No way to sugar coat it; we have a lot to cover this quarter. A market that has been lulled into a sense of complacency with high valuations and giddiness over the prospects of artificial intelligence has been shocked back to reality. As we write this letter, Donald Trump is in the midst of upending decades of growth in free trade with protectionist tariffs that ultimately amount to a tax on all imported goods. Of course, countries are retaliating with similar measures and near-term growth in the global economy is now uncertain.
During the first quarter, we saw several head fakes on tariffs and chaotic geopolitical negotiations. Even more surprising was rhetoric around the annexation of allies in Panama, Greenland and…. Canada? There may be some longer-term strategic imperatives implicit in the outlandish claim of making Canada the 51st state, but this type of rhetoric has shocked global markets and Canada in particular. Correspondingly global stocks fell, led by the US while Canadian stocks actually outperformed their southern neighbour.
At first blush, weaker US performance and relatively better Canadian performance would seem paradoxical. But often, the simplest explanation is the best one. Regardless of the catalyst for a weaker economic outlook, those companies with absurdly high valuations and distant hopes of profits are the most exposed. This is exactly what we have seen so far this year. Many Canadian stocks are not overly demanding in terms of their valuations and, while not immune to market pressures, have not suffered as much as US stocks.
As for the US, I’m sure many of you have seen some troubling headlines. “$5.4 trillion evaporates over a 2-day wall street rout”. A large majority of that “evaporation” was speculative hope and one could argue was never real to begin with. Roughly half of those losses came from just ten stocks. Three stocks, Apple, Tesla and Nvidia, accounted for almost 20% of the market decline. While our portfolio did not come out unscathed, it has definitely fared better than the market overall over the last few months.
So, what now? The damage is done in terms of uncertainty. Business owners and executives are going to be hard-pressed to commit to any major capital investment or wide-spread hiring in this chaotic environment. US consumer confidence measures are approaching Covid depths. At least Canada has escaped worst-case scenarios in terms of tariffs. An uproar within the US and even rumblings in the Republican party have at a minimum delayed greater action.
All is not lost. In fact, if you’ll excuse some optimism, distress creates opportunity. Eliminating interprovincial trade barriers in Canada and greater focus on capital investment and productivity have emerged as an imperative priority. In Europe, even normally frugal Germany is realizing they need to invest more, both from a military and infrastructure perspective. We continue to view artificial intelligence as a productivity enhancer for all industries in the long term, even if the hype may have exceeded the opportunity in the short term. Manufacturing may not repatriate in the way Donald Trump would like, but this trend was already in place post-Covid and is an opportunity for some industrial companies involved in automation (unfortunately limiting the return of jobs that are now obsolete).
We will not try to predict Trumps decision making (good luck) or time the “bottom” of the market. A recession could ensue. Company share prices may fall. But reality is that this is only a problem on paper. Quality companies with durable cash flows and dividends that are trading at reasonable valuations will undoubtedly regain any lost ground over time. And of course, when stock markets fall, opportunity presents itself. Often indiscriminate selling results in good companies getting lumped in with bad ones. Companies on our watchlist are reaching valuations that now look more attractive.
Rest assured, our Investment Committee is remaining diligent, meeting regularly to discuss risks and opportunities in this current environment. We have been accumulating cash through dividend payments and contributions to take advantage of dislocations such as this. We are monitoring all holdings closely and will take advantage of opportunities patiently. As Mr. Buffet says, it is important to keep your head when everyone else is losing theirs.
We appreciate the trust you have placed in us and welcome any questions you may have.
During the first quarter, we saw several head fakes on tariffs and chaotic geopolitical negotiations. Even more surprising was rhetoric around the annexation of allies in Panama, Greenland and…. Canada? There may be some longer-term strategic imperatives implicit in the outlandish claim of making Canada the 51st state, but this type of rhetoric has shocked global markets and Canada in particular. Correspondingly global stocks fell, led by the US while Canadian stocks actually outperformed their southern neighbour.
At first blush, weaker US performance and relatively better Canadian performance would seem paradoxical. But often, the simplest explanation is the best one. Regardless of the catalyst for a weaker economic outlook, those companies with absurdly high valuations and distant hopes of profits are the most exposed. This is exactly what we have seen so far this year. Many Canadian stocks are not overly demanding in terms of their valuations and, while not immune to market pressures, have not suffered as much as US stocks.
As for the US, I’m sure many of you have seen some troubling headlines. “$5.4 trillion evaporates over a 2-day wall street rout”. A large majority of that “evaporation” was speculative hope and one could argue was never real to begin with. Roughly half of those losses came from just ten stocks. Three stocks, Apple, Tesla and Nvidia, accounted for almost 20% of the market decline. While our portfolio did not come out unscathed, it has definitely fared better than the market overall over the last few months.
So, what now? The damage is done in terms of uncertainty. Business owners and executives are going to be hard-pressed to commit to any major capital investment or wide-spread hiring in this chaotic environment. US consumer confidence measures are approaching Covid depths. At least Canada has escaped worst-case scenarios in terms of tariffs. An uproar within the US and even rumblings in the Republican party have at a minimum delayed greater action.
All is not lost. In fact, if you’ll excuse some optimism, distress creates opportunity. Eliminating interprovincial trade barriers in Canada and greater focus on capital investment and productivity have emerged as an imperative priority. In Europe, even normally frugal Germany is realizing they need to invest more, both from a military and infrastructure perspective. We continue to view artificial intelligence as a productivity enhancer for all industries in the long term, even if the hype may have exceeded the opportunity in the short term. Manufacturing may not repatriate in the way Donald Trump would like, but this trend was already in place post-Covid and is an opportunity for some industrial companies involved in automation (unfortunately limiting the return of jobs that are now obsolete).
We will not try to predict Trumps decision making (good luck) or time the “bottom” of the market. A recession could ensue. Company share prices may fall. But reality is that this is only a problem on paper. Quality companies with durable cash flows and dividends that are trading at reasonable valuations will undoubtedly regain any lost ground over time. And of course, when stock markets fall, opportunity presents itself. Often indiscriminate selling results in good companies getting lumped in with bad ones. Companies on our watchlist are reaching valuations that now look more attractive.
Rest assured, our Investment Committee is remaining diligent, meeting regularly to discuss risks and opportunities in this current environment. We have been accumulating cash through dividend payments and contributions to take advantage of dislocations such as this. We are monitoring all holdings closely and will take advantage of opportunities patiently. As Mr. Buffet says, it is important to keep your head when everyone else is losing theirs.
We appreciate the trust you have placed in us and welcome any questions you may have.