Flash Report

We have posted a flash report update on eight of our coverage companies. In the reports we see underlying themes of declining raw materials prices helping company profits, strong demand in specific cyclical areas of the market, and some slight pressure on margins. We have downgraded a couple of the names in the flash report due to margin compressions. We feel the report offers valuable insights into the areas of strength in the economy and how this translates into company strength, as well as highlighting the industries with near-term pressure.  

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Report Update

We have posted a report update on Altus Group (AIF). AIF is a notable player in the commercial real estate market, which is a vast asset class with ample room for growth. It has a capital-light strategy and focuses on acquisitions to improve its revenue quality. Its improving fundamentals can allow for multiple expansion, and it has shown resiliency in a tough environment. For a view into the commercial real estate industry, we feel this one is worth a look.

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Investor Sentiment Survey

Thank you to all of those that have participated in our investor sentiment surveys thus far. We feel that these surveys have added value to our thought process on the current investment landscape, and we hope that you all have felt the same. 

The survey shouldn't take more than 5 minutes and no personal details are required.

Let us know how you are feeling about markets and the economy by following the link below! We will let you know the results in our next market update.

Investor Sentiment Survey

Market Update

The markets have largely been moving higher over the last few weeks as investor optimism has begun to return and promising inflation readings have been rolling in. Earnings season has officially kicked off, and we are beginning to see encouraging signs of positive earnings surprises. The financials sector has been benefiting from eased concerns on depositor outflows and profits, and healthcare names have been demonstrating strong results. The Federal Reserve announces its decision on interest rates next week, and it is largely believed that they will hike by 25 basis points. In this market update, we review the market and sector performances for the first half of the year. 

The Canadian and US Markets
2023 has been a warm welcome to market participants after what was a tumultuous and highly uncertain 2022. It goes without saying that volatility has cooled down, the upside potential in stocks has outweighed most negative surprises, and diversification is benefiting investors’ portfolios.
 
We have reviewed our mid-year market update from last year, and it is almost easy to forget how challenging the first half of the year was for markets. For the first half of 2022, the S&P 500 was down 21%, the Nasdaq was down 30%, the Dow Jones down 15%, and the TSX had declined by 11%. In the Canadian and US markets, the energy sector was the only positive sector in the first half of 2022, and in Canada, real estate and tech were down 22% and 39%, respectively. In the US, the technology and consumer discretionary sectors were down 30% and 33%, respectively. For those investors who stuck it out and built up an ‘iron gut’, their patience is now beginning to bear fruit.
 
For the first six months of 2023, the Nasdaq has been leading the charge higher, coming in at a 30% first half gain, the S&P 500 increasing by 15%, and both the Dow Jones Industrial Average and the TSX increasing by 3%. This is where we start to see diversification of sectors and indices really come into play – an investor solely in the tech market would be up significantly this year, however, this worked against them in 2022, whereas, an investor solely in the Canadian markets is not participating in the Nasdaq rally of 2023, although they also did not experience the pain from 2022. Overall, it was a great start to the year and the performance bodes well for the investing mantras of staying the course, having conviction, and adding on declines.

Source: 5i Research, Eikon
 
There are certainly parallels to be drawn between the sector performances of the Canadian and US markets for the first half of 2023, but unlike last year, there are a few differences in performance across the two markets. On the Canadian side, technology finished the first half of the year up by 24%, helping to offset some of its ~39% decline in the first half of 2022. The consumer discretionary and industrials sectors have improved as recession fears subsided and future expected earnings began to expand. The more defensive sectors such as utilities, consumer staples, and to an extent financials, have largely traded flat on the year. The energy sector has contracted so far this year, and while its valuations remain attractive, oil is facing more headwinds than in 2022 and investors are seeking out the more heavily discounted sectors with improving outlooks.
 
We envision the TSX ending the year higher than where it is today, and we feel that a lot of this catch up will come from the real estate and financials sectors.

Source: 5i Research, Eikon
 
The US markets have benefited from their increased exposure to technology companies, as the secular AI trend has helped to propel the Nasdaq and the S&P 500 higher. Technology and consumer discretionary led the way in the first half of 2023, with industrials and communications close behind. The consumer discretionary sector was heavily discounted in 2022 as fears of a deep recession suppressed valuations to levels unseen in years, but an improving economic backdrop and steadily declining inflation have resulted in a valuation re-rating in these areas. The industrials and materials sectors have seen a bit of a bounce back so far this year, although similar to the Canadian story, the more defensive sectors like consumer staples, healthcare, and utilities have traded flat or down on the year.
 
While the year-to-date performance of some of these sectors and the overall indices may seem outlandish, taken into context of the grueling drawdowns of 2022, this is underpinned by a reversal in economic fundamentals, an improving outlook, and a rotation from defensive names to oversold and heavily discounted names.
 
Thoughts for the Second Half
In the markets, the trend is an investors’ friend, and the trend for the first half of the year has been up. To some, the percentage gains of the first half may seem unsustainable, but when taken into context of the broad-based selloff of 2022, these moves are simply making up for lost time.
 
In our first half 2022 performance market update, we noted that inflation was public enemy number one to the Central Banks, and while there are still more data points to digest for 2023, both Canada and the US have come in at a ~3% inflation rate. With continued tailwinds from lagging inflationary items such as housing and automotives, we expect inflation to moderate and fall further by the end of the year. With the economy remaining strong, company earnings improving, and interest rates being the only driving force towards a recession now having less relevance in a ~3% inflationary environment, we see the markets continuing their direction upwards into the second half of the year.

Best wishes for your investing!

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