In an attempt to gauge the vulnerability of developed world economies to climbing interest rates, Citibank created the Global Macro Strategy Housing Vulnerability Scorecard. The Canadian housing market ranks first as the most vulnerable to rising interest rates amongst developed nations. The scorecard is based on five criteria - private sector credit growth and nominal home price appreciation since 2020; housing price relative to income; year-on-year change in mortgage rate; and percentage of mortgages with terms under five years.

Here's how Canada ranks:

• Credit growth: Canada ranks first, with 18.3% growth
• Housing Price to Income Ratio: At 136.3%, Canada once again has the dubious distinction of ranking first.
• Increase in housing prices: With 16.4% growth, Canada ranks fourth after Australia’s, the U.K.’s, and New Zealand’s figures.
• Short-term mortgage rates: Canada's 1.9 percentage point increase in shorter-term mortgage rates align roughly with average G10 numbers

Countries like Canada with high sensitivities should ideally see their central banks halt rate increases earlier than others to prevent potential catastrophe within their real estate market along with undue strain on their financial systems. However, the Bank Of Canada has taken a highly aggressive approach toward monetary policy tightening. Interestingly, this week's CPI data showed rising mortgage costs registering as one of the most prominent increases within the CPI basket - implying that BOC'S attempts at cooling inflation through rate hikes may in fact be fueling inflation via implications on housing costs. Unfortunately, RBC expects the Bank of Canada to raise rates again at the July meeting. On the other hand, I believe the Bank of Canada is making one the biggest errors in Canadian financial history.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Alimentation Couche-Tard (ATD-T) A solid earnings result from ATD, with revenue and adj. EBTIDA coming in ahead of consensus expectations. Gross profit was up 13.8% YoY. ATD currently trades at 10.5x NTM consensus EV/EBITDA, which is in-line with its longer-term average. With a strong balance sheet, and potential M&A to drive growth, we remain buyers of the name at current levels. Couche-Tard, is a Canadian multinational operator of convenience stores. The company has 14,302 stores across Canada, the United States, Mexico, Ireland, Norway, Sweden, Denmark, Estonia, Latvia, Lithuania, Poland, Russia, Japan, China, and Indonesia. The company operates its corporate stores mainly under the Couche-Tard, Circle K, and On the Run brands but also under the affiliated brands Mac's Convenience Stores, go!(Go Store), 7-jours, Dairy/Daisy Mart, Becker's and Winks. Owned in Core Portfolio.

(+) ChargePoint (CHPT-US) EV charging stocks rallied this week in response to the latest news about companies switching over to use Tesla-style EV charging plugs. Investors are still having some trouble making sense of EV charging in the wake of Tesla’s decision to open up its supercharging network to other EV drivers. That decision effectively gave Elon Musk’s company a victory in the North American standards war about the shape of the plug that will charge U.S. EVs in the future. ChargePoint announced “NACS solutions for new and existing EV-charging deployments, enabling customers to continue to serve any EV in any parking space.” NACS, or the North American Charging Standard, is the Tesla plug. It isn’t taking long for the EV charging industry to adapt. Shares were up over 18% this week. Owned in ESG+ Portfolio.

(new) Coinbase (COIN-US) Last week, we added an exploratory position in Coinbase. However, shares of the crypto services company slid Friday, pressured by a dip in the bitcoin price that followed a Wall Street Journal that the SEC is calling recent bitcoin ETF filings inadequate. Coinbase is the crypto custody partner for BlackRock, whose bitcoin ETF filing earlier this month set off a wave of followers and a rally in the price of bitcoin and Coinbase shares. Owned in Opportunity Portfolio.

