Markets rebound after tech stocks plunge

Key Concepts

• Risk-On Markets: Investment strategy favoring assets with higher potential returns, typically associated with economic growth and investor confidence.
• Procyclical Returns: Investment performance that moves in the same direction as the economic cycle.
• Agentic AI: Artificial intelligence capable of independent action and decision-making.
• ISM Manufacturing Index: An economic indicator derived from monthly surveys of purchasing managers in the manufacturing sector.
• LTL (Less-Than-Truckload): A shipping method for smaller freight volumes that don't require a full truckload.
• USMCA (United States-Mexico-Canada Agreement): The free trade agreement governing trade between the three countries.
• Contagion Risk: The risk that problems in one part of the financial system will spread to others.

North American Market Analysis & Investment Strategy – IIA Global Asset Management

Market Rally & Cyclical Thesis

The North American markets have experienced a rally following a downturn driven by tech stock performance. Sebastian McMahon of IIA Global Asset Management confirms this aligns with their expectations for a “risk-on” market environment in 2024, fueled by anticipated synchronized rate cuts. This environment is expected to benefit commodities and equities, with emerging markets leading the way, followed by Europe and then the TSX (Toronto Stock Exchange). The firm’s core thesis centers on a shift towards “value over growth” and “cyclical over tech” investments. McMahon states, “We were expecting risk on markets this year…So far so good for our thesis here.” Despite being only five weeks into the year, the initial performance supports this outlook.

US Tech Sector & Private Credit Concerns

Regarding the recent decline in US tech stocks, McMahon suggests it may be premature to “bottom fish.” He highlights aggressive repricing, particularly in Software as a Service (SaaS) and consultancy firms facing disruption from “Agentic AI” – AI capable of independent action. While acknowledging significant hedge fund short positions (approximately $24 billion) in these names, he emphasizes a more pressing concern: the “contagion risk” within the private credit market. Specifically, firms like Blue Owl and Aris have substantial exposure to loans backing software companies, which were previously considered exceptionally stable but are now facing re-evaluation. This suggests a potential systemic risk beyond individual stock performance.

Commodities & the TSX Outlook

McMahon views commodities as having a stronger outlook for 2024, but acknowledges the uncertainty surrounding upcoming trade deal renegotiations. However, he remains optimistic about the Canadian economy benefiting from the overall “risk-on” tone, citing the ISM manufacturing index showing increased production and new orders. He anticipates increased US demand for Canadian imports as manufacturers rebuild inventories. IIA Global Asset Management maintains a positive outlook for the TSX, projecting a 15% outperformance compared to the S&P 500’s expected 10% gain this year.

Precious vs. Base Metals

While precious metals, particularly gold, have experienced a recent run, McMahon cautions against attempting to predict its price, stating, “It’s hard to put a number on that.” He suggests a period of consolidation is likely. Instead, he identifies opportunities within gold and base metal miners, particularly copper miners in Canada. He argues that elevated commodity prices, coupled with relatively stable production costs, will drive margin expansion for these companies. He notes that stock-picking colleagues see “ample value” in the valuations of commodity producers.

XPO Logistics: An AI-Driven Opportunity

IIA Global Asset Management’s top pick is XPO Logistics, a US-based transportation company specializing in LTL (Less-Than-Truckload) shipping. McMahon positions XPO as one of the first companies to demonstrate AI-driven margin expansion. Specifically, AI has already resulted in a 12% reduction in “empty miles” through optimized route dispatch. He believes that a stronger macroeconomic outlook in 2026 will further boost freight volumes and pricing power, particularly given the structural deficit created by the Yellow Corporation bankruptcy. While acknowledging USMCA trade risks, XPO’s broader North American footprint (with a greater presence in Mexico) mitigates some of this exposure. The stock is already up 35% this month, but the firm believes there is significant further upside.

AI Adoption in Transportation vs. Other Sectors

McMahon highlights the surprising leadership of the transportation sector in AI adoption. He explains that the logistical complexities of trucking, particularly route dispatch, lend themselves to rapid and substantial cost savings through AI implementation. He contrasts this with expectations for AI gains in financials and big tech, which he describes as “elusive” thus far. He emphasizes that real-world productivity gains are currently being observed in the “real economy,” specifically within the trucking industry. He notes the importance of efficient dispatching, stating that optimizing routes can yield significant savings.

Conclusion

IIA Global Asset Management’s current investment strategy prioritizes cyclical and value stocks, particularly within the commodity and transportation sectors. They see opportunities in the TSX, base metal miners, and companies like XPO Logistics that are actively leveraging AI to drive efficiency and margin expansion. While acknowledging risks related to trade negotiations and private credit, their overall outlook remains positive, predicated on a “risk-on” market environment and anticipated synchronized rate cuts. The firm’s perspective emphasizes the importance of identifying companies demonstrating tangible AI benefits in the real economy, rather than solely focusing on the tech sector.