It’s that time of year again where we recruit a handful of our favourite portfolio managers and ask them to reflect on the past year and what they anticipate for the year ahead.
Buckle in for their thoughts on central banks, Bitcoin’s surge, the AI craze, what sectors were on the naughty and nice list this year, and more.
Craig Basinger talks investment strategies and portfolio construction
Speaking broadly, what was on the naughty and nice list this year? Do you expect the same trends to continue in 2024?
2023 was full of surprises, fortunately much more of the good kind. While some regions of the world flirted with recession, the US remained resilient. Remember the mini-banking crisis among regional banks in the US? Well, that passed, thanks to a few billion of support. Inflation got a whole lot better. That is good news. Markets don’t like inflation, but the future me and you really should dislike it – inflation erodes the value of your money and savings. It makes you poorer (or less rich). And then there is AI, with great promise to make us all more productive. Don’t worry, this isn’t AI-generated. To ensure authenticity, I will include some superfluous commas and dangling modifiers so you know it’s a human. A few weeks left, but this year looks like a doozy.
So, let’s celebrate. Sure, the NASDAQ was the star, and folks are wondering why they didn’t own more (or any in some cases). Throw Bitcoin into that bucket at +150% or so this year. Or they are wondering why they own the TSX or those boring dividend names that weren’t boring this year but only managed some high single-digit returns. Or oil, kind of the dog of the year. Regardless of the hits and misses, there were more hits, and any year that a standard balanced mix does somewhere around 10% is a good year.
What is perhaps more noteworthy is that 2023 appears to be a mirror of 2022. Simply put, the biggest decliners in 2022 were generally the biggest gainers in 2023, and vice versa. Bitcoin has risen from $17k to $42k, yet in 2022 dropped from $50k to $17k. Nasdaq, S&P, Europe, and Asia were some of the biggest drops in 2022. And that TSX that is clearly at the back of the pack in 2023 was one of the smaller decliners of 2022.
So, what could 2024 look like? Don’t worry, it won’t be a simple mirror of 2023. Investing will never become that easy. However, gravity is not just a constant here on Earth; it is in the markets as well. Sooner or later, it drags down the moon shots and lifts up those that have fallen too far. Timing gravity is the hard part.
When analyzing their portfolios for the year ahead, what should investors be sure to check twice?
This is the celebratory rally as more and more evidence points to inflation risk fading, and now central banks are saying the same thing. This has fueled the Santa Claus rally, which is 100% driven by multiple expansion. Earnings revisions remain flat at best. Fun and profitable, yes, yet multiple expansion (and its less popular cousin, multiple contraction) is a zero-sum influence over time. It is earnings growth that drives the long-term of stocks. And earnings growth is driven by the economy.
We are among the many who had thought we would have seen more economic weakness in 2023. Although perhaps we did – Canada, Germany, and Japan all posted negative GDP growth in Q3. The UK was a zero. Yet the US economy charges on. Sorting out how this desynchronized slowdown unfolds in 2024 will likely be at the core of market returns. Because the economy’s path will drive sales growth, the cost of capital, labour’s bargaining power, and the ability to raise prices… all go into driving earnings.
The only trend we see from 2023 carrying over into 2024 is the number of surprises. We believe this market is going through a great reset – from a multi-year period with a very low cost and abundance of capital to a world with a higher cost of capital and less availability. This transition back to a more normal world has been going on for two years now and isn’t over. But in the meantime, let’s see if the euphoric high from inflation’s demise and central banks admitting they are done can push the market multiples even higher into year-end.
Vlad Tasevski talks crypto markets
Crypto markets have been quite volatile this year. What "North Star" should people keep in mind while navigating 2024?
What we have to remember is that the digital asset space is only 15 years old. It’s very much in its teen years when you look at it from an asset maturity perspective. Anybody who has raised teens knows how they can be – arguing with authority figures, oscillating between overconfidence and low self-esteem, and struggling with their identity. And the last 36 months have been very “teen” for crypto: at constant odds with regulators, experiencing the euphoria and rock bottom of the bull and bear markets, and trying to figure out how crypto and crypto services will interact with the global economy moving forward.
Looking back on 2023, the FTX court case and the Binance settlement will be viewed as pivotal moments in time when the industry as a whole moved away from its unruly teen years and into adulthood. And with the increased likelihood that the SEC will approve a spot bitcoin ETF in the US, 2024 looks set to be the year when bitcoin officially goes mainstream. That potential development has the entire industry buzzing and would greatly increase the accessibility and legitimacy (in the eyes of more traditionally-minded investors) of the world's most important cryptocurrency. And this is very exciting stuff for people like us who have been supporters of the technology from the beginning.
Bitcoin’s recent rally has pushed its price to nearly $60,000 CAD, thanks in no small part to the potential US spot ETFs. How do you see their launches affecting Bitcoin and cryptocurrencies in general next year?
There’s no crystal ball for the future. But if the SEC does approve a US spot bitcoin ETF, the industry consensus is that it will be a massive long-term boon for the asset class. The reality is that ETFs make certain assets much more accessible to a much broader group of investors. Full stop. You need only look at how the gold market has grown since the first spot gold ETF launched in the early 2000s to get a reference point for how impactful a US spot bitcoin ETF approval could be for digital assets.
It’s possible that in the near term, this impending SEC approval will already be priced into Bitcoin’s current valuations. But we have to remember that the US ETF market is worth $6.5 trillion. If only a fraction of that capital is redirected over to spot bitcoin ETFs over the next 12-24 months, there’s a very compelling case that the value of Bitcoin and the digital asset space as a whole will benefit greatly from these inflows.