(+) Canadian Pacific Kansas City (CP-T) held an investor day during which management provided incremental color around the rail's long-term growth prospects following the Kansas City Southern merger, which creates nascent, seamless single-linehaul services from Canada and the upper Midwest down through Texas, the Gulf of Mexico, and into Mexico. Management called out an impressive multiyear revenue pipeline approaching $5 billion. Clearly, CP won't secure all of that, but the magnitude gives us incremental confidence in the firm's revenue synergy goals for the newly combined networks (around $1.5 billion). Synergies reflect tangible opportunities to grab market share from competing rails and trucking (truck to rail conversions) and capitalize on a solid runway of industrial development projects, many of which should benefit from nearshoring trends to Mexico (automotive production, for example). Although persistent macro weakness and uncertainty will weigh on volumes in the near future, we remain of the view that CPKC possesses a best-in-class rail network run by best-in-class operators, and is confident that long-term investors will be rewarded. Owned in Core Portfolio.

(+) Enovix (ENVX-US) rose this week after saying it received a purchase order to produce battery cells for the U.S. Army, to be used for soldiers' central power source, called the Conformal Wearable Battery; financial terms were not disclosed. U.S. Army soldiers typically carry more than 60 lbs of gear, including batteries, to power critical equipment. Enovix said its cell has the potential to nearly double the energy density of current CWB cells, which could result in substantial operational advantages including longer lasting and lighter battery packs. Management estimates the total military wearable market opportunity to be $350 million/year. Owned in Opportunity Portfolio.

(+) Eli Lilly (LLY-US) Eli Lilly’s obesity drug may be even better than its rivals. The pharmaceutical giant’s experimental drug retatruitide helped patients lose up to 24% of their weight after almost a year, which is the highest reduction seen in the obesity drug space so far. Average weight loss did not appear to plateau after 48 weeks, suggesting a longer study could show even more potential. It’s one of several drugs that mimic certain hormones in the gut, changing the way patients eat and reducing appetite. Needless to say, it’s a big market in the U.S. and globally. Owned in US Portfolio.

(+) Palo Alto Networks (PANW-US) is well on its way to becoming the first cybersecurity company to reach a $100 billion market capitalization, Morgan Stanley said this week. Analysts at the firm designated the stock their top cybersecurity pick, and hiked their 12-month price target by 18%, to $302 per share. Jeff Marks, the Club’s director of portfolio analysis, said Monday that investors should be patient with Palo Alto shares as the stock hit a fresh all-time high this week. Owned in Opportunity Portfolio.

(+) SolarEdge (SEDG-US) The solar stock rose after Bank of America raised its price target to $396 from $379. The new target implies upside of more than 50% from Thursday’s close. The bank also said it has a healthy setup diversified structural growth story. Owned in ESG+ Portfolio.

Spotlight: Oil Strategy Sentiment towards the oil market has obviously soured year-to-date, supported by the 13% decline in WTI and that the energy sector is the worst performing sector on the TSX. RBC argues that we’re reaching a pivotal point and that the next six weeks will dictate the tone of the market for the balance of the year. On the one hand, the global economy is expected to enter a supply deficit starting in Q3 according to expectations in the financial markets. On the other hand, physical markets have remained sloppy and has largely overshadowed the perceived tightness in the financial balances. With that all being said, RBC argues that physical markets should tighten in July given Saudi production cuts, the seasonal return of refinery capacity, and continued strong crude imports from China. Bottom line, RBC remains constructive and believes WTI will average ~US$77/bbl (+10% from current levels) in the second half of the year. Within our portfolios we have minimal exposures. Energy exposure stands at 7% in the Opportunity, 5% in the Core, 0.5% in the US. The Cash Flow Portfolio has the highest exposure at 14%, but the four names we own are only off about 6% and yield roughly 6% - so are essentially flat on a total return basis.

