Not much the BoC could do to counter the structural challenges the economy faces: Jack

Key Concepts

• Software as a Service (SaaS): Software distribution model where applications are hosted by a provider and made available to customers over the internet.
• Generative AI/Agents: Artificial intelligence capable of creating new content (text, images, etc.) and performing tasks autonomously.
• Value Stocks: Stocks that trade at a lower price relative to their fundamentals (e.g., earnings, book value) and are considered undervalued by the market.
• Yield Curve: A line that plots the interest rates (yields) of bonds having equal credit quality but differing maturity dates. A positively sloped yield curve indicates expectations of economic growth.
• Accommodative Monetary Policy: Central bank actions aimed at stimulating economic activity, typically through lower interest rates.
• Koosma Review: A review of the Canada–United States–Mexico Agreement (CUSMA) initiated by the US Trade Representative.

Market Reaction to Software Sell-Off & Value Exposure

The discussion centers around the recent sell-off in major tech stocks, particularly within the software sector, and potential strategies to navigate this market environment. Jordan Jack from JP Morgan Asset Management identifies a key driver of the sell-off as the rise of Generative AI and “agents” – AI systems capable of performing tasks previously done by software companies. He explains this disruption is twofold:

• SaaS Vulnerability: Software-as-a-Service companies (providing services like travel booking, payroll, taxes) face a challenge to their value proposition if AI agents can perform those tasks directly for the end user. The question becomes, “what are you really worth at the end of the day?” if an agent can replicate the service.
• Data Ownership & Subscription Models: Software companies that own valuable data are better positioned, as agents will need to leverage that data. However, even these companies face scrutiny regarding the necessity of ongoing subscription models for end consumers. Jack notes the core question is whether customers need to maintain subscriptions when agents can utilize the data directly.

Jack believes the market is “deciphering the winners from the losers” in this new landscape, and while the speed of the sell-off may be “a little bit stretched,” the underlying trend is justified. He advocates for leaning into software companies with “proprietary knowledge” and a strong “pipeline of businesses” that agents will need to leverage.

Global Market Strategy & Value Orientation

Responding to the question of investment strategy during the downturn, Jack emphasizes a shift towards a more global and value-oriented approach. He highlights that the US market was “very very expensive” coming into the year, with global stocks outperforming US stocks in the previous year.

• Global Diversification: He recommends diversifying beyond North America, specifically citing opportunities in Europe, Japan, and Canada. However, he acknowledges challenges in Canada related to the sensitivity of mining companies to metal prices.
• Value Stocks & Macroeconomic Factors: Jack links the value story to positively sloped yield curves (indicating economic growth expectations) and the broader AI buildout, which supports infrastructure and industrial sectors. He also points to political risk in the US as a reason to seek global exposure. A “positively sloped yield curve” is supportive of financials.

Canadian Economy, Monetary Policy & the Loonie

The conversation then turns to the Canadian economy. Jack anticipates the Bank of Canada will hold interest rates, noting that monetary policy is already “pretty accommodative” – potentially “a half a percentage point higher” than current levels. He argues that further rate cuts are unlikely to significantly boost growth in 2026.

• Bank of Canada Assessment: The Bank of Canada believes monetary policy is already in a pretty accommodative state.
• Canadian Dollar Outlook: He predicts potential strengthening of the Canadian dollar (“loonie”) relative to the US dollar if the Federal Reserve cuts rates while the Bank of Canada remains on hold.
• Koosma Review Risk: Jack identifies the Koosma review of CUSMA as a “big risk” that could increase trade and policy uncertainty, potentially weighing on economic activity in Canada. He expresses hope for a beneficial deal for both the US and Canada but acknowledges the uncertainty surrounding the negotiations. He states, “There appears to be, you know, at least at first glance, uh some desire to get a deal done uh and then, you know, you know, the the opposite uh ends up happening.”

Logical Connections & Synthesis

The discussion flows logically from the initial observation of the tech sell-off to a broader exploration of investment strategies in a changing macroeconomic environment. The rise of AI is presented as the catalyst for the software sell-off, prompting a re-evaluation of value propositions and a shift towards companies with defensible data assets. This leads to a discussion of global diversification as a means of mitigating risk and capitalizing on opportunities outside the expensive US market. Finally, the conversation focuses on the specific context of the Canadian economy, highlighting the Bank of Canada’s policy stance and the potential impact of the Koosma review.

Main Takeaways:

• The software sector is facing significant disruption from Generative AI, leading to a market correction.
• Investors should focus on software companies with proprietary data and strong business pipelines.
• Diversifying globally, particularly into value-oriented markets like Europe and Japan, is a prudent strategy.
• The Canadian dollar may strengthen if the US Federal Reserve cuts rates while the Bank of Canada holds steady.
• The Koosma review poses a significant risk to the Canadian economy due to potential trade uncertainty.