Central banks are cutting interest rates at the fastest clip in years. When will the Fed and The Bank of Canada join them? Investors have been waiting for central banks to start cutting interest rates since March of 2022. Now, it looks like it is finally happening: For the first time since January 2021, the number of central banks cutting interest rates in November has surpassed the number hiking them, according to an analysis from Deutsche Bank’s Jim Reid. That is certainly a promising development for investors cheering for central banks to pull off a “soft landing” for the global economy. Before investors get too excited about the prospect that the BoC and The Fed might join in the fun by mid-2024, investors should keep in mind that hopes for a policy pivot have been dashed before. Unless we see a recession, it will be tough to see a big imminent global easing cycle. After all, inflation is still above target levels across the major economies. Several central banks in South America have cut interest rates, including the central banks of Brazil and Peru, among others. In Brazil and Mexico, central banks raised interest rates ahead of the Fed. Now, they are beating the Fed to cutting rates as well.

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

Portfolio Notes

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

Canadian Pacific Railway (CP-T) The Mexican government issued a decree requiring private railways to prioritize passenger service over freight. Operators have until Jan 15, 2024, to submit proposals. While the decree prioritizes passenger service over freight, which could increase costs and complexity of CPKCS operations in Mexico, it also makes it clear that CP’s freight service concessions in Mexico will be respected. This bodes well for CP’s coast-to-coast-to-coast Canada-US-Mexico operations and we think the benefits from the merger remain intact. CP has a long and successful history of cooperating with rail passenger service across its network (i.e., Amtrak in the US) and we believe that management is well equipped to handle this decree in Mexico. Owned in Core and ESG+ Portfolios.

(~) Capital Power (CPX-T) agreed to acquire equity stakes in two U.S. combined-cycle gas plants with aggregate gross generating capacity of almost 2.2 GW. It is a US$1.1 billion investment. They are funding the deal via an associated $400 million equity issuance at just over $36 per share, well below market. CPX can generate 14% annual average equity returns at the proposed price, implying a significant premium over likely borrowing costs to fund ~$1 billion of the transaction with new debt. Shares yield 6.75%. Owned in Cash Flow Portfolio.

(-) Deere (DE-US) shares dropped after the agricultural equipment maker issued disappointing guidance for fiscal 2024. Deere said it expects net income between $7.75 billion and $8.25 billion, short of the $9.31 billion expected from analysts. Peer company Caterpillar ticked down as well. Owned in US Portfolio.

(+) Eli Lilly (LLY-US) Companies that make weight-loss drugs are attracting a lot of attention on Wall Street at the moment, and for good reason. Goldman Sachs estimates that these products will have sales of $100 billion by 2030. Currently, only two companies are competing in the market, Eli Lilly, and Novo Nordisk. If Goldman Sachs estimates are correct, both these companies have huge growth ahead. Amgen is planning to have its own drug available in 2027, assuming it passes all the regulatory tests and is effective. We love Eli Lilly for a few reasons. (1) It is an American company, so it should have an easier time selling to a US audience (patients, doctors, and funders). (2) Its drugs are currently cheaper. (3) Early trials point to their drug being more effective, 26% mean weight loss compared to Novo Nordisk's 16%. (4) Eli Lilly has a second horse in the race with Retatrutide, a drug still in trials but also proving effective. Eli Lilly currently has an annual revenue of just under $33 billion. If it can capture only a third of the weight loss market, its revenue will double. We think Eli Lilly will capture more than 50%, which means its revenue will most likely triple over the next 7 years. The market is also pricing in some steep growth, with Eli Lilly currently trading on a PE of 100. Profit growth will hopefully push that PE lower in time, but there is no doubt shares are expensive. Owned in Core, ESG+, US and Opportunity Portfolios.

(+) McDonalds (MCD-US) Carlyle Group, a private-equity firm, announced it would sell its stake in the Chinese operations of McDonald’s back to the fast-food giant. The sale, reportedly worth $1.8bn, will yield Carlyle a six-times return on its initial investment, made in 2017, according to the Financial Times. China is the second-largest market for McDonald’s. By 2028 it aims to have over 10,000 restaurants there. Owned in US Portfolio.

(~) NVIDIA (NVDA-US) Chipmaker Nvidia’s earnings were definitely this week’s most highly anticipated event. Looks to me that Nvidia’s 200% revenue growth was clearly priced in which is a good thing. After the bell they posted a 19.64% positive EPS surprise, and an 11.90% positive sales surprise. That translated to more than a 10x increase in quarterly earnings vs. this time last year, and a 205% increase in sales. Shares were down slightly on the report, but let's not forget that they are up 242% so far this year. A stunning performance for the company and the stock. Owned in Core, ESG+, US and Opportunity Portfolios.