(+) SmartCentres REIT (SRU.UN) has 188 properties in Canada focusing on an open-air retail strategy, which as of Q1, enjoys 98% occupancy. The REIT derives more than 25% of its revenue from Walmart. When the REIT reported Q1 results on May 10th, net rental income and other came in at $124.8 million up 3.4% versus the same quarter a year ago. Funds flow from operations was $0.54 per unit, up $0.03 from a year earlier. Meanwhile, the REIT reported a payout ratio to adjusted funds flow from operations of 93.0% compared to 96.1% in Q1 2022. Despite those improvements, units are down 13.7% over the past twelve months and they have been hitting 52-week lows this month. The REIT has been undertaking a diversification strategy and currently expects 45 projects to be underway within the next two years, focusing on areas that include apartments, condos, hotels, and seniors homes. Meanwhile, with interest rates on the rise, investors are likely focused on debt. As of Q1, the REIT reported $5.238 billion in total debt with a weighted average term of 3.9 years. It also reported a working capital deficiency of $551 million. In terms of liquidity, on the assumption that cash flow levels permit the REIT to obtain financing on reasonable terms, SmartCentres REIT said it anticipates meeting its obligations. In a sign of confidence about the future, as units sold off, two insiders including CEO Mitchell Goldhar have been buying. In June, CEO Mitchell Goldhar spent just over $1.1 million buying units in the public market. Executive Vice President of Portfolio Management and Investments Rudy Gobin was also buying this month, picking up 5,000 units at prices between $23.35 and $25.57. The insider now holds 40,000 units. Units enjoy a distribution yield of about 7.8%. Owned in Cash Flow Portfolio.

(-) Constellation Brands (STZ-US) The Corona, Modelo and Pacifico owner reported results that were better than expected on both top and bottom line. Within the segments, beer sales look strong as STZ continues to premiumize its portfolio and the launch of Modelo Oro. Partly offsetting this strength is ongoing declines in Wine & Spirits which is expected to continue through F'24 (net sales -0.5%). We continue to like STZ because it is successfully gaining share from the premiumization of its Wine & Spirits and Beer portfolio, introducing new categories, and pursuing DTC channels. It has outperformed the broader market YTD and is trading in line with its historical average at 20x forward PE. We would add incrementally at these levels as valuations remain undemanding. Owned in Core Portfolio.

Weekend Reading

Maximum Canada is happening Canada has a nation-building population strategy. Now all they have to do is build a bunch of housing, and they’ll be golden. Does America? NOAH OPINION

Global Insight 2023 Midyear Outlook The resilient U.S. economy has continued to avoid a recession, but for how long? Meanwhile, the Federal Reserve’s interest rate plans amid nagging inflation stand to hold sway over markets as the rest of the year unfolds. This special 2023 Midyear Outlook showcases RBC Wealth Management’s unique perspectives that can help to navigate the road ahead while identifying the catalysts and opportunities to optimize portfolios. RBC

Citi GPS: Economic and social mobility. The Role of Business in Improving Outcome. Social mobility is the idea of the American Dream: that opportunity should be afforded to each of us in accordance not with our background but with our ability. In other words, our chances to succeed should be determined not by the circumstances of our birth but by our own efforts. While many aim for this, in most countries, mobility remains a challenge, and where you come from does significantly impact your lifetime outcomes. CITI GPS

Emerging stock markets projected to overtake the U.S. by 2030 The stock market capitalization of emerging markets is forecast to eclipse that of the U.S. and other developed markets in less than a decade according to Goldman Sachs. GOLDMAN SACHS

Geography Is the Chessboard of History What places do you think are better to establish a city? You probably want a plain crossed by a river, to have lots of fertile land that can feed a big population, and an easy way to travel. Conversely, you want to avoid mountains. A 2% slope makes cultivation impractical, and above 6% it’s impossible. Why? UNCHARTED TERRITORIES

Overconfidence: How to Fail Spectacularly We tend to Overestimate our ability to predict the future. People tend to put a higher probability on desired events than undesired events. FARNAM STREET

The ultimate score for rich people? “Golden” passports. A few hundred thousand dollars can buy citizenship in some very pretty places. VOX

Mapping the Ownership Network of Canada’s Billionaire Families Behind ever billionaire is a complicated network of corporate control — a network that is seldom made public. For the last decade, Statistics Canada has maintained a database on the inter-corporate ownership of Canadian corporations — a database that it bills as a “unique directory of ‘who owns what’ in Canada”. FROM THE TOP DOWN