covid situation, and focus on the global technology industry, whose earnings results over the past week were closely watched by investors.

Coronavirus update

The third wave of the virus appears to have peaked in Canada over the past few weeks. The country’s 7-day average rate of new daily infections sits near 8000, versus the 8600 level from the week ago period. Declines in the pace of new daily infections were witnessed across some of the big provinces such as Quebec, Ontario, and BC. Saskatchewan was relatively unchanged, while Alberta had a modest increase. More problematic were Manitoba and Nova Scotia, both of whom saw a meaningful jump in the number of new daily infections across their provinces. The northern territories also saw an uptick. While it is certainly premature to proclaim an end to the country’s third wave, there are reasons to be more optimistic. Additionally, vaccinations continue to ramp higher, with more than 30% of the country’s population having now received one dose.

Elsewhere, cases continue to steadily decline in the U.S., while Europe is also seeing a falling trend in new infections, though a wide disparity exists from one part of the region to the next. Turkey for example continues to face elevated case figures, prompting the country to enter into a renewed lockdown. Meanwhile, India has yet to see a notable decline in its infections, with the country still reporting a staggering level of over 350,000 new daily infections per day over the past week.

Strong earnings from technology

The global technology sector has become one of the most scrutinized by investors, for a number of reasons. First, it is arguably the most important global sector, representing the largest weight, by far, in global markets. As a result, it has meaningful influence over the direction of global stock market returns. Secondly, it has been on a remarkable run for a number of years, helping propel global markets higher. Lastly, investors have been hoping that robust earnings growth could help offset some of the valuation headwinds that emerged earlier this year as a result of higher bond yields.

This week’s earnings reports, highlighted by very strong revenue growth in some cases, helped to remind investors that fundamentals remain solid and future prospects are bright. In many cases, businesses tied to cloud computing, e-commerce, advertising, cybersecurity, and wireless connectivity among other themes, are benefitting from secular tailwinds that have existed for some time, and were accentuated by the pandemic. The results released over the past week suggest the tailwinds remain strong today. Moreover, management teams of many businesses struck an optimistic tone about the prospects for stronger near-term demand, fuelled by a reopening of the global economy.

The operating environment remains undoubtedly positive for many high growth technology companies and we continue to invest in the space. Nevertheless, it is important to recognize the risks that the stocks, rather than the businesses, face. First, expectations of future growth are already high and reflected in current valuations. The companies will have to deliver growth that exceeds current estimates in order for their stock prices to move meaningfully higher in the future. Secondly, valuations are very sensitive to interest rates. Investors typically value a stock by estimating future earnings and cash flow, and discounting those future streams back to present day values using an interest rate. A stock’s current value is therefore susceptible to changes in the rate that is used, and this is particularly true for high growth businesses. Put simply, higher interest rates and bond yields, could more than offset a stock’s strong earnings growth.

The strong results from the technology sector should be supportive for markets near -term given the sector’s prominence. But, at some point, bond yields may resume their march higher as investors shift their attention back to the potential for building inflationary pressures. We believe it’s important to manage for this risk, by ensuring our clients’ portfolios are well-diversified, with exposure across factors and sectors that can help offset the vulnerabilities within high growth technology holdings. Ultimately, the threat may come to pass with no meaningful impact, but it’s prudent to err on the side of vigilance rather than risk complacency and, as always, seek out the opportunity amid continued uncertainty.

Have a wonderful week and keep progressing!

“To reach a port we must set sail – Sail, not tie at anchor Sail, not drift.” Franklin D. Roosevelt

Be well & enjoy the moments

Derek