2023 Q2 Update

August 14, 2023 | Sam Rook


Bonds, stock valuation, AI & more

Happy Summer to everyone and a warm welcome to the new clients who joined us in the last 3 months.


What Happened


              The biggest story of the second quarter was the steady decline of inflation in conjunction with an “okay-ish” (the technical Economics term) global economy. Inflation is still around 3% which is the high end of most Central Bankers’ comfort zone, but it’s not 6.5% so we can all breathe a bit easier. The Bank of Canada surprised with a couple of interest rate increases in early summer but it looks like we will have a pause on any further increases for now.


              Where interest rates go in the next 2-3 years is murky but I’m a believer that nearly every Central Banker in the western world studied the 1970’s inflation cycle and while they might not RAISE rates, they are probably going to be slow to LOWER rates. Especially in the face of an economy that isn’t retracting.


              Stock markets really like stable interest rate environments so Q2 has been a strong quarter for performance with the giant tech companies leading the way. More on them below.


So, about those bonds


              Did you know that from 2011 until May of last year, a 10 year Government of Canada bond would pay you less than 3%? Imagine lending money for 10 years and not even getting 3% a year from it. At the lowest point in May of 2020, the 10 year Canada bond paid you under 0.3%.


              Well with the sharp interest rate increases of 2022 and earlier this year we are now seeing bonds paying you 4% or more. US treasury bonds with a year to mature are paying around 5% now!


What does this mean for you?


              We’re buying bonds and pushing your asset mix back to a more balanced level that will help your money to continue to meet your goals. It’s not sexy or exciting but getting four or five percent with very little risk does help us meet your financial goals.


Planning Points


              The FHSA is now available. You can only open a FHSA if you do not own personal real estate or have not owned for the past 5 years. You receive tax deductions for contributions made to the FHSA (just like with RRSP contributions) and it can be combined with the Home Buyers Purchase Plan that has been available through your RSP account for years.


              With real estate prices like we have today, the FHSA won’t solve much on the house prices front but it is a viable option to help younger members of your family build up a bit of extra savings for their down payment.


Thinking about stock valuation


              Let’s talk about those large, pricey stocks that are dominating the stock market. There are 6 companies in the world that are valued at over $1 Trillion dollars. Five of them are technology companies (Saudi Arabia’s National Oil company is the sixth) and I am sure you can definitely name 4 of the 5 without much thought. The latest trillion-dollar company is the Graphic Processing Unit (GPU) maker Nvidia which has nearly tripled in price this year on the back of expectations around the boom in Artificial Intelligence. Nvidia’s GPUs are the most powerful microchips in the world and have been used in video game consoles, Bitcoin mining servers and several other complex computer processing areas.


              With the rise of ChatGPT, a language model processor developed by Open AI late last year, we saw euphoria around the benefits of Artificial Intelligence start to grow. A number of other software programs called Generative AI systems came along earlier this year that did things like create art, write songs in the style of famous musicians or even hilariously make portraits of Canadian Prime Ministers as Glam Rockers from the 80s.


              This euphoria has really put the wind the sails of the large tech companies this year as the market tries to figure out which company will grow their business in Artificial Intelligence. The concern now is will AI actually be of economic benefit or are we just a little too excited about something new and shiny…. like we were a couple of years ago with Bitcoin?


              One of the core tenets in our philosophy of investing is that we own high quality and don’t pay too much for it. Investing isn’t about picking winners as much as it is avoiding losers and one of the best ways to avoid losers is to avoid buying stocks of companies that are expensive relative to their future earnings potential. I think we are starting to get there with some of the big tech stocks and Nvidia is the poster child.


              My go-to person when I am researching valuation is Professor Aswath Damodaran of NYU’s Stern School of Business. Prof. Damodaran just happened to write a blog post about Nvidia a few days after their latest quarterly earnings report and I think it’s a great piece that talks about the future impact of AI not only on Nvidia’s business but how to view stock valuations in general. Remember we want to avoid over-paying for something new and shiny because when the shine wears off, look out below!


Happy Summer!