Overview
- Portfolio and Market Performance
- Company News
- Market Outlook
Portfolio and Market Performance
Year-to-Date Performance as of the close on January 31, 2023
- S&P/TSX Composite Index: +7.1%
- S&P 500 Index: +6.2%
- NASDAQ: +10.6%
- Conservative Equity Portfolio: +8.3%
On a longer-term basis, which is how equity investments are usually measured, the Conservative Equity Portfolio has averaged 5.09%/year over three years, +8.45% over five years and +11.35% since inception (October 2015).
Our fixed income has turned positive as well, with the PIMCO Monthly Income Fund up approximately 2.75% year to date and 4.65% in the last three months. Fidelity has done a bit better, returning 3.62% year to date and 6.6% in the last three months.
Company News
AMD
Advanced Micro Devices, Inc. (NASDAQ: AMD) reported fantastic numbers at the end of January, continuing to crush competitor Intel Corporation (NASDAQ: INTC) and take market share. While the PC market was down year over year for obvious reasons related to the pandemic, AMD was affected far less than many had expected. Their data center chip sales were up 42% for the quarter while Gaming, which many expected to be heavily hit was only down -7%. All in all, these are very strong numbers for what the market was expecting to be a very weak market.
AMD personifies a large part of our portfolio – overly punished last year with general macro fears, but due to the quality of the business, rallying 31% year to date. They prove in the numbers that they are stronger and fitter than their competitors and are still gaining market share. For example, Intel has forecast a 40% year-over-year decline in sales, and AMD has forecast a 10% decline, and this is with a weak PC market and a chip glut.
When we talk about the quality of the companies we own, this is exactly what we are talking about. Quality companies hold up through downturns as they tend to lose less business and gain market share in comparison to their competitors.
Tesla
Tesla Inc. (NASDAQ: TSLA) reported year-end results last week that were as expected: record sales volumes and record profits. Deliveries were up 40% year over year to 1.3 million vehicles. They are forecasting 1.8 million units for this year; however, should supply chain issues continue to resolve, we expect that number to break 2 million units this year and 3 million in 2024. Tesla Model Y sales were up 88% last year, reaching the #4 spot in global auto sales. We believe that this year, the Model Y will be the #1 selling car in the world, dethroning the Toyota Corolla, which has maintained that spot for over 20 years.
The big news last month was the price cuts and demand. After the most recent price cuts, demand went through the roof. Orders are now coming in twice as fast as production and wait times are starting to increase again. They even increased the price on the Model Y in late January as demand far outpaced supply. This has always been Tesla’s strategy – offer a superior product at a competitive price, then adjust the price higher or lower to stabilize demand. They can do this only because they have industry-leading margins. This is a great example of the Tesla flywheel. The more Tesla sells, the lower the cost to make; the lower the cost to make, the lower the sticker price; the lower the sticker price, the more Tesla will sell. And the cycle continues. Tesla’s strategy has always been to find ways to reduce the cost of their vehicles.
This year we believe some of the price cuts will be offset by lower input cost and scaling production volumes in Austin and Berlin. Commodity prices have been coming down significantly over the past year. We believe gross auto margins to remain above 20% for the year, which is extremely high for the industry and unheard of for a company growing this fast. Catalysts this year will include the 3rd generation architecture, which could be announced on Investor Day, March 1st, and the Cybertruck launch later this year. We think 3rd generation architecture could be for a compact Tesla that they can produce for under $20,000.
Despite Tesla’s outstanding year, the stock was extremely volatile – down 65% in 2022 and now up 58% year to date. When we cut through the noise, Tesla is still the best long-term investment we can find. Trading today at $190 per share, the company should be worth $400 to $500 per share over the next 24 to 36 months based on our earnings estimates.
We have also seen an improvement in Elon Musk this month as it seems he’s been less in the headlines at least for the time being. Tensions with the White House appear to be cooling as Musk met with both Democrats and Republicans last week. We hope this trend continues and the market can get back to focusing on the fundamentals of the business and not the CEO.
Disney
Walt Disney Co. (NYSE: DIS) shares fell by over 40% last year but are now up 25% year to date. We believe this is due to Bob Iger returning as CEO, which we discussed in our last letter, as well as the reopening of China and the successful release of the new Avatar movie, which has already brought in over $2 billion at the box office. Disney has a tremendous franchise, and if properly monetized, should pay off well for patient investors.
Market Outlook
Some of the hardest-hit names last year are the best performers year to date. For example:
- Advanced Micro Devices, Inc. (NASDAQ: AMD), up 31%
- Amazon.com, Inc. (NASDAQ: AMZN), up 23%
- Walt Disney Co. (NYSE: DIS), up 25%
- NVIDIA Corporation (NASDAQ: NVDA), up 34%
- Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM), up 28%
- Tesla Inc. (NASDAQ: TSLA), up 58%
We believe some of this movement was due to tax loss selling at the end of the year and repurchasing 30 days later in January.
It’s interesting to note that some of our top performers last year are down year to date:
- Metro Inc. (TSE: MRU), down 4%
- UnitedHealth Group Inc. (NYSE: UNH), down 5%
- Johnson & Johnson (NYSE: JNJ), down 7%
This is why in order to lower volatility, it’s good to diversify across different sectors and asset classes.
Most of the selloff in tech last year was, we believe, due to two things: higher interest rates and deleveraging. Many investors purchased high growth stocks on margin during the pandemic. When the U.S. Federal Reserve Board (Fed) started to raise rates, growth stocks went down, and then came the margin calls and further selling ensued.