Sector: Canadian Banks Canadian bank earnings season kicks off next week and all eyes will be on credit provision (PCL) trends. If PCL guidance this quarter is not materially different from recent trends, then stocks may start to look attractive. However, if you believe that we shouldn’t see a peak in PCLs until mid/late next year and if you believe the old adage of “buy banks when PCLs peak”, then the spring might be the right time to really start adding to bank positions. Nevertheless, yes, valuation is attractive, yields are attractive and while there are numerous headwinds and few near-term catalysts, in our view, valuation may be enough at this point to get investors interested in the group again. That is, if nothing scares them on the Q4 conference calls. We have held steady on our underweight call on the bank group for total return accounts for some time now and we do think heading into Q4 results that still makes sense. If yields have peaked, credit concerns will begin to ease in 2024 as mortgage payment shock may be more manageable.

(-) Stantec (STN-T) Shares dipped this week after Stantec did a “bought deal” issuance of 2,703,000 common shares at a price of $92.50 for gross proceeds of approximately $250 million. Stantec is a Canadian based top-10 Global Design firm (as ranked by Engineering News Record) that provides engineering, design, and Consulting Services to clients in Canada, the U.S., and internationally through its five business segments: 1) Buildings; 2) Energy & Resources; 3) Environmental Services; 4) Infrastructure; and 5) Water. The company supports clients through all stages of the project lifecycle, such as upfront planning and design, construction administration and project commissioning, maintenance, and decommissioning and remediation. Owned in Core and ESG+ Portfolios.

(+) Uber Technologies (UBER-US) announced a new nationwide partnership with Big Lots, bringing the home discount retailer's massive selection to the Uber Eats app, furthering its mission to help consumers get almost anything they need, delivered on-demand. Just in time for the busiest shopping season of the year more than 1,200 Big Lots retail locations across the US are now available for consumers to shop with Uber Eats. Big Lots joins PetSmart, Staples, Party City, Bed Bath & Beyond, Office Depot and other major retailers on the Uber Eats app and dozens of grocery partners across the country. Since launching its first non-food partnership in 2020, Uber's grocery, retail and new verticals business has grown to more than 100,000 merchant partners. In the U.S. and around the world, Uber is uniquely poised to meet consumers' growing desire to save time and get more of what they need delivered on-demand within hours—if not minutes—rather than days. Owned in Core, ESG+, US and Opportunity Portfolios.

(+) Vale (VALE-US) was upgraded to Buy by Goldman Sachs. The Brazilian mining and metals company is their top pick in the Latin American materials industry. "The story is now too attractive to ignore, and investors will slowly increase exposure as confidence around iron ore supply/demand balance in 2024 increases.” Goldman Sachs’s revised iron ore model now points to a balanced market due to limited supply growth, still elevated Chinese steel exports and limited market share gain from scrap in China for 2024. The firm raised its price target on Vale to $19.50 a share from $12.20 a share, based on a discounted cash flow analysis. Owned in Opportunity Portfolio.

Weekend Reading

RBC MacroMemo - November 21 - December 11, 2023 Some headwinds fade / Economic data worsens/ Developed world weakens / Consumer outlook shifts/ China is not Japan / Inflation cooperates / U.S. fiscal burden may create drag/ Who drives global growth? / Unions ascending? RBC

Fall Economic Statement 2023: Federal government backloads new spending, maintains near-term bottom line At $40 billion the federal deficit is effectively unchanged from what the government projected in Budget 2023. This will be achieved despite a weaker economic backdrop dampening revenue projections by $600 million, and higher public debt charges and net actuarial losses than previously expected. The offset will come from muted program spending growth. RBC

How China took over the world’s online shopping carts: Chinese e-commerce platforms like Shein, Temu, and TikTok Shop are going global with big ambitions REST OF WORLD

What's the ideal number of steps to take per day? These studies looked at 111 309 individuals to find a sweet spot. Relationship of Daily Step Counts to All-Cause Mortality and Cardiovascular Events. SCIENCE DIRECT

The Downsides of Diversification The benefits of diversification have been known for over half a century. However, despite the theoretical ease with which someone could apply this mantra to their investment portfolio, there are practical difficulties in doing so. DOLLARS AND DATA

Honoring Mementos Like a Minimalist A few years ago Shira Gill panicked because she couldn’t find the yellow sticky notes her dad used to leave her around the house. She finally recovered them from the depths of her basement. She then had them photographed. But that wasn’t the end of the story. SHIRA GILL

Wealth taxes are a bad idea They create so many unintended consequences that we are better off not introducing them in the first place. KLEMENT

100 Notable Books of 2023 Each year, we pore over thousands of new books, seeking out the best novels, memoirs, biographies, poetry collections, stories and more. Here are the standouts, selected by the staff of The New York Times Book Review. NEW YORK TIMES

Canada's 10 most-stolen cars and what we can learn from that https://driving.ca/column/lorraine/2023-top-10-most-least-stolen-cars-canada-list-theft

The 2024/2025 Rate Forecast At the Mortgage Professionals Canada conference last month, Benjamin Tal, Deputy Chief Economist at CIBC World Markets, gave a very hopeful and informative presentation. He came forward with a positive forecast: rates are due to fall. CANADA MORTGAGE NEWS

The Line by Scott Galloway What this post is ultimately about is the difference between opinions and principles. Opinions are easy to hold and cheap to change, and their value is commensurate. Principles, on the other hand, are things for which you are willing to sacrifice. Willing to draw a line. GALLOWAY