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Michael: So on a revenue basis, AI is eventually going to help drive revenue growth for companies. So there is a lot of benefit, or a lot of potential, I should say, in AI going forward.
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Chiara: Hello, again. You are listening to the ETF Experience podcast, a podcast that helps you navigate the world of investing without the jargon. I'm your host, Chiara, and today we are diving into a topic that every investor has faced at some point, optimism versus skepticism, otherwise known as bulls and bears.
Markets are always moving. And for every argument that says, buy now, there's another one that says, not so fast. So how do you decide what's right for you? To break it all down, I'm joined by returning guests Michael and Trevor. And together, we will explore both sides of some of the biggest trends shaping investing today. So let's get into it.
Donald Trump, the 45th and 47th president of the United States, was recently sworn in. Now that Trump is back in the office, markets have rallied on expectation of pro-business policy, corporate tax cuts, and deregulation.
So could this momentum push the US into another bull run? And if so, what sectors are set to benefit from this? Start us off.
Michael: So Trump is very pro-growth, pro-business. And when you think about Trump, you know, he's talking about tariffs. And I guess to us Canadians, that's very uncomfortable. But he's doing that to try and bring manufacturing back to the US, which obviously would help the US economy. He's also talking about reducing regulations, that if he does do that, that's very positive for businesses. Then, you've got a tax cut. So all these things are positive for the market as a whole.
So in addition to Trump, then there's a couple other things that I think about when I'm thinking about the full case for markets. So current S&P 500 earnings growth expectation for 2025 and 2026 are both 13% plus. So, you know, when you think about that, you don't need any valuation. You don't need the market to get any more expensive. Just if the market keeps up with the earnings growth, you're going to have two years of 13% growth if those expectations are met. So that's pretty strong growth.
And then the third thing I'd talk about as far as, you know, what pause in the US market is. It's just sort of-- I won't go into a lot of detail-- the whole AI thing. So AI is set to really reduce operating expenses for companies and thereby increase profitability. So, you know, if I'm being really quick, those are the three things I'd point out as being really positive for the US market at this point.
Chiara: OK. Over to you, Trevor. What is the bear case or bear with a twist?
Trevor: Maybe I won't go full bear. I'll just be less bull, perhaps. Right? I think, you know, what we've seen over the last many years is investors having a greater and greater allocation to US equities. In some instances, there are advisors, and there are clients who might have more US equities than they do Canadian equities. That's been a trend.
But look, I mean, I think the fact of the matter is that in Canadian dollar terms, so if we add in a strengthening greenback and a declining loonie, if we add that into the mix, US large cap returns are up almost 70% in total in the last two years. And so I'm not suggesting anyone time the market. I don't have a crystal ball. I can't say, you know, head for the hills or anything interesting like that. But there are probably a dozen different things you could do with portfolios to protect a little bit, to diversify a little bit, before you take the radical step of going completely to cash.
And so maybe what I think investors can think about is if you've been in the US large-cap space, think about maybe taking some of those profits and harvesting them and diversifying into other areas, maybe still in the US equity space. That could mean things like low volatility investments.
What's interesting to me is the small-cap, mid-cap space in particular. We have a lot of conversations about that these days. We've done a podcast on that. Another one would be shifting maybe towards more of a dividend or a yield orientation with portfolio.
So there's a bunch of things you can think about doing within the asset class. Certainly, you can get out of the asset class, but I'm not prepared to make that call, certainly. I'm no strategist. I'm not going to make a change in my asset mix or allocation, but maybe I will change the actual tools that I have inside of my portfolio.
Chiara: Yeah. So, Trevor, you mentioned that we often talk about the small, mid-cap space. What is the bull case for the small, mid caps?
Michael: A bull case would partially be the whole Trump tariff thing. The idea here that with tariffs, you're going to basically make-- import a good more expensive, and therefore it will be beneficial for more and more manufacturing to occur in the United States. And a lot of the manufacturing type companies are in that small, mid-cap space. So that's part of the bull case.
Part of another item I mentioned is that generally small, mid-caps are trading cheaper than large caps. So you're not paying up for them as much.
And then final point is over long periods of time, small, mid-cap stocks actually do have better earnings growth than large cap. That hasn't been the case the last couple of years. But when you look at 10, 15, 20 years, that's generally what we see.
Trevor: I think, yeah, I mean, I would echo all of that. Right. In the textbooks, we're all taught that small cap beats large cap over time. And it does so with more volatility. I don't know that something broke, but five or six years ago, large cap started to trade richer and richer and richer valuations.
It's not that small, mid started to trade cheaper. But now, we're in this really interesting point in the market cycle where you can actually go from large cap to small, mid at lower multiples. These businesses are less expensive, ultimately. And that's a neat way to diversify a portfolio but still get a quality slice, perhaps, of the small, mid universe.
Chiara: So now, I want to turn it over to DeepSeq. It was a topic in the news, I think, two weeks ago for us. You know, we saw large drawdowns in mainly the tech companies. So what does this mean for the AI trade moving forward? What is the bulls and bears case? Maybe start off with bulls again.
Michael: Sure. So I talked to our analysts. And they see DeepSeq as an evolution in AI, not a revolution. So it's sort of the next step. And when you think about AI, it's sort of broader. The way like to look at it is, you're aware of Microsoft Copilot. This is this is an AI tool that Microsoft is really-- ought to make productivity much better when you're using their tool.
