1. Be Part of the Energy

   Bring back Calgary’s old city slogan and maybe some life to the energy sector. It is suggested that the alleged tariffs will not impact the oil patch due to the heavy oil needs in America. However, tariffs are innately inflationary, and energy and commodity prices usually follow suit. The US market is also a lot healthier than the Canadian market with the consumer spending and debt servicing ratios sitting in normalized zoned. Therefore, with consistent or greater demand for our product, we may benefit from the stronger US market and energy might be one of the only recipients for a positive outcome.

2. Own USD

   

   Even though your spending might be in Canadian dollars, for the most part, we believe you should continue to diversify your investments globally and increase your exposure to the USD and more global based investments. With the alleged proposed tariffs, certain business sectors in Canada will struggle and, to compensate, the Canadian dollar may weaken even more. The Canadian market is more exposed to and as such sensitive to interest rate changes. Even though we are expecting several rate cuts at the beginning of the year, the growth that is expected to stimulate is often delayed. So, we would anticipate a weaker Canadian economy at the start of the year, especially with unemployment still above 6%, and therefore maintain underweight in Canadian equities.

   
   
   
   
   
   

3. Winners Keep Winning (Relative)

   Much ink has been spilt over current market concentration. The cautious and conservative-sounding experts continue to attract attention. This prediction doesn't mean that this time will be any different but simply acknowledges that the fundamentals of the largest companies are significantly different from the market averages. One of the most highly valued large US companies, Nvidia, was estimated by analysts at the beginning of 2023 to generate $12.4 billion in free cash flow in 2025. Today that estimate is $64.1 billion, so analysts have missed the mark by 5.16 times. And that is with only a $500 million increase in capital expenditure. This is something that former market cap leaders such as General Electric and Walmart could not achieve given the capital and asset intensity of their businesses. The Magnificent 7 continue to be more profitable and grow faster than the market, while not trading at abnormally high or low relative valuations. Without the Mag7, the S&P would be almost exactly where it was before the 2008 Financial Crisis. Winners keep winning.

4. Concentration Risk is Real but Not Necessary

   Just seven S&P 500 stocks have been responsible for much of this index’ gains in recent years. Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA) and Tesla (TSLA) were up a collective 31% in the first six months of 2024, compared to 7.4% for the other 493 stocks in the index. During the same period, NVIDIA, Alphabet, and Microsoft were responsible for 49% of the index’s total gains.

   
   

   Meanwhile, in the case of the blue-chip Dow Jones Industrial Average, NVIDIA has bumped Intel right out of the index. This represents a major change to the chipmaking guard and also exposes a harsh reality: cap-weighted indexes and the funds and ETFs that mirror them are effectively designed to buy high (Nvidia) and sell low (Intel).

   

   How does this affect Canadian investors? If they invest in indexes or in many of the largest mutual funds, the concentration risk can be outright scary. When financial advisors ask us to analyze their client’s holdings, we routinely see portfolios with exposure of 30% or more to Magnificent 7 stocks. When we factor in the holdings’ overlap among their various equity mutual funds, it sometimes pushes their portfolio concentration above 50%! The irony is that it is not necessary to take these risks in order to keep up with the market.

5. Market Broadening

   The Magnificent 7 have been making money hand-over-fist, there’s no denying it. Generally speaking, these are very good businesses, but they are not the only ones.  Table 1 is a list of stocks in the Kipling Global Enhanced Dividend portfolio that contributed a gain of 50% or more over the 12 months ended October 31, 2024. The impressive part is that there are 17 stocks on this list, and not one of them is a tech stock.

   
   

   Our overriding sense is that the market is in a broadening out phase. There are more ‘big gainers’ coming from outside the tech space, and more opportunities to pursue long-term capital growth through established businesses with solid free cash flow and dividend growth. There is less need than ever for exposure to the hype, volatility, and YOLO (You Only Live Once) valuations associated with the Mag 7.

Source: Bloomberg

6. Caution on U.S. BB rated Credit

   According to Bloomberg, the spread on the Bloomberg Ba U.S. high yield index is currently 1.54%. With the exception of one month (February 2005), this is the tightest level since 1997 and one of the tightest on record. For reference, the 30-year average is approximately 3.29% (more than double current levels). That is not to say that all U.S. Ba/BB bonds are going to default, but if you believe in any sort of reversion to the mean, it seems likely that credit spreads could move wider (all else equal meaning bond prices lower). While it is always important to be selective in fixed income investing (and even more so in high yield), we think it is particularly important in the U.S. right now.

    

   There is uncertainty in the world and uncertainty with an incoming Trump administration. It may be one of the least opportune times to invest in U.S. high-yield debt in decades (which seems to be what credit spreads are implying.)

7. Gold Will Outperform Emerging Market Equities in USD

   If there is a new round of tariffs on emerging market countries, this can lead to weakening currencies and weaker economies, which can affect their stock market. In the longer term, a weaker currency will improve their ability to export, but in the immediate future it will hurt US dollar-denominated emerging market equity returns.

