CANADA’S SOVEREIGN WEALTH FUND
I enjoyed Andrew Coyne’s recent article in the Globe and Mail: “The Canada Strong Fund: a solution no one can describe, for a problem no one can identify.”
Coyne asks whether our federal government actually knows what the Canada Strong Fund is, and is not optimistic that they do. A quote:
“We know what it isn’t: a sovereign wealth fund. Not, at any rate, as a sovereign wealth fund is usually defined, viz. a fund that invests a sovereign’s – a state’s – wealth. It would be a fund, certainly. And it would invest on behalf of the state. It’s the wealth part that’s missing.”
Coyne describes the wealth part as “missing” because the Government of Canada does not have any surplus funds to invest, surplus funds being the defining element of a sovereign wealth fund; Norway’s being a well-known example; they invest surplus revenues from their oil and natural gas extraction efforts in the North Sea.
Except that Canada has a negative net worth, in the amount of $1.4 trillion. So, the $25 billion that the government says it will contribute to kickstart the fund will be borrowed money.
Coyne makes several other criticisms of the fund, but on to what matters to our clients: does investing in it make sense for us?
One of the government’s key messages is that the fund is a place for Canadians to invest their savings. But our clients already have access to many private investment vehicles.
We should also keep in mind Canada’s financial position, and that it did not happen by accident, but through the policies of successive governments. As we pointed out in the March edition of Marche Monthly, our most recent budget projected an annual deficit of $78.3 billion, an almost doubling of the government’s projection last fall of $42.2 billion.
We must consider the wisdom of investing money with an organization—our federal government—that has led us all to the current national position.
Our conclusion here at Marche Wealth Management is uncomplicated: continue to strictly follow our equity philosophy. We tend to manage concentrated portfolios composed of quality businesses we want to own for many years. We believe this approach will maximize long-term performance, improve after-tax returns, and keep costs to a minimum. We focus on owning companies which:
And we do not, at the present time, understand Canada’s sovereign wealth fund.
ACTIVE AND WELL-POSITIONED
Another pillar of our equities strategy is to own companies that pay dividends and are primarily in regulated industries. As an example of the fact that we have been active and are well-positioned in the current, volatile market environment, we are prudently invested in Canadian companies across energy: Canadian Natural Resources, TC Energy, and Enbridge are prime examples of dividend-paying companies we own, and in whose performance we are pleased.
In addition to adding carefully selected energy companies, last year we added industrial businesses, including Honeywell and Canadian company MDA Space, which gives us exposure to defence, an industry in which our federal government has renewed its interest.
These new positions increase our exposure to energy, industrial, and defence companies while making our portfolios more defensive. These have proven to be constructive moves for our clients.
We are also pleased with the performance this year of our Canadian bank holdings, including TD and BMO, which both pay dividends. In addition, we are happy with the performance of our positions in the two largest artificial intelligence (AI) related companies: Amazon and Google.
KEYSTONE NEWS
U.S. President Donald Trump has signed an executive order authorizing a proposed project to transport Canadian oil across the border, as part of an effort to revive parts of the Keystone XL pipeline project, which was cancelled by former President Joe Biden.
This is a positive development for our portfolios, and for South Bow Corp, which we own and pays a high dividend. It is also an encouraging sign that despite all the noise created by the ongoing U.S. Canada trade war, our two countries can cooperate on important economic issues, including those that support North American energy independence.
CORPORATE EARNINGS
Even though conflict in the Middle East has created high prices for oil and other commodities, equity markets have pushed to new highs, supported by an economy that is showing resilience due to strong corporate earnings, AI-driven business investment, consumers absorbing higher energy costs better than anticipated, and an economy that is less oil-intensive than in prior decades.
Still, uncertainty remains. The longer the Strait of Hormuz remains closed, the more severe the oil shortage could become, increasing the risk that elevated energy prices will become more of a damper on economic activity.
CORPORATE EARNINGS
Even though conflict in the Middle East has created high prices for oil and other commodities, equity markets have pushed to new highs, supported by an economy that is showing resilience due to strong corporate earnings, AI-driven business investment, consumers absorbing higher energy costs better than anticipated, and an economy that is less oil-intensive than in prior decades.
Still, uncertainty remains. The longer the Strait of Hormuz remains closed, the more severe the oil shortage could become, increasing the risk that elevated energy prices will become more of a damper on economic activity.
Technology
The performance of a small group of large technology companies, including Apple, Microsoft, Alphabet (Google), Amazon, and Meta, have an outsized influence on the performance of the overall markets, so their corporate earnings reports are carefully watched. In their reports from Q1, most companies reported that they were delivering solid revenue increases, healthy margins, and strong cash flows.
That said, the markets are looking for signs that companies investing heavily in AI are translating that money into tangible earnings.
We continue to see AI as promising through the lens of long-term growth, while at the same time, we remain disciplined about being diversified.
CENTRAL BANKS
Since the outset of the U.S.-Iran war, markets have reduced their expectations for lower interest rates, with investors now anticipating both the U.S. Federal Reserve (the Fed) and the Bank of Canada to remain on hold through the next several meetings.
The latest Fed meeting also marked chair Jerome Powell’s final meeting at the helm. Powell indicated he plans to remain on the rate-setting committee as a governor for a period “to be determined.” As Kevin Warsh’s nomination to succeed him as chair continues to advance through the Senate confirmation process, short-term market volatility could appear as investors adjust to a new leadership regime.
Of course, volatility is our friend, as we are always closely monitoring the markets for opportunities to prudently capitalize by buying great companies at what we consider to be less than their intrinsic value.
APRIL SHOWERS
Let’s hope they bring May flowers. Enjoy the spring!
We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about—someone who would appreciate this simple approach—please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP®, CIM, FMA, FCSI®
Your life, uncomplicated
tyler.marche@wellington-altus.ca
416.446.5432
WHO WE ARE
Tyler Marche, MBA, CFP®, CIM, FMA, FCSI® – Senior Wealth Advisor & Senior Portfolio Manager
Elizabeth Yip – Senior Investment Associate
Joy Loewen – Associate
Tracy McClure – Associate
Matthew Wilcox – Associate