EVERYONE’S TALKING

Everyone is talking about AI. Not just around the proverbial water cooler or at the Victoria Day barbeque, but in the boardrooms of the S&P 500: according to the Financial Times, a record 110 companies in that index cited the term “AI” in their first quarter earnings calls.

OK, that’s not everyone, but the fact is: AI is a hot topic.

It is that modifier, “hot,” that gives me pause. What we stay focused on is not the latest bright, shiny object, but our longtime investment criteria and strategy. So, while we believe AI is a game-changer and that it will impact many parts of our lives, our focus now is on ensuring we own companies that meet our investment criteria and are also well-positioned to benefit from advances in AI technology. Companies like Amazon and Alphabet, for example, which year-to-date are up 40% and 39%, respectively.

We have detailed our strategy in some past editions of Marche Monthly, and it can be reviewed here, but for the moment, here are some highlights:

-Above all, we focus on preservation of capital.

-We buy companies that we understand, that have strong balance sheets and a mastery of the fundamentals, are predominantly in regulated industries and that pay dividends.

-Our portfolios are not the market, but instead are customized to each client.

-We keep our portfolios defensive. We buy companies that we believe are trading at a price below what we think is intrinsic value, which therefore gives us a significant margin of safety.

Related, it is too early to have a sufficiently deep understanding of how AI is going to impact the market, and who the winners and losers are going to be. For example, Bill Gates thinks the biggest winner will be the company that figures out the best digital personal agent or assistant. What he foresees, in this extensive blogpost, is fascinating:

“Think of it as a digital personal assistant: It will see your latest emails, know about the meetings you attend, read what you read, and read the things you don’t want to bother with. This will both improve your work on the tasks you want to do and free you from the ones you don’t want to do.

“Company-wide agents will empower employees in new ways. An agent that understands a particular company will be available for its employees to consult directly and should be part of every meeting so it can answer questions. It can be told to be passive or encouraged to speak up if it has some insight.”

Sounds exciting, right? Absolutely. And in terms of what AI will be able to do, that’s just the tip of the iceberg. But here is the problem from an investing point of view: There’s a 50% chance that the winning company doesn’t even exist yet. That’s how new and fluid the situation is.

We want you to know that we are following the AI story very closely in these very early chapters, that we appreciate the significance of it, and that our portfolios are positioned to benefit now and in the future.

DEBT CEILING

The debt ceiling, being the amount of debt the US federal government is legally permitted to carry, has also been a big story. US Treasury Secretary Janet Yellen has advised that the government may be unable to fulfill all of its payment obligations as early as June 1st if the ceiling is not increased from its current very considerable height of $31.4 trillion.

Since the feds reportedly fund 25% of the US economy, there would be a number of consequences to that money drying up, including a recession, mass layoffs, the government defaulting on its debt, and volatility in the stock market.

Sooner or later, the ceiling will be lifted, and it will probably be sooner – given the political costs to both Democrats and Republicans of unleashing chaos on the US economy before an election year. In fact, at time of writing this blog, President Joe Biden and Speaker of the House Kevin McCarthy have reached an agreement that now must be approved by Congress.

All of that said, here is the key takeaway for us: however long it takes to resolve the situation, our portfolios will not be affected in any substantial way, because neither will the companies we own. Such as Restaurant Brands International, which we bought early last year and which owns Tim Hortons, Burger King, Popeyes and Firehouse Subs. These brands have fared well amid high inflation, proving they are able to pass along price increases to their customers – as reflected in RBI’s stock price, which is up more than 38% since we bought it a year ago.

If the market does overreact to the uncertainty and there is a market gyration, we are in position, as always, to capitalize on it by buying appropriate companies – those that meet our stringent investment criteria – with a margin of safety.

THE MARKET NOW

While we are always ready to capitalize on market volatility, the past two months have been relatively calm. If you were to remove tech stocks from the market, its performance has been relatively flat so far this year. We continue to outperform our benchmarks and the market, and as we indicated in the April Marche Monthly, it is largely on the backs of the carefully-selected tech stocks in our portfolios, including Amazon and Alphabet.

We also continue to believe that bonds are still attractive for investors who have a bond allocation in their portfolios, while also believing that for people with longer time horizons, equities will generate superior long-term returns.

BANKING ON IT

Why has there been low volatility in the market lately? Because things are going as expected, by which I mean we are still on track for a mild recession – as we have been saying for some time, and which the market has already priced in.

Our point of view on a recession has been supported by the less-than-impressive first quarter earnings of the big Canadian banks. Their performance is a reliable predictor of the Canadian economy overall, because they are such a big part of it, by funding so much of it (think mortgages, as one example).

Their so-so performance underscores that the market is a forward-looking indicator of economic growth and earnings. The market gives us a window into what is likely to happen (in this case, a mild recession), as opposed to what has already happened – which is what GDP, a backward-looking indicator, does for us.

ARE WE ON THE WRONG TRACK?

When it comes to Canada’s attractiveness as a place to invest, more than 60% of our country’s CEOs think so. That according to a Globe and Mail/Nanos Research poll of 30 CEOs “overseeing public and private companies from all sectors of the economy with combined annual revenues of more than $225 billion.”

Major points of concern include overregulation, taxes that are too high and the difficulty getting government approval for big projects.

On a few past occasions in this blog, I have worried about Canadian competitiveness and what it means for future generations – because we work with multiple generations within our client families. To the CEOs’ list above, I would add concern over our extremely high level of federal debt, which the Canadian Taxpayers Federation estimates at $1.2 trillion (more than $35,000 per person), and growing at a rate of $144 million per day.

Future generations will have to pay down this debt, a burden which will not be a positive for their prospects in life. All of the above is why it is more important than ever to have a comprehensive financial plan, so your wealth can be preserved as efficiently as possible for future generations. If you, your friends or family would like your financial plan and portfolio reviewed, we will be happy to do it on a confidential basis, to identify gaps and opportunities in the wealth management strategies being currently employed.

Speaking of future generations, the affordability of home ownership is a major concern for many of our clients with young adult children. Fortunately, we have a new tool in our arsenal for helping out the next generation.

THE FIRST HOME SAVINGS ACCOUNT

It is the FHSA, First Home Savings Account, which we have opened for many clients. I detailed the features and benefits of this account in our March Marche Monthly, but here is the upshot: The FHSA is a new registered account which combines features of an RRSP and a TFSA to help Canadians save up to $40,000 on a tax-free basis towards the purchase of their first home.

We believe the FHSA is a powerful tool for those looking to purchase their first home – but sometimes it is not clear if it is the best strategy versus RRSPs and TFSAs. If you, your family or friends would like to discuss which strategy makes the most sense for them – or any other wealth management issues – just let us know.

IT’S THAT TIME OF YEAR…ALMOST

With a week of beautiful weather here in the GTA, the thoughts of many people are turning to the upcoming summer. It is a season in which things tend to slow down, and people become more reflective and bigger picture in their thinking. Some of our clients ponder intergenerational, legacy and estate planning matters in the summer, and cross things off their list that have been there for a long time.

This is the perfect time to remind you that we have an unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients – so we can support you with whatever matters may be on your mind. Please see our full team and the Wealth Management “wheel” below, and contact us to talk.

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.

WHO WE ARE

**To learn about our unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.

WHAT WE DO