Dear Clients,
With the start of the new year, we are writing to provide you with an update on your portfolios. To summarize, 2023 ended on a strong note and we remain optimistic for 2024.
Strategic Overview
In previous notes, we discussed factors in recent years that led to higher-than-expected inflation and unusual demand swings, particularly in the consumer and technology sectors. Our consistent view has been that these distortions were mostly the result of the pandemic and thus temporary in nature; the important footnote being that "temporary" meant two to three years, not just weeks or months, approximating the timespan of the pandemic and measures taken in response. Indeed, global inflation peaked in late 2022 and although it remains above central banks' targets in most of the developed world, it has receded meaningfully. This has allowed long-term interest rates to decline after rising sharply from 2020 to October of 2023. The US Federal Reserve has even discussed lowering short-term rates in 2024 after one of its most aggressive tightening campaigns in history.
Continued moderation in inflation and interest rates favours an upward bias in equity performance. That said, many worry about a possible recession in 2024. Our perspective on this is that there are real challenges in some sectors of the economy, particularly where consumers and corporations have taken on heavy debt loads and where there is secular demand destruction. We are careful to avoid stocks with these vulnerabilities. On the other hand, we have identified companies in various sectors and niches where demand is resilient or where they are able to grow even in the face of macroeconomic pressures. Should the broad economy experience an unexpected pullback as it did in the early phases of the pandemic, central banks have significant room to lower interest rates and that would, paradoxically, be positive for stock prices.
We continue to favour high quality companies with long-term growth drivers and are willing to evolve our views and make changes to the portfolios where necessary.
Investment Spotlight
In this note, we would like to highlight the evolution of our investment thinking regarding two dominant leaders in the aerospace sector, Boeing and Airbus. For many years, we have taken note of secular demand growth in domestic and international travel. We are attracted to Boeing and Airbus because of the duopolistic nature of their market leadership, especially in commercial aerospace, allowing for strong pricing power and a multi-year order backlog that provides solid financial visibility.
We first invested in Boeing in 2016, favoring it over Airbus because of its superior profitability. Boeing’s stock did very well until 2019, when two fatal plane crashes forced a global grounding of its 737 Max fleet for nearly two years. After careful analysis of the root problems behind this crisis, we came to see that Boeing’s management team had been too focused on short-term profits and had fallen short in critical areas of engineering and manufacturing. In contrast, Airbus proved far superior in engineering and design standards and had invested rightly to establish a robust platform that allows for a smooth transition to the production of longer-form narrowbody planes, which are increasingly sought after by airlines. This led to the sale of our position in Boeing; despite the challenges, we did well on this investment.
All travel-related stocks were hit hard during the pandemic and weakness in Airbus shares was exacerbated by Russia’s invasion of Ukraine in early 2022. We saw this as an opportunity to invest in Airbus and its share performance since then has been very strong.
In Closing
2024 marks the 20th anniversary of our wealth management practice at RBC Dominion Securities. Over the past 20 years, we have encountered various challenges and opportunities, and through it all, we have learned a lot and grown in knowledge and wisdom. It has been a great honour to know each one of you and we look forward to many more years of dedicated investment management for you and your families!
Best wishes,
Woon Ai, with Cindy, Bonnie and Helen
This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.'s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that any action is taken based upon the latest available information. The strategies and advice in this report are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein.
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