8. Potential for a Canadian Renaissance?

   By many metrics, the Canadian economy has underperformed that of the U.S. in the last nine years. According to Bloomberg, the Canadian dollar was trading at $0.7742/USD on October 16, 2015 (the day before the 2015 Canadian Federal Election). To the extent currency markets are forward looking/analyzing polling data, the Canadian dollar began 2015 at approximately $0.86/USD. Today the Canadian dollar is around $0.71/USD. According to National Bank Financial, since 2017, productivity in the U.S. increased by over 14%, while Canada’s productivity improved by less than 2%. According to Bloomberg, since election day 2015, the S&P/TSX Composite Total Return Index is up 146.2%. Meanwhile, the S&P 500 Total Return Index has increased by 252.7% in local currency terms (281.5% in Canadian dollars). Numerous other measures (such as GDP per capita and growth in GDP per capita) tell a similar story.

    

   While multiple factors are likely at play, tax policy is likely one of the drivers. A decade ago, Canada had the second lowest corporate tax rates in the G7. Today, the total tax on distributed profits are the highest in the G7 (when considering dividends taxes at the personal income level). This tax disadvantage has been further exacerbated by an increase in the capital gains inclusion rate from 50% to 66% for personal gains over $250,000 and for all capital gains for corporations and many types of trusts. In addition, the Canadian federal government has introduced a 2% tax on buybacks for all public corporations and targeted financial institutions with a variety of new taxes.

   

   It is easy to write Canada off, but we think it is important to remember a few things. Canada has significant natural resources which the world still wants. Natural gas looks to be a key fuel source to satiate increased power demand from data centers (partially driven by demand from artificial intelligence). Liquified natural gas can also displace higher carbon fuels (coal, oil) internationally. Uranium, copper, nickel, oil, potash, and rare earth metals are all in demand globally and Canada is one of the few liberal democracies in the world capable of supplying this demand. In addition, according to the OECD Canada has the highest proportion of college/university graduates in the G7.

    

   Canada is scheduled to have a federal election on or before October 2025. Currently, public opinion polls show the Conservative government leading and put them in a position to form a majority government. While a lot can change in the next ten months (and a trade war with the U.S. produces few winners), a new federal government could be a catalyst to improved economic performance in Canada. Barring a trade war, we also think that markets will begin discounting the potential for a new government in advance of any election.

9. Continued Rise of Alternative ETF Strategies

   Equity ETFs “Exchange Traded Funds” absolutely dominate market share of US-listed ETFs with 77% of Assets Under Management, while fixed income ETFs come in a distant second with just over 17%. What we are seeing is the rise of Alternative ETF strategies, with over one thousand listed in the US, yet only a fraction of market share. There have been 291 new ETFs in this space listed just this year. Non-Traditional ETFs have become extremely popular over the past year with several distinct categories; buffer, currency-hedged, interest rate volatility, leverage/inverse, long/short, option overlay, and synthetic income strategies. As these alternative strategies become more popular and understood by investors, we could see this market hit $1T USD (currently at $600B) and another 500 ETFs listed in 2025.

10. The Trump Administration: A Staff Turnover Carousel

    Remember the first half of 2017? It seemed like every day brought news of another member of Donald Trump’s administration resigning, being fired, or landing in hot water over past controversies. While it made for great material on late-night talk shows (anyone still chuckling over “The Mooch”?), it was a chaotic way to kick off a presidency.

    

    The Trump administration’s turnover rate broke records, especially during its first year. While it is tough to pin down an exact number, estimates suggest that 92% of senior officials and Cabinet members had left by the end of his term. In 2017 alone, 34% departed, compared to the historical averages of 72% turnover over four years and just 11% in the first year.

     

    Some of this churn may have stemmed from an underprepared first term, and when Trump returns to office, our prediction is that his second administration will see less first-year turnover—though still above the long-term average-coming in at 20%. A steadier staff would likely mean less disruption for financial markets compared to his first term.

    
    

11. Should’ve Worked Harder on Throwing a Spiral

    The business of professional sports has been fascinating to watch evolve over the past decade. Team valuations have skyrocketed, making ownership a pretty sound investment. While returns vary across franchises, most professional sports teams have outperformed the equity market, often delivering double-digit annualized returns.

    

    With that growth, salary caps and player salaries (with the NHL being a notable exception) have followed suit. Case in point: Juan Soto’s record-breaking 15-year, $750 million deal with the New York Mets.

     

    Looking ahead, we expect this trend to continue into 2025. Our prediction? During the 2025 offseason frenzy, at least two major North American leagues (NHL, NBA, NFL, or MLB) will see record-setting player contracts—whether it’s in total compensation or average annual value.

    
    

12. Our Market Cycle Clock: Finally Ticking Forward

    If you have been in one of our reviews over the past five years, you’ve probably spent some time looking at our Market Cycle Clock—our trusty tool for tracking the interplay of Growth vs. Inflation. For the past 26 months, the clock has been stuck in the bottom-left quadrant: Low Growth, Low Inflation. This setting has made us optimistic about financial markets and the economy.

    
    

    Looking ahead to 2025, we expect to see growth finally pick up, moving the clock toward the right. As growth accelerates, our views on the markets will shift to align with a higher growth environment. This could mark the beginning of new opportunities for portfolios and a more dynamic economic landscape