Market Call: Darren Sissons' outlook on Global & Technology Stocks

Market Call with Darren Sissons – January 12, 2024 – Summary

Key Concepts:

• Geopolitical Risk & Gold: Increased geopolitical tensions are driving gold prices higher.
• K-Shaped Economy: A widening wealth gap where those with assets (stocks, real estate) benefit while others fall behind.
• Fiscal Stimulus: Significant US government spending (7% budget + 13% defence increase) is fueling economic activity.
• Defensive Sectors: Defence sector poised to benefit from global uncertainty.
• AI Profitability: Questioning the profitability and sustainability of the current AI boom.
• Valuation & Timing: Importance of buying quality companies at attractive valuations, and trimming positions when significantly overvalued.

1. Market Overview & Precious Metals

The discussion began with a review of market conditions, highlighting gold’s recent surge to new highs (up $300/ounce YTD as of January 12th) and silver’s accompanying rise. Darren Sissons attributes this primarily to escalating geopolitical risks, citing the invasion of Ukraine, potential governmental instability in other nations, and even potential future conflicts (mentioning a possible invasion plan for Greenland). He also pointed to Jerome Powell being sued as contributing to the tense backdrop. He emphasized that this geopolitical tension is a continuation of trends seen in 2023, including tariff wars. The significant US fiscal stimulus (7% budget increase + 13% defence spending) is also a key driver, creating a stimulative environment for the US economy. The question posed was how much higher these precious metals could go.

2. Fiscal Policy & Inflationary Pressures

Sissons anticipates continued high levels of US government spending, including a likely high single-digit deficit leading up to the November midterm elections. He also mentioned Scott Bessent’s plan to utilize tariff revenue for investments, potentially triggering further economic activity. He warned that this continued spending, coupled with the tariff revenue investments, could lead to inflationary pressures, particularly in the long end of the rates curve.

3. Benefiting Sectors: Defence, Banks, & Capital Goods

Beyond precious metals, Sissons identified several sectors poised to benefit. The defence sector is expected to gain from increased global uncertainty and military build-up. Banks are predicted to benefit from the increased government spending flowing through the financial system, with a low expectation of non-performing loans. He also highlighted capital goods and infrastructure projects (shovel-ready projects) as potential areas for investment.

4. The K-Shaped Economy & Wealth Effect

Sissons described the current economic landscape as a “K-shaped economy.” The upper portion of the “K” (those owning stocks, shares, real estate, and bonds) has experienced significant wealth accumulation since the global financial crisis recovery. Conversely, the lower portion (those without such exposure) has seen their financial situation deteriorate. He believes this wealth effect will continue to drive economic activity.

5. Specific Stock Discussions & Recommendations

• Viatris (VRS): Sissons stated they do not own Viatris, classifying it as a small-cap pharmaceutical company. He prefers larger, established names like Novartis, Novo Nordisk, and Johnson & Johnson.
• Lam Research (LMR): While acknowledging Lam Research as a good company, Sissons advised against buying at current levels due to recent price increases and inflows from ETFs. He prefers Applied Materials and suggests waiting for a correction.
• Banco Santander (SAN): He suggested taking profits on Banco Santander, particularly if purchased at lower prices (under $50). He acknowledged its good franchise but noted the challenges of negative interest rates in Europe in the past.
• McKesson (MCK): Sissons expressed caution regarding McKesson, citing a thin net margin (around 1%) and the need to creatively analyze its revenue model.
• Nestle (NSRGY): He views Nestle as a good long-term holding, particularly if purchased during periods of weakness. He noted currency adjustments (Swiss Franc depreciation) and the impact of GLP-1 drugs on the food sector.
• Atlas Copco (ACPCY): He considers Atlas Copco a best-of-breed company in its category, particularly strong in vacuum technology. He believes it's currently undervalued.
• Franco-Nevada (FNV): They currently hold Franco-Nevada and haven’t trimmed it yet, but it’s approaching levels where trimming might be considered. He attributes its performance to the broader precious metals rally.
• Microsoft (MSFT): They continue to hold Microsoft, appreciating its growth trajectory and the potential of its Azure cloud platform and AI initiatives.
• Shell (SHEL): Sissons recommends Shell, citing its rising return on invested capital, cheap valuation, and diversification into areas like LNG and carbon capture.
• Visa (V): He remains positive on Visa, believing increased government spending will flow through the payment system. He dismissed concerns about potential presidential intervention on credit card interest rates, noting banks own the underlying credit assets.
• Quantum Computing (Qubit): He advises caution with Quantum Computing, stating the sector lacks a profitable commercial model.

6. Past Picks Review (March 4, 2023)

• Canadian Apartment REIT (CR): Sold due to changes in government policy regarding landlord-tenant boards.
• Franco-Nevada (FNV): Performed well, but approaching levels where trimming might be considered.
• Microsoft (MSFT): Positive performance, continues to be held.

7. Key Quotes

• “Gold, precious metals in many ways are a reflection of geopolitical risk.”
• “If you don’t own it [Lam Research], should you be getting in here? I would say, look Lam Research is a great company. But you don’t want to be buying it when it’s had a run like that.”
• “You never go bankrupt taking a profit.”
• “The problem is none of [the quantum computing companies] are making any money.”
• “You make money when you buy, not when you sell.”

8. Technical Terms & Concepts

• K-Shaped Economy: A type of economic recovery where different segments of the population experience vastly different outcomes.
• GLP-1: A class of drugs used for weight loss and diabetes management, impacting the food sector.
• USMCA: United States-Mexico-Canada Agreement (trade agreement).
• Return on Invested Capital (ROIC): A measure of how efficiently a company uses its capital to generate profits.
• LNG: Liquefied Natural Gas.

9. Conclusion

Darren Sissons presented a cautiously optimistic outlook, emphasizing the importance of navigating a complex geopolitical and economic landscape. He advocated for a focus on quality companies with strong fundamentals, particularly those benefiting from increased government spending and long-term trends like digitization. He stressed the importance of valuation, timing, and disciplined portfolio management, including taking profits when appropriate. He highlighted the potential in defensive sectors like defence and energy, while remaining wary of overvalued technology stocks and speculative areas like quantum computing.