The rate cuts anticipated by mortgage borrowers may not materialize. The mortgage curve is currently deeply inverted. The 5-year mortgage rate (currently close to 5%) is around 150 bps lower than the 1-year rate and 125 bps lower than the 2-year rate, but only 40 bps and 20 bps lower than the 3-year and 4-year rates, respectively. Despite this, as you can see in the chart below, borrowers have increasingly opted for variable and shorter-term mortgages over 3-5 year and 5+ year mortgages since mid-2023. As RBC Capital Markets explained in a recent note, for borrowers to breakeven on the decision to take out a shorter-term mortgage, mortgage rates would have to decline significantly by the time refinancing arrives – close to the rates that prevailed when the BoC policy rate was 2% or lower. In RBC CM’s view, a decline of this size is unlikely without a significant recession or exogenous shock. Currently RBC CM forecasts that the BoC policy rate is most likely to only reach 3% at the end of the easing cycle, which translates to mortgage rates between 4 and 4.5%. Additionally, risks are skewed to the BoC easing less than expected, rather than more. For all mortgage holders, total mortgage payments are expected to peak at 9.3% of disposable income by mid-2025, according to a recent report by Oxford Economics. Rising interest payments this year will entirely reflect the passthrough of higher interest rates to fixed-rate mortgages, which accounted for around C$1.6trn or 70% of total outstanding mortgage debt in Q4 2023. The BoC estimates that 82% of fixed-rate mortgages with a term of five years or more and 34% of those with a term of five years or less that were acquired just before the central bank started hiking rates in March 2022 are due to come up for renewal during the next three years. Low to medium-income households are likely to see their discretionary spending contract the most due to higher mortgage payments. There is no question that there will be a negative impact on consumer discretionary spending from existing borrowers who re-financing at much higher rates than those available prior to 2022. Adjust your portfolio exposures accordingly.
Should you have any questions or concerns, please feel free to reach out.
Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Constellation Software (CSU-T) A good quarter for CSU with revenue, EBITDA and margins all in-line with consensus expectations. The one quibble with the quarter could be M&A is becoming lumpier as CSU is becoming increasingly dependent on contribution from large acquisitions. CSU hasn’t announced any large acquisitions since Q2 (3 quarters ago). Nevertheless, the pace of M&A remains solid, with this quarter’s below-expectations deployment driven by lower purchase prices (a good thing). Now given this was a ‘good’ quarter, in our view, not a great quarter, we wouldn’t expect that shares to materially move in either direction today. We continue to view CSU as core holding for total return portfolios. Valuation has been a sticking point to start this year, but less so since they reported Q4 results in March. CSU currently trades at 20.6x forward consensus EV/EBITDA (was 23.5x in January), which we view as fair. Owned in Core and ESG+ Portfolios.
(-) Deere (DE-US) For the seventh consecutive quarter, Deere ran past EPS estimates as the ag equipment maker kept a tight lid on expenses, but the company's Q2 earnings outperformance is being overshadowed by another reduction in its FY24 net income guidance. With farming fundamentals continuing to soften, DE's outlook is also darkening. In fact, the company's outlook has worsened since last quarter when it guided for a net sales drop of approximately 20% in FY24. The main takeaway is that agriculture fundamentals weakened further this quarter as disinflation puts a dent into farming incomes. It's important to remember that DE is lapping very difficult year-over-year numbers - revenue soared by 34% in last year's Q2 - which adds some key context to its results and outlook. Owned in US Portfolio.
(~) Home Depot (HD-US) Already contending with sluggish demand for home renovation and repair projects, unfavorable weather added another challenge for the company as total sales and comparable store sales fell a bit short of Q1 expectations. A pull forward in demand during and in the initial months following the pandemic set the stage for a "year of moderation" in 2023, according to CEO Ted Decker, and it now appears that 2024 will largely mirror last year. Similar to the past several quarters, HD experienced softness in certain big-ticket discretionary categories, which could include products like grills, outdoor furniture, appliances, and power tools. Home Depot remains well-positioned to capitalize on pent-up demand in the home improvement category once the housing market improves. Owned in Core, ESG+, and US Portfolios.
(+) Humacyte (HUMA-US) had an excellent week after the FDA review of the company’s marketing application for its experimental bioengineered blood vessel, Human Acellular Vessel (HAV). The U.S. regulator accepted Humacyte’s biologics license application for HAV early this year to review it for vascular trauma indication, with a target action date of August 10, 2024. If HAV is approved around the target action date, the company is likely to begin its commercial launch before year-end. The company is poised to gain significant share for surgical procedures requiring vascular grafts, including reconstruction due to trauma, vascular access for dialysis patients, peripheral arterial disease repair, and, eventually, coronary artery bypass grafts. Owned in Opportunity Portfolio.
(~) Hydro One Limited (H-T) delivered earnings that were right in-line with street expectations. The dividend was also increased by 6% to an annualized rate of $1.26/share, implying a payout ratio of 66% based on RBCCM’s 2024 estimate. Looking ahead, the underlying rate base is anticipated to grow by 6% per annum through 2027 which in turn should continue to support the H’s dividend growth profile. Bottom-line, we view Hydro One as a high-quality transmission and distribution company with above average dividend growth, but also acknowledge that shares are trading at a rich valuation relative to history. Owned in Cash Flow Portfolio.
(+) The Trade Desk (TTS-US) In a recent press release, Netflix announced the launch of its in-house advertising technology platform by 2025 along with key programmatic partners, including Magnite which was the only SSP partner (A supply side platform, or SSP, is programmatic software for publishers to facilitate sales of their advertising impressions), The Trade Desk as one of the DSP partners (A demand-side platform, or DSP, is a type of software that allows an advertiser to buy advertising with the help of automation), along with DV360, and DoubleVerify as one of the measurement and verification partners. Shares jumped on the news. Owned in Opportunity Portfolio.
Company of The Week: The Trade Desk
First Quarter 2024 Investor Presentation
Weekend Reading
2024 Federal Budget - Planning for the proposed increase to the capital gains inclusion rate This article details what’s known about the proposed changes at the time of writing; it also outlines planning strategies you may wish to consider before the proposed June 25, 2024, effective date and going forward. THE NEWTON GROUP
A new study “Caring in Canada” from the Canadian Centre for Caregiving Excellence More than 3,000 caregivers and care providers were surveyed to understand the environment. What first jumps out from the report is just how much of the burden of care falls on unpaid caregivers. They work, on average, 5.1 hours daily for 4.6 years taking care of loved ones. CCCE
Translating Wall Street Jargon In finance-speak, the term "veteran forecaster" can be translated to mean someone who is supremely confident in their predictions but almost always wrong. It has to be this way because forecasters are so unreliable. Yet the financial media loves certainty so they keep bringing them back on again and again. Certainty sells better than nuance. BEN CARLSON
Increased longevity will bring profound social change People will have to work longer and pension systems will need to be transformed. MARTIN WOLF FT
I Went To China And Drove A Dozen Electric Cars. Western Automakers Are Cooked A trip to the Beijing Auto Show reveals just how advanced China's EVs are. So what are the so-called "foreign" automakers doing about it? INSIDE EVS
Jerry Seinfeld's Duke commencement speech YOUTUBE
As nearly a billion people vote in India’s elections, there’s one platform many turn to for information: WhatsApp. With nearly 400 million active users across the country, WhatsApp is a critical channel for politicians to get their message out. One party owns it: the BJP, led by Prime Minister Narendra Modi. REST OF THE WORLD

“The sports page records people's accomplishments, the front page usually records nothing, but man's failures.”
– Barbara Walters