Now inflation appears to be coming down and the tone of the mainstream media and financial experts is beginning to shift.
Dr. Jeremy Siegel, Wharton professor, now thinks the Fed is actually going to cut rates in the second half of the year.
Larry Summers urged the Fed to avoid pledging to any rate hikes after this week.
Just a few days ago, former Fed Chief Yellen said persistently weak inflation is likely to return as a long-term challenge for the economy and policymakers once the pandemic-era distortions behind the recent surge subside and prices cool. She now sees low inflation as a long-term challenge.
Deflation is something we have been talking about for the last six months, and that narrative is finally beginning to gain in the mainstream media.
Inflation and Interest Rates
The biggest factors driving markets today continue to be interest rates and inflation. In early February, the Fed increased interest rates by 0.25% to 4.5%. This is the smallest rate increase we’ve seen in a while and shows a continued decline in the scope of raises as we get very close to the end of increases. The question is no longer how fast and how much rates will be going up, but how long they will be held at this elevated point before being brought back down.
Notably, in the Fed’s recent press conference, when answering questions, Jerome Powell said the Fed was happy to see inflation coming down while the job market remains strong, indicating they do not need to crush the labour market and the economy in order to tame inflation.
In Canada last week, the Bank of Canada increased the overnight rate by 0.25%, to 4.25%, signalling a slowing and potentially an end to the interest rate increases on this side of the border.
It looks like the banks agree, as mortgage rates may have peaked at the end of December and seem to have declined slightly in January. Generally, you can get a fixed 5-year mortgage close to 5% today.
The Consumer Price Index in both Canada and the U.S. continues to surprise to the downside, and we are seeing inflation coming down while the economy is not being as negatively affected as many had expected. That’s not to say we don’t think there is a slowdown; we just think it’s not as bad as some people thought it could be and things seem to improve month by month.
China
In China, things continue to look more positive. The central government is looking past COVID and trying to focus on reviving the economy.
After lifting zero-COVID restrictions in December, there was a wave of COVID cases that showed a peak in early January. Chinese health officials have stated that the current COVID wave is coming to an end, and they see no new variants. Official numbers declared 80,000 COVID-related deaths in hospitals since December 8, but it is difficult to know the total number as there is not a lot of transparency.
There was a report from Peking University this month that estimated that around 64% of all people in China were infected with COVID through the pandemic, which would imply 900 million of their 1.4 billion population.
The Chinese stock market continues to hold strength, rallying about 55% since its bottom at the end of October. We are seeing a loosening of regulatory pressures. For example, Ant Financial, now Ant Group Co. Ltd. (HKG: 6688), a subsidiary of Alibaba Group Holding Ltd. (HKG: 9988), had upset regulators in late 2020 and had their IPO cancelled – which was slated to be the world’s largest IPO on record. It looks like they are now out of the penalty box, as Chinese banking regulators allowed them to more than double their registered capital in their consumer finance division.
In short, this bodes well for China and the global economy as we are seeing an increase in economic activity from China. This is already having a positive impact on markets in general. Positions we hold that will benefit more directly are Tesla, Apple and Disney, in that order. Apple, for example, gets about 18% of their revenue from China, and that share is expected to grow significantly this year.
Europe
Over in Europe, the news has continued to improve as well. The Eurozone recently posted positive GDP growth of 0.1% for the final quarter of 2022. This upended the European recession narrative everyone was expecting and shows a much stronger European block. As we mentioned last month, the lower energy prices due to a historically warm winter certainly helped this significantly as Europeans’ pocketbooks were not squeezed as badly as people were expecting.
When you dig through the numbers, Germany and Italy were the most negative, while Spain and France were the most positive. Germany is more dependent on energy for industrial uses and is Europe’s biggest exporter, where Spain gets a lot more GDP from travel and is warmer, so they are less affected by higher energy prices. No surprises here.
This is not to say that Europe is out of the woods yet, but certainly they’ve had a very good first inning to 2023 – as good as one could expect given the challenges they face.
You can see the theme across the board: in China, things are better than people were expecting; in Europe, things are better than people were expecting; and in North America, things are better than people were expecting. While no one knows what’s around the corner, we are certainly off to a good start this year. We continue to have a strong outlook for our portfolios over the next 3-5 years but are cautious about the economy in the near term.
~~~
Thanks, everyone, and stay warm out there.
Simon & Michael
Simon Hale, CIM®, CSWP, FCSI®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Michael Hale, CIM®
Senior Wealth Advisor,
Portfolio Manager
Wellington-Altus Private Wealth
Hale Investment Group
1250 René-Lévesque Blvd. West, Suite 4200
Montreal, QC H3B 4W8
Tel: 514 819-0045
Returns for the Conservative Equity Portfolio, Diversified Income Portfolio and Focused Total Return Portfolio represent the returns of model portfolios only and do not represent the returns of any client. Individual account performance may differ materially from the representative performance history, due to factors including but not limited to an account’s size, the length of time the strategy has been held, the timing and amount of deposits and withdrawals, the timing and amount of dividends and other income, trade execution timing and pricing, foreign exchange rates, and fees and other costs. This is not an official statement from Wellington-Altus Private Wealth (“WAPW”). WAPW cannot verify the accuracy of these performance numbers. Please refer to your official WAPW statement for your specific performance numbers.
