DIARY OF A PORTFOLIO MANAGER

January 16, 2026

“I wish that I could fly
Into the sky
So very high
Just like a dragonfly”

-                                                    Lenny Kravitz, Fly Away

Good afternoon

I flew to Toronto last week for our annual Portfolio Management Conference. From door to door, I probably could have driven there faster but flights went smoothly so all good.

Three days of sessions with a wide variety of speaker, various breakout sessions (I am still trying to get through video replays of the ones I missed as I can only be in one room at a time). I have about 20 pages of notes so I tried to distil as best I could to what you see below. Many of you may find this a bit dry so feel free to move on with your day if this is more detail than you need. There will not be a quiz afterward. Overall, the tone was bullish but this was also followed by talk of how many assets are expensive and the economic growth is not without risk.

Rick Rieder BlackRock Senior Managing Director, Chief Investment Officer of Global Fixed Income, on the short list to be the next Chair of the Federal Reserve

Key Highlights

• Extraordinary amount of gambling happening in markets today. Why is this important? Believe that trading in zero-day expiry options and leveraged products will drive volatility spikes in '26.
• Spreads are tight and valuations are high. Need to manage portfolios with this in mind (e.g. strive for balance, use volatility to advantage).
• Think we're in an environment of strong and resilient growth. 55+ cohort is driving consumption. 25-45 cohort is struggling (and gambling!).
• Interest rate transmission mechanism is different today. The older demographic that controls a lot of wealth and are net savers benefit from higher rates (not the stimulus of lower rates).
• AI will challenge labour. People underestimate the productivity to come, which will not be good for labour. There are companies like META growing like crazy that are cutting jobs. There are 4mm people engaged in transportation and we could see that number halved as self-driving proliferates.
• Why is this "the best investing environment of our lifetime"? The compounding power of high ROE businesses in the U.S. equity market. Still like Tech and love Healthcare

BCA Research’s Matt Gertken - Geopolitics and U.S. Politics in 2026

Key Highlights

• Tactically overweight cash, but prepare to overweight long-dated Treasuries if and when labor market deteriorates further.
• Tactically overweight US assets versus global, but prepare to overweight Europe and Emerging Market currencies and equities if and when China provides major fiscal stimulus.
• Tactically underweight Europe until Ukraine ceasefire clinched. Brinksmanship and military incidents are likely until a ceasefire deal is fully agreed.
• Buy gold on dips. The gold price should suffer a correction, but we would buy on dips as geopolitical risk and policy uncertainty will eventually resume their long-term upward trend.
• Sell oil on rips. Oil fundamentals remain weak, and the risk of a global oil supply shock has receded.

GEOPOLITICAL RISK MOVES SIDEWAYS IN 2026

• Geopolitical risk may temporarily decline in 2026, based on two key assumptions: Ukraine War Containment: 55% probability of ceasefire, 35% status-quo.
• US-China Trade Truce: A continuation of the current de-escalation
• However, long-term trend of rising geopolitical risk remains intact
• Russia-NATO Conflict: Highly improbably, but not impossible (10% odds) Russia’s military is overstretched in Ukraine and cannot fight a two-front war.
• Ongoing threats: Russia will likely continue low-level sabotage (e.g. critical infrastructure, cyberattacks) to intimidate NATO and test U.S. resolve.
• A Russia-NATO military incident is highly likely in the near term and could cause a market correction. As long as it does not lead to extended hostilities, it would not trigger a scenario of full scale war.

US-China trade truce likely to last through Midterm election

• US unlikely to escalate trade war ahead of midterm. China still depends on exports.
• Manufacturing activity shrinking in both countries. Temporary need to restrain tariffs.
• US eases high-tech export controls. Firms retain China market share.
• China benefits from chip access while pursuing indigenous innovation.

The world is transitioning from a unipolar (U.S. dominated) to a bipolar system.

• Rationale: The US cannot sustain its 1990s dominance due to domestic political pressure and fiscal constraints.
• Transition Phase: The world is in a multipolar "twilight zone." Widespread decoupling from China will not occur unless China acts belligerently.
• Outcome: China will eventually attempt to break out of US containment, resulting in bipolar global division. But probably not in 2026.

There are huge obstacles to attacking Taiwan

Low probability of invasion (10%): A full-scale invasion is unlikely in the near term. The US could invite an attack by signaling low support for Taiwan, but China would still have an interest in avoiding huge risks.

• Rationale: An invasion would disrupt China's economic growth and tech ambitions, risking domestic stability and access to semiconductors and global markets.
• Signposts: China's current economic stimulus and slow pace on alternative energy pipelines do not signal imminent invasion.

More Likely Escalation (25%): China seizes a small, outlying Taiwanese island.

