February 2024 Portfolio Management Team Update

Elvis Picardo

February 23, 2024

February 2024 Portfolio Management Team Update
By Elvis Picardo, CFA®, CIM, Senior Portfolio Manager, iA Private Wealth
February 22, 2024

Market Review
Global equities advanced for the third straight month in January, despite a significant decline on the last day of the month after the Federal Reserve signaled it was in no hurry to cut interest rates.

The TSX Composite eked out a 0.3% gain in January, bringing its three-month advance to 11.4%. Gains in the technology, communication services and industrials sectors were offset by declines in the materials, health care and utilities groups.

The S&P 500 rose 1.6% in January for a three-month gain of 15.5%; the index’s January gain bodes well for the rest of the year, going by the historical record (Figure 1).  The Dow Jones Industrial Average advanced 1.2% in the month, while the Nasdaq Composite was up 1.0%. Large-cap U.S. stocks continued to outperform small-caps, with the Russell 1000 up 1.3% in January compared with a 3.9% decline for the Russell 2000. The “Magnificent Seven” turned in a mixed performance in January, with Nvidia’s 24% surge and Tesla’s 25% slump at opposite ends of the performance spectrum.

In international markets, most major European bourses posted gains in January, with the notable exception of the U.K.’s FTSE-100 index, which fell 1.3%. Japan’s Nikkei 225 index was the standout performer among global indices, gaining 8.4% in January after a 28% surge in 2023, as low valuations and changes in corporate governance continued to attract foreign investment. China’s CSI-300 index and Hong Kong’s Hang Seng were among the worst performers globally last month, tumbling 6.3% and 9.2% respectively, as the world’s second-largest economy struggles with slowing growth and a real estate debt crisis.

Presently, the TSX Composite has clawed back most of the near-20% decline inflicted on it in the 2022 bear market, gaining 18.5% from the October 2022 low. But while U.S. indices have set new records in recent weeks – with the S&P 500 notably trading above 5,000 this month – the TSX has yet to reclaim the high of 22,213 it set in April 2022, currently trading about 1,000 points or 5% below that level (Figure 2). Notwithstanding the risk of a recession in Canada, strategists’ consensus 12-month target for the TSX is around 23,800, which would put it firmly in record territory.

(Sources: FactSet, Bloomberg)

Figure 1: As goes January, so goes the rest of the year

Figure 2: TSX Composite 3-year Price Chart (Feb. 2021 to Present)

Source: FactSet

Economic Outlook
A global recovery would certainly benefit the TSX, given Canada’s reliance on exports as a major engine of economic growth. Recent reports by the Bank of Canada and the International Monetary Fund (IMF) provide encouraging news in terms of the outlook for the global economy and Canada respectively.

In its Monetary Policy Report released on January 24, the Bank of Canada noted that economic growth had stalled in Canada in mid-2023 and is forecast to remain weak in the first quarter of 2024. Growth is forecast to pick up gradually from mid-year, expanding from 0.8% in 2024 to about 2.5% in 2025, as household spending strengthens on the back of easier financial conditions and improved confidence, while a recovery in foreign demand is expected to support exports and business investment.

The Bank of Canada projects inflation to stay around 3% through the first half of 2024, easing to 2.5% in the second half of the year and returning to its 2% target in 2025. The Bank noted, however, that it is still concerned about the risks to the outlook for inflation and wants to see further and sustained easing in core inflation.

The U.S. Federal Reserve also expressed caution about inflation at its latest meeting on January 31, saying that policy makers want to see more evidence that inflation is firmly on a path to their 2% target before lowering interest rates. The Fed’s cautious approach has been validated by recent economic data that has been stronger than anticipated, while inflation has also proved to be “stickier” than expected. As a result, market participants have dialed back their forecasts for rate cuts in the U.S., with three to four cuts expected in 2024, starting in June.

The IMF, in its World Economic Outlook report released last month, forecast that moderating inflation and steady growth put the global economy on course for a “soft landing.” It projected global growth of 3.1% in 2024 and 3.2% in 2025 (Figure 3), with the 2024 forecast up 0.2 percentage point from its October 2023 estimate because of greater-than-expected resilience in the U.S and several large economies, as well as fiscal support in China. The IMF also noted that inflation is falling faster than expected in most regions.

Figure 3: Global Growth Projections

Source: IMF World Economic Outlook Update January 2024

Portfolio Strategy
The improved outlook is reflected in earnings per share (EPS) estimates for the TSX Composite, which are forecast to grow by 5.3% in 2024 and 11.0% in 2025, after declining 9.2% in 2023. For the S&P 500, index earnings grew marginally in 2023, but are forecast to expand by low double-digits this year and next (Source: FactSet).

The TSX Composite is presently up 1.0% YTD, lagging the S&P 500’s 4.4% advance (as of February 21), which is being driven by Nvidia (which had released yet another blowout earnings report at the time of writing) and Meta Platforms. The outlook for the TSX Composite in the first half of 2024 appears somewhat tepid compared to that for the S&P500, as the AI boom continues to power U.S. markets higher. Note that we had increased our allocation to U.S. equities in client portfolios late last year, to redress our underweight position relative to the global benchmark (the U.S. now has a 70% weight in the MSCI World Index).

Overall, the current 59% equity allocation in our balanced growth mandates is at the mid-point of our 55% to 65% band. While we have maintained our defensive posture because of economic uncertainty and higher geopolitical risk, our model portfolios are demonstrating strong upside capture thanks to growth-oriented securities like the Platinum Growth Fund, which is up 4.5% YTD after gaining 19% in 2023.

While we are optimistic about the medium- to long-term outlook for equities (and bonds, because of the high likelihood of rate cuts), we believe downside risk mitigation should not be overlooked given the threat of a pullback after the substantial advance from the October 2023 lows. We achieve such risk mitigation in our client portfolios through a hefty weighting in high-quality bonds, select alternative investments that are not correlated to the markets, and value stocks including Fortis, Manulife, TD Bank, CVS Health, Disney, Medtronic, and Verizon. These stocks provide an attractive combination of dividend income and prospects for capital appreciation, and we believe they could outperform once interest rate cuts commence.

The Portfolio Management Team (PMT) believes that the multiple changes to model portfolios that were made in 2023 have positioned client portfolios adequately for this stage of the economic cycle. The PMT intends to rebalance all client portfolios within the next two weeks to deploy recent contributions in registered and other accounts, and continue to participate in the market rally.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.

This information has been prepared by Elvis Picardo, who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.