Market Call: Nadeem Kassam's outlook on North American Equities

Key Concepts

• Seasonality: Recurring patterns in market performance during specific times of the year (February-March weakness).
• Economic Backdrops: The overall health of the global, Canadian, and US economies, including growth, employment, and inflation.
• Corporate Fundamentals: The financial health and performance of companies, including earnings and guidance.
• Fiscal Policy: Government spending and taxation policies.
• Monetary Policy: Actions taken by central banks to manipulate the money supply and credit conditions.
• FFO (Funds From Operations): A metric used to evaluate the performance of real estate investment trusts (REITs).
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• KEGGER (Key Earnings Growth Rate): A measure of a company's earnings growth.
• Synergies: The benefits gained from combining two or more entities (e.g., through a merger).

Market Call Summary – February 29, 2024

This segment of Market Call featured Nadine Kassum, Chief Investment Strategist and Portfolio Manager at Private Wealth Counsel, discussing North American equities and answering viewer questions. The conversation covered recent market pullbacks, the outlook for 2024, specific stock analysis, and broader economic trends.

1. Market Pullback & Seasonality

The discussion began with the recent market pullback, described as “ugly.” Kassum attributed this to seasonal weakness observed over the past ten years during February and March. While pinpointing a single trigger proved difficult, she suggested portfolio rebalancing and general market sentiment as contributing factors. She noted, “It’s hard to really pinpoint the reason why folks came into the markets yesterday and just hit the sell button, but again, it’s one thing or another or a combination of several factors.”

2. Positive Outlook for 2024 – Three Key Underpinnings

Despite the recent pullback, Kassum expressed a positive outlook for the year, based on three key factors:

• Economic Growth: She highlighted relatively healthy economic growth trends globally, in Canada, and the US, projecting faster growth than the past three years.
• Corporate Fundamentals: Kassum emphasized strong corporate earnings reports across the US, Europe, and Japan, with positive guidance for the remainder of the year. She noted a “broadening out” of positive results.
• Macroeconomic Factors: Positive trends in employment and inflation, particularly the inflation print “south of the border,” were cited as supportive of the outlook.

3. Consumer Impact & Fiscal/Monetary Policy

The conversation addressed the impact of consumer spending, noting a one-time tax break for US consumers in April. In Canada, easing interest rates (100 basis points of easing) and declining inflation were identified as benefits for consumers. Kassum differentiated between the immediacy of monetary policy (interest rate changes) and the slower, but potentially more impactful, effects of fiscal policy (government spending). She stated, “Monetary policy, those are immediate. If you’re on a floating rate mortgage…you’re going to see that immediate change. However, it’s imprecise. Fiscal is very precise. But as you mentioned, the process to which fiscal actually makes its way into the real economy is much slower.” She highlighted planned federal government spending on defense, housing, and the auto sector as potential tailwinds.

4. Stock Specific Analysis – Viewer Questions

Several specific stocks were discussed in response to viewer questions:

• Northland Power: Kassum advised caution, noting past challenges with project execution, dividend cuts, and a cheap valuation (4-5x FFO). While acknowledging its attractiveness, she stated it wasn’t a preferred pick.
• Brookfield Renewables: Recommended as a preferred choice in the renewable energy sector, citing positive tailwinds.
• Telus: Kassum expressed a neutral view, citing regulatory changes and competitive pricing pressures. She favored Rogers due to its potential to monetize its MLS acquisition and a stronger balance sheet.
• Uber Technologies: Considered compelling, but volatile. Kassum advised assessing risk tolerance, noting Uber’s growth potential and adaptation to self-driving technology. She stated, “If you have a one feature product and you’re absent minded to the the benefits of AI, you’ll probably be under pressure.”
• Microsoft: Recommended as a buying opportunity despite recent pressure related to software concerns. She highlighted strong Azure growth (39% year-over-year) and robust demand, attributing the price decline to emotional rather than fundamental factors.
• Bank of Nova Scotia (BNS): Considered well-positioned with earnings growth expected to accelerate. International business, capital markets, and wealth management were cited as strengths.
• Restaurant Brands International (RBI): Acknowledged challenges related to AI pressures and input costs, but suggested potential for recovery.
• Cameco: Recommended as a way to play the nuclear energy resurgence, citing an unrivalled network and the benefits of the KSU merger.
• Allied Property REIT: Kassum expressed caution due to challenges in the office sector, vacancy levels, and dividend cuts.
• Canadian Pacific: Recommended due to its unique network spanning Canada, the US, and Mexico, and the potential for revenue synergies from the KSU acquisition.

5. Key Arguments & Perspectives

• Long-Term Perspective: Kassum consistently emphasized a long-term investment horizon, advising against reacting excessively to short-term market fluctuations.
• Importance of Fundamentals: She stressed the importance of focusing on underlying economic conditions, corporate earnings, and company-specific fundamentals.
• AI as a Catalyst: AI was repeatedly identified as a significant driver of both opportunities and challenges across various sectors.
• Capital Allocation: Kassum highlighted the importance of strong capital allocation decisions by companies, particularly in the context of large capital expenditures.

6. Notable Quotes

• “It’s hard to really pinpoint the reason why folks came into the markets yesterday and just hit the sell button, but again, it’s one thing or another or a combination of several factors.” – Nadine Kassum, explaining the market pullback.
• “If you have a one feature product and you’re absent minded to the the benefits of AI, you’ll probably be under pressure.” – Nadine Kassum, on the impact of AI on companies.

7. Technical Terms Explained

• Basis Points: A unit of measurement used in finance to describe percentage changes in interest rates (100 basis points = 1%).
• FFO (Funds From Operations): A metric used to evaluate the performance of REITs.
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• KEGGER (Key Earnings Growth Rate): A measure of a company's earnings growth.
• Synergies: The benefits gained from combining two or more entities (e.g., through a merger).

8. Synthesis/Conclusion

Nadine Kassum presented a cautiously optimistic outlook for North American equities in 2024, underpinned by positive economic trends and strong corporate fundamentals. While acknowledging short-term market volatility, she emphasized the importance of a long-term perspective and focusing on companies with strong execution track records and the ability to adapt to evolving technological landscapes, particularly in the realm of AI. Her stock-specific recommendations highlighted a preference for companies with strong balance sheets, diversified revenue streams, and exposure to secular growth trends.