Fraser Stark talks retirement
What advice do you have for individuals nearing retirement or those already in retirement to navigate market fluctuations?
Adopting a holistic and dynamic approach to retirement planning is vital, especially for those nearing or already in retirement. This strategy involves creating a financial plan built with a long-term view and regularly revisiting the plan to accommodate changes in portfolio value, lifestyle, health, family circumstances, and living costs. It also involves diversifying investments between lower-risk assets to minimize market fluctuations for essential everyday needs. It presents the opportunity to take on more risk in their portfolio for discretionary spending or for longer-term goals (e.g., estate). Incorporating income-for-life solutions like the Longevity Pension Fund can help retirees overcome the psychological challenge of spending and enhance financial security through a lifetime income stream. Seeking personalized advice from financial professionals is critical for strategies tailored to individual circumstances, market conditions, and retirement planning goals.
Why do you think older rules of thumb, like the 4% rule, are still followed today? Do they still have a place when planning for retirement?
The 4% rule's popularity in retirement planning stems from its simplicity and past success. However, its relevance today is diminished, not only due to inflation, longer lifespans, and fewer defined benefit pensions but also because of the vast and innovative financial products now available, which weren't as prevalent historically. This change in the financial landscape necessitates a more nuanced approach and presents an opportunity to better achieve the outcomes and goals of a retirement plan. Retirees should consider their individual portfolio performance, inflation, and personal circumstances, adjusting them as needed. Financial advisors are crucial in navigating these complexities, offering personalized strategies that balance income generation, lifestyle aspirations, estate planning, and family considerations, moving beyond traditional rules.
Nick Mersch talks tech
In your opinion, was the tech sector on the good or bad list this year?
The tech sector was on the extremely good list this year. After a dismal 2022, the industry rebounded strongly despite higher rates on the narrative surrounding AI. ChatGPT brought AI from behind the shadows to the mainstream, as we could now touch and feel this exciting new technology. Investors tried to figure out where to allocate capital to get exposure to this theme and piled into familiar names, with the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) stealing the spotlight. We believe this trend is just getting started, and we are taking a full-stack approach in our Purpose Global Innovators Fund as the theme broadens out beyond the Magnificent Seven.
We believe the core pillars in 2024 will be:
- Physical infrastructure buildout (Semis & Cloud),
- Infrastructure Software (Tooling), and
- Application Software (ERP, HCM, CRM, Other SaaS).
AI was all the rage in 2023, but were there any other standouts for you either in terms of performance or disruptive influence?
This may sound narrow-minded, but I believe every tech investor should be exclusively focused on the implications of AI going into 2024. It is that important. We are in the midst of the next technological revolution. AI will change everything from workflows to business models to unit economics… everything. If you’re not positioned to capitalize from this theme while remaining flexible to skate where the puck is going, you’re going to get left behind. There are very few certainties right now, but we are identifying early winners and losers and are positioning the fund to capitalize accordingly. 2024 will be one of the most technologically exciting years in a very long time.
Greg Taylor talks central banks and forecasts
This year, the Fed and BoC were front and centre as they continued raising interest rates and implementing quantitative tightening measures. What’s your take: were they too Grinchy? What do you expect to see from central banks next year?
Central bankers have a reputation for making predictions that would make most weather forecasters look like superstars. Central banks, as usual, kept easy money policies on for too long, which contributed to the spike in inflation we all experienced coming out of the Covid crisis. Once they realized they had gone too far, panic ensued, and globally they began to unwind these programs and launched one of the most aggressive rate hiking programs in history. The bond yields rocketed from nearly 0% in 2020 to 5% on the US 10-year last fall. A rapid move in yields such as this can break things like we saw earlier this year with the collapse of several US regional banks, which is something the Grinch would admire.
Now that Canada is in the middle of a housing crisis and the average person is struggling to pay for groceries, we are hearing comments from the same bankers declaring victory on inflation and an end to their aggressive rate hikes. Markets pivoted off the new expectations for rate cuts and a ‘soft landing’ to end the year near all-time highs for equities. But do we really believe it this time? Bond markets are now pricing in US rate cuts for March and a total of 5 cuts through the year. This seems too much to me unless we are in a severe recession or financial crisis that requires cuts. I think markets have gotten ahead of themselves as they usually do. 2023 will likely be the cycle high in bond yields, but the drop won’t be as fast as many would like, as inflation won’t fall as fast as expected. This will make for difficult and volatile markets, add in a US presidential election in which the FOMC will not want to be seen as influencing, and 2024 may be a year central bankers do less than we are predicting now.
What’s on your holiday wish list for the markets next year?
We started to see some of it over the last month, but I would wish for a broadening out of returns for equity markets. Much was written throughout the year about the US Magnificent Seven and their domination on returns. With markets near all-time highs, many investors who are overexposed to quality or value names are feeling like they missed the party. This should reverse next year as the drop in bond yields will make high-dividend stocks more attractive. A fall in the value of the US$ vs other currencies will also contribute to broadening out the rally to other sectors. A market in which Value and Quality outperform growth may lead to the TSX outperforming other markets, a present for every Canadian.
— Craig Basinger is the Chief Market Strategist
— Vlad Tasevski is the Chief Operating Officer and Head of Product
— Fraser Stark is the President of the Longevity Retirement Platform
— Nick Mersch is the portfolio manager for the Purpose Global Innovators Fund
— Greg Taylor is the Chief Investment Officer
Sources: Charts are sourced to Bloomberg L.P. unless otherwise specified.
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