Rationale: A "dress rehearsal" operation to intimidate Taiwan without triggering a full US military response. US would impose serious sanctions but not maximum pressure.

Base Case Scenario (65%): Gaining Influence: China will focus on political and economic influence.

• Taiwan's KMT Party: The KMT is gaining power and is more open to trade with China.
• 2028 Election: The KMT is increasingly likely to win the presidency.
• Future: This could lead to a major trade deal around 2029-2030, increasing China's influence.
• Long-Term Risk: Tensions could rise in the 2030s if Taiwan resists China's demands for access to its service sector (finance, media).

U.S. POLITICAL & ECONOMIC OUTLOOK

• Democrats Will Win House, Republicans Likely Keep Senate
• Senate: Democrats have a ~35% chance of winning.

SECTORS AND INDUSTRIES

US Internet – Brad Erickson

Key Themes:

• Race for AI chatbot dominance Market looks increasingly like winner take most, largely to the benefit of the hyperscalers, and to the detriment of platforms lacking durable distribution or other major rails of commerce
• OpenAI represents key single point of leverage and is creating an intentional too big to fail approach to infrastructure partnerships
• Investor ROIC time frames continue to evolve with premium placed on demand visibility & near-term acceleration Continued investor patience required on AI infrastructure ROIC Will take at least 12 months to get more clarity on ROIC
• Capex spending will continue because hyperscalers are confident that long-run ROIC will be strong
• Consumer interaction with internet continues to evolve Emergent agentic and voice-only interfaces challenge decades of established business models tied to legacy user behavior
• Growing war between publishers and LLMs because LLMs are using data and not providing sufficient economics in return

U.S. Banks – Gerard Cassidy

Key Themes:

• U.S. economic growth projected at 2.0-2.5% in 2026, supporting bank stock outperformance similar to the 1995-1997 period.
• Average loan growth expected to accelerate to 5.0-6.0% in 2026, driven by commercial/industrial, commercial real estate, and home equity loans.
• Net charge-offs forecasted at 0.40-0.60% of loans, with nonperforming assets remaining stable to slightly higher.
• Federal Reserve likely to cut rates by 25-50 basis points in 2026, followed by a period of stability.
• Dividends expected to be the primary capital return method, with 5-10% increases; stock buybacks may accelerate post-Basel III “Endgame” finalized (mid-2026).
• M&A activity anticipated to accelerate for banks >$50B in assets due to improving rate/regulatory environment.
• Basel III “Endgame” proposal unlikely to significantly increase capital requirements for banks >$100B.
• Reemergence of inflation poses a risk to the bullish outlook by potentially altering Fed monetary policy.

U.S. Software – Rishi Jaluria

Key Themes:

• AI is a top spending priority for enterprises in 2026, with 90% of survey respondents expecting increased AI spending. However, there is growing scrutiny over AI budget ROI, with 29% citing lack of ROI as a top concern.
• AI is not the "Death of Software"; instead AI will transform software's definition (e.g., agents/multi-agent systems) and lower barriers to entry, driving innovation and M&A activity.
• GenAI adoption is strong, with 60% of organizations already in production, but data privacy remains the top concern (77% of respondents).
• Monetization of AI in software is expected to unfold gradually, with LLM vendors and cloud providers leading the wave, though meaningful revenue impact for enterprise software may not occur until 2028 or later.

U.S. Healthcare Services – Ben Hendrix

Key Themes:

• RBCCM expects a mixed medical cost performance in 2026.
• Following years of elevated utilization, managed care companies are expecting Medicare Advantage margin expansion given disciplined plan design and a healthy Medicare Advantage rate update versus previous years.
• The expiration of Affordable Care Act (ACA) enhanced subsidies could cause the ACA risk-pool to deteriorate as healthier individuals forego coverage.
• The adoption of GLP-1 anti-obesity drugs will likely increase the number of eligible patients for outpatient procedures that were previously ineligible given their obesity related health issues. This would be a benefit for the Ambulatory Surgery Centres.
• RBCCM expects a largely benign healthcare policy environment following this year’s mid-term election cycle.

Business & Information Services - Ashish Sabadra

Key themes

• GenAI Companies with proprietary data and deep client integrations with critical workflows will benefit from AI tools that improve efficiencies and drive client engagement
• Should drive both growth and margin expansion for AI winners
• Macro Strong issuance trends driven by strong refinance volumes for the next 3 years
• Trading volumes have tough comps following liberation day impacting exchanges

