A Pair of Portfolio Dispositions, and Thoughts on the Direction of the Canadian Dollar

October 18, 2024 | Nick Scholte


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Timely sales on a both the U.S. and Canadian side of discretionary client portfolios. Also, declining Canadian inflation in turn suggests declining Canadian interest rates which, further in turn, suggest a declining Canadian dollar.

To my clients;

It was an up week for North American stock markets, with the Canadian TSX finishing up 1.4%; the U.S. Dow Jones Index up 1.0%; and the U.S. S&P 500 up 0.9%.

Two sales in client portfolios this week:

- U.S. Bancorp reported solid earnings this week and rose substantially on the news, nearing our analyst’s $50 per share price target (subsequently raised modestly). Shares were sold for discretionary clients on Wednesday at USD $49.13 per share, having been initially acquired earlier this year in February for $41.52 per share, representing an 18+% gain in about 8 months.

- Longer-term Canadian holding Element Fleet Management (Symbol: EFN) was also sold for discretionary clients on Thursday. This position was initially acquired in January 2021 at $11.91 per share (newer discretionary clients onboarded post January 2021 will have different initial acquisition costs) and was sold yesterday at $29.47 per share. This was a reluctant sale as EFN was a more specialized story and was the #1 high conviction pick of our RBC analyst. Unfortunately, we lost this analyst coverage a few months back, and our secondary research provider (Veritas – an exclusive partner of RBC Dominion Securities) downgraded the position this week on concerns that the special market recovery conditions that prevailed for EFN at the start of 2021 had run their course. I’m not sure our departed RBC analyst would have agreed with the Veritas analyst, but I rely heavily upon analyst research and opinion to drive my investment decisions for clients, and it was untenable for me to maintain the position given the analyst dynamics. At better than 2.5x the original investment, this was a star performer in client portfolios for the ~ 3.5 years it was held.

Neither of these dispositions were actively considered in advance, so I have yet to identify suitable replacement investments for the proceeds. I hope to do so in the next week or so.

Moving on, clients will know that I have repeatedly cited the divergent paths of the U.S. and Canadian economies in these weekly updates. The divergent paths, notably stronger U.S. economic growth vs stagnant Canadian growth (and actual declining Canadian GDP output on a per capita basis) led to a decision earlier this year to overweight U.S. holdings while simultaneously reducing the weight of Canadian positions. As further evidence of these divergent paths, Canadian year-over-year inflation surprised to the downside this week, registering just 1.6% on an annual basis. This is BELOW the target set by Canadian (and, for that matter, U.S.) central banking authorities of 2.0%. Canada had already embarked earlier and more aggressively on its rate cutting path, and this inflation news is expected to drive the bank of Canada to continue to do so with odds of a 0.50% cut at next week’s meeting now expected by more than 2/3’s of polled economists. Unsurprisingly, after a late summer rally in the Canadian dollar, the trend toward USD strength has been reasserted. Over the short to medium term, the tailwind at the back of the USD is expected to provide important diversification benefits to client portfolios.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

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