I’ve received many questions about how the new administration in the US will affect us here in Canada. 

The short answer is that we aren’t sure at this time.  There are concerns regarding how a 10% tariff on imported goods would apply to the country 80% of our exports go to. But different than 8 years ago, the Canadian government took steps to not be caught off-guard which is good. Another good thing is that there isn’t any ambiguity as to who won.

I will write about this further when things become clearer, but I wanted to send something out about the equity conference I returned from last night. 

This was a conference where RBC DS invited some of the top money managers from around the world came to speak about their investment approach, and how they see the markets and economy moving forward. It’s fascinating listening to the different approaches and styles of investing, and then listening common themes between them.  I've summarized some of those below.

 

Fixed income:

After some recent movement in the bond market, the marked is now pricing in 4 more rate cuts in Canada by the end of 2025.  We feel that is accurately priced.   Bond markets had an incredible year.  It was kicked off in November of last year when first the B of C announced they were done raising rates, then later the Fed signaled the same thing.  The index was up close to 13%  for the year at the end of the Q3 (Sept. 30^th).  That return is mostly due to capital appreciation: lowering of interest rates increases the value of the bonds you are holding.  Moving forward, the outlook is for more traditional returns in the 4-6% range. Bonds will also be a ballast for the portfolio, and gain value in a “flight to security” scenario. 

 

Equity Markets:

1. Technology companies are real, and they are here to stay. 

Much has been made of the AI stocks rise to worrying heights.  This is not the tech bubble though.  These companies a) employ a lot of people b) have strong balance sheets and cashflow c) are investing heavily in research and development.   The exception was NVIDIA.  I didn’t hear any equity manager speak ill of it, or question it, but not many are investing in it.  The rise has been astronomic, and where it goes from here somewhat uncertain- so it represents a risk.  Also, to this point the main trade in AI has been in the manufacturing side, but the next trade in AI is in the companies that are utilizing it effectively. 

2. The market will go up, but…

The stock market is likely to continue to go up.  It is expensive, but it is likely to continue and get more expensive.  When I use terms of “expensive” or “Cheap”, I’m referring to one of the more simple ways to evaluate a stock: the Price Earnings ratio.  This is simply a stock’s Price relative to its profits.  Currently, the S&P 500 index (the 500 largest companies in the US) has an average PE ratio of around 27. This number is referred to as the “multiple” and  it means that the average price of a stock on the S&P500 is currently 27 times its earnings or profits.   That’s higher than average.  It typically ranges between 20.5 and 28.5.  We will most likely move above that average range, but there isn’t much room after that.

 

c. There are concerning issues in the economy.

1. China’s productivity increases are likely to level out.  One of the main sources for China’s rapid growth is based on changing into a manufacturing economy.  They brought millions of people in from agricultural businesses in rural parts of the country, and into factories to make things.  That has largely come to an end.  10% of their population is still in agriculture (it’s close to 2% in NA), however they are primarily elderly people, and unlikely to move.   Productivity in North America has also leveled out.  Post-Covid, the expected productivity rate is 1.8%, less than half it’s pre-Covid Historical rate of a steady 3.8%. 
2. The amount of US debt that is piling up is significant and worrying.  The way to address it is through raising taxes, however the new administration has pledged to cut them.  The steadily increasing costs to service the debt are compounding.  Tariffs have been promised, which will stifle growth and has long been proven to be ineffective in increasing domestic production.

We have been talking about muted growth in the stock market for the last 10 years, but it now looks like it is upon us.  Increases in Productivity leads to increases in profits.  If we are in a new era of lower productivity around the world, that means lowering of profit growth. The implications of that will be reflected in the PE ratio I discussed earlier, where investors will probably be unlikely to pay the same “multiple” if profit growth is less…. So… in simple terms:  lower stock valuations.

 

In an economy where profits are harder to get, that means more competition. Historically the companies that win are the gorillas. The big companies with strong cashflows, strong customer bases and steady profits.  Not the new ones coming in trying to win over new customers and develop income streams.

 

So- investing in those strong companies is probably the winning formula for this lower productivity era, and also the place to be should the market become volatile.

 

Many investors that require income from their portfolio have funded much of that through harvesting capital gains for the past 30 years.  moving forward, this will likely be more difficult to do.  Companies that instead pay steady dividends regardless of the economic cycle will be more valuable to the portfolio.