Multi-Industry & Electrical Equipment - Deane Dray

Key themes

• 9 powerful multi-year secular drivers that are translating into committed capital and projects where only 15% have started, cancellation rates are below the industry average, and where half the dollar amount is from datacenter.
• Two speed economy: Datacenter vs non datacenter Datacenter companies are growing 15-10% with 9 -backlog driving strong demand visibility
• Tariffs are less of a concern compared to last year The current administration will find a way to invoke regardless of IEEPA ruling
• See tariffs as a manageable headwind
• Balance sheets across the sector are strong
• Positioning Chicken cyclicals are the place to be at this point in the cycle
• Highest quality names have struggled at this point in the cycle but still prefer to have some exposure here to add defensiveness if sentiment rotates to risk off
• Sentiment is currently risk on
• Valuation Valuations are reasonable at current levels especially on a relative basis to S&P 500
• Top risk is AI bubble fears
• The recent sell off in cooling is overdone Even if Vera Rubin chips do not require chillers, datacenter will still be running elder generation chips and still require cooling for other parts of the datacenter
• NVDA wanted to indicate consumers that that they are making improvements on power consumption

Canadian Consumer Names– Irene Nattel

Key Themes:

• Discretionary names enjoy strong FCF, ROIC
• Valuation bifurcation favouring high-ROIC discretionary names
• Value-seeking behavior: Well entrenched, and sticky, across cohorts
• Inflation and tariff uncertainty: Well managed but shaping consumer behaviour
• Valuation bifurcation: Favouring quality, momentum over deep value
• Community-centric brand engagement: Community is the new trust agent
• Bridging the data opportunity gap: Leveraging AI to better harness the value of large data pools
• Consumer spending: Uneven, but resilient

Canadian Diversified Financials– Bart Dziarski

Key Themes:

• Diversified financials have shown resilience in 2025 despite elevated macro volatility, highlighting their defensive business models.
• On a longer-term basis, diversified financials have also outperformed, further highlighting their role as sources of alpha within financials.
• Brookfield Entities/Private Equity: Healthy monetization pace should continue and Fundraising should remain strong.
• Asset Managers: Constructive equity markets and continued mutual fund flow momentum should support AUM growth in 2026
• P&C Insurance: A stock pickers sector, positive on personal property and negative on commercial.

Global Mining - Sam Crittenden & Josh Wolfson/Michael Siperco

Key Themes

• Copper remains the key focus of base materials. Demand is anticipated to continue, driven by strong end markets in the power and data sectors, which should offset weaker demand in China.
• New copper supply was materially restricted in 2025 due to mine closures, and it will take beyond 2026 for these sites to return to production.
• Longer-term, supply will remain restricted due to geological challenges, which supports a higher copper price in the medium term.
• Copper stocks are pricing ins a $4.29 copper price, well below $5.96 spot.
• Gold has further upside, as Central bank demand is likely to remain firm and price elasticity is relatively flat. Expect new highs in 2026.
• Cash flow leverage at gold mining companies to the higher, and rising, gold price is strong, and there is a greater emphasis on shareholder returns.
• Higher cash costs do not seem to be fully reflected in gold miner consensus expectations. This tilts in favour of royalty companies that do not have capital expenditures.

Canadian Energy Infrastructure – Maurice Choy

Key Themes:

• North American energy demand continues to march higher. Expect rate base growth to rise and new buildouts from the midstream sector, backed by contracts.
• Balance sheets are in good shape, supportive of growth and dividend increases.
• There is an improving political sentiment in Canada, offset by geopolitical developments (e.g., Venezuela).
• Regulated utilities are trading in-line on relative P/E to the TSX compared to history.
• Regulated utilities credit metrics are also moving in the right direction.
• Alberta power could increase on the growth of datacenter demand which would lead to higher utilization of existing assets. This would also be supportive for contract extensions and/or new growth projects.

Renewable Energy – Nelson Ng

Key Themes:

• Renewable energy is required to meet future power demand. McKinsey is forecasting for the U.S. to grow its energy demand by 3.5% per annum through 2040.
• The decline in rates relative to a few years ago has improved the unit economics for development of renewable assets.
• However, sentiment for renewable remains mixed. On the positive side, data centers require 24/7 power and the growth of the category has led to greater energy infrastructure opportunities. On the negative side, the Trump administration is not in favour of renewable energy.

Telecom and Media – Drew McReynolds

Key Themes

• The good news is Canadian telecom fundamentals have inflected positively; the bad news is it will take time for the recovery to bear out.
• Balance sheets are being repaired, industry growth has turned positive, and free cash flow will improve over the next two to three years.
• Canadian telecom is capable of low-double-digit returns over a 2-3 year time frame for patient investors.
• Valuations are neither rich or inexpensive, while investor sentiment has turned less negative. There is room for valuations to improve at sector fundamentals improve.

Real Estate – Pammi Bir & Jimmy Shan

Key Themes:

REITs are capable of generating high single digit to low double digit total returns in 2026.

Pecking order of sub property types: Senior housing, industrials, self storage, retail, multi-family, office

Valuations: Sector is trading at a 12% discount to NAV, P/AFFO is in-line with average, AFFO yield spread also in-line with historical GoC 10 yr

REITs are looking interesting relative to other yield-oriented sectors

M&A activity has picked up. This should place a stronger floor price. Takeout candidates include: FCR.UN, GRT.UN

Key risks: sharp increase in rates, accelerating inflation, hard landing scenario

Canadian Industrials – Walter Spracklin, James McGarragle, Saba Khan

Key Themes:

• Rails: Shipper Survey suggests pricing steady in 2026. Bulk (record Canadian crop) is a tailwind, while intermodal is the key unknown (impacted by tariffs and truck rates). Improved tariff visibility could be a key Catalyst
• Global Engineering: GlobalData calls for a reacceleration in global construction output in 2026/2027 following a slower 2025 (largely attributable to the impact of U.S. tariffs). Only ~41% of IIJA funding (US$550B of incremental/new funding) has been spent to-date, with the remainder still to be allocated over the coming years.
• Machinery: The YoY change in total construction spending in the U.S. has turned negative since February 2025. Looking ahead, we believe we are mid-cycle innings as it relates to non-residential construction spend, with the recent moderation in activity largely driven by short-term disruptions stemming from the reprioritization of infrastructure spending.
• Auto collision repair: The number of insured vehicles have declined in recent quarters, which we believe has in part been driven by the inflationary backdrop for auto insurance. Looking ahead, we believe that once consumers become accustomed to the operating environment, paid claims are likely to return to their long-term trend of rising over time.

Canadian Banks and Lifecos – Darko Mihelic

Key Themes:

• Canadian Bank Index is trading at 2.02x P/B and 13.9x forward P/E, well above historical avg.
• RBC expects median bank EPS growth of 10.9% and 12.6% in 2026 and 2027, respectively
• Expect modest loan growth in 2026, but expect revenue growth to be driven by net interest income (NII) growth driven by NIM expansion.
• 2026 PCL guidance was mostly in line with 2025 actuals and guidance. We assume an average total PCL ratio of 42 bps in 2026, down from 47 bps in 2025.
• Capital levels are solid with an average CET1 ratio of 13.7% in Q4/25. We model incremental buybacks through 2026 and 2027
• Expect solid non-interest revenue growth of ~6% in both 2026 and 2027, driven by continued strength in capital markets and wealth management segments.
• Cost savings initiatives should help improve efficiency ratios and profitability for the group
• For Lifecos, RBC models core EPS growth of ~8% in 2026, and ~9% in 2027
• Wealth Management and International segments (Europe for GWO, Asia for MFC and SLF) contributed to strong earnings growth thus far in 2025 (12% and 16 respectively), but we expect growth in 2026 in these segments to decelerate to ~9% and ~5%, respectively.
• Lifecos increased their medium-term core ROE targets at their most recent investor days: GWO increased its target from 16-17% to 19%+, IAG increased its target from 15%+ to 17%+, MFC increased its target from 15%+ to 18%+, and SLF increased its target from 18%+ to 20%
• Capital levels remain strong, with enough excess capital for substantial buybacks
• Lifeco Index is trading above historical averages on a forward P/E basis, but this is justified given stronger growth and higher ROE targets

Canadian Oil & Gas – Greg Pardy & Mike Harvey

Key Themes:

• Senior/Integrated Oil Financial resilience remains intact alongside disciplined commitment to shareholder returns (though $55-60/bbl WTI won't leave a lot of excess cash for buybacks).
• TMX has been a grand success in affording export diversification and narrowing spreads. The policy reset in Ottawa bodes well for future energy infrastructure development.
• Intermediate Explorers & Producers Montney development remains in the early innings and shale fatigue in U.S. basins should see investment flow north.
• Multi-lateral developments have greater improved productivity.
• Valuations have moved higher and necessitate greater selectivity amongst stock pickers. Looking for business model differentiation and asset quality to underpin performance.

Canadian Technology – Paul Treiber

Key Themes:

• Canadian Tech underperformed in 2025. Returns were extremely bifurcated with SHOP and CLS driving the bulk of gains while many names suffered on fears of AI-driven disruption.
• Significant market enthusiasm for AI remains despite some negative data points (e.g. MIT study on failure rate of GenAI pilots). May prove the adage “we overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
• Will AI disrupt software? This narrative is generally underestimating the value of software. AI is capable of phenomenal things but can lack intelligence. The real opportunity for AI is to reduce labour spending not to reduce software spending. Software is only 1.3% of revenue vs. labour at 18% of revenue for the average U.S. company.
• Believe revenue and adjusted EBITDA growth to drive returns for Canadian software in 2026. Canadian technology is in line with its 10-year average relative valuation versus the TSX while U.S. technology is trading at a marked premium.