So for example, if you use PowerPoint, it will help you develop graphs. You just need to tell it, "Oh, I want to do this, that." It will change them automatically. So it's going to increase productivity.
So Copilot costs about $30 a month, is what Microsoft is selling it at. The average knowledge worker in the US is paid just over $7,000 a month. So Copilot costs less than 1% of the average US knowledge worker's salary.
If Copilot can just increase the productivity of that worker by just 5%, that's a huge savings for companies. They're getting more productivity out of the same amount of workforce, which means they can maybe do different things. They can have a smaller workforce. But either way, that's very, very positive for companies.
We've already seen people using AI. So we know it works. We just go and search on the internet. You type in using AI to code. You get a lot of examples of AI encoding. And so we know as AI develops more and more, it's going to be able to, again, increase efficiency in a wide variety of industries. And this is just the cost side. We haven't even talked about the revenue side. So on a revenue basis, AI is eventually going to help drive revenue growth for companies. So there is a lot of benefit or a lot of potential, I should say, in AI going forward.
Chiara: Great. And the bears case-- you know, we see a lot of portfolios out there are overweight technology. So what does this mean for the NVIDIAs of the world?
Trevor: Yeah. I mean, you know, let this be a cautionary tale with a few earnings misses and a few interesting developments on the chip and the hardware side in the last couple of weeks, that you don't want to put all of your eggs into one basket.
I think the AI idea definitely has legs. But maybe what we're starting to see is it's trickling down from hardware to software. And so that means maybe a couple of things. Maybe it means you bring in more active management in your portfolio to be able to navigate and help invest in that change. That means maybe moving away from the Magnificent 7. Not to say that there's no juice left in that lemon, but there are definitely other areas of opportunity that you can think about in the technology space, either on your own or by partnering with an asset manager such as ourselves.
AI is not going anywhere. I think personally, you know, the day I can ask my phone to move my appointment from 7:00 to 6:00 or something like that, then I'll be impressed. I don't have too much exposure to it in my own life, but it's definitely coming. And some of the innovations are just mind blowing at this point. So again, don't abandon what you already have, but think about ways where you can further diversify your exposure there, too.
Chiara: Now, I want to talk about inflation. We thought inflation was in the rearview mirror. I guess not. It's still such a topical. We see many headlines about, inflation is cooling or it's back on because of tariffs. So if inflation is cooling and central banks currently are in a rate-cutting cycle, how could you fuel this market rally? And what sectors or ETFs will benefit investors?
Michael: So inflation is in fact cooling, this is a good tailwind for sort of your bond proxy sectors. So think about sectors such as utilities, real estate, pipelines, telecommunications. So Canadian telcos have other issues, but normally that's a bond proxy sector.
So with lower rates, what we tend to see, then, is that people who have previously invested in GIC, where they might have been getting 4% or 5%, 6%, when they renew, they're only getting 1% or 2%. They might then start moving some of their money into the market. So generally, these types of companies do quite well in that kind of environment.
Chiara: OK. And on the flip side, you know, we recently saw that the fed hit a pause on interest rate cuts posing the central banks to stay hawkish. What risks does this pose for investors? And how should we position defensively if this is still the case?
Trevor: I think what I would say is that interest rate uncertainty, whether it's the US fed, whether it's the Bank of Canada, the Bank of England-- the Bank of Japan is raising rates these days, et cetera. I think what it does is it kind of puts fixed income into a bit of a microscope.
I think at the same time, what it also does is it makes real assets real interesting again. There was a time, certainly in my salad days when I was a young and upcoming investment professional, maybe, when I was taught that stocks did 9% to 11%, bonds did 6% to 8%, and cash did 5% to 7%. That's the textbook from the '90s. I'll date myself a bit.
It's been forever and ever since cash returned anything close to that. And we had a pretty good bond market last year, but that was the exception rather than the rule, right? So I think what's interesting is we don't know which way rates are going to go. You get a cut with some hawkish statements. You get the flip side.
I think real assets like infrastructure, commodities-- those are definitely some of the sectors that you just mentioned, Michael. I think those are interesting opportunities to think about putting into portfolios amongst your cash, your bonds, and your stocks in the traditional sense.
Chiara: I think that might tie into the next topic as well. Although in recent years and at the time of this recording, Trump has delayed tariffs on Canada, tariffs are still not completely off the table, right? So this has implications on our loonie, as we've seen on Monday. And we're also starting to see a currency divergence, specifically a stronger US dollar, a weaker CAD. What is driving the shift? And how can investors position themselves and their portfolios to capitalize on those currency moves?
Michael: In terms of currency, what's driving a shift is a couple of things, that the company or the country that puts on tariffs-- so in this case, the US is threatening tariffs against Canada and Mexico, other parts of the world-- their currency tends to appreciate. And currency at a country that has the tariffs applied to them, their currency tends to depreciate.
In addition to tariffs, part of what's driving the shift is that the bank of Canada had reduced rates much lower than the US bet. So it's more profitable for investors to have US dollars to invest in the US currency market. They're actually getting some-- they're getting more money there than they would in Canada.
So what would it take for things to reverse? Well, for the Canadian currency, for the Canadian dollar, if we get some more certainty around tariffs, that would be a big part of it. Right now, there's still a lot of fear that Trump will apply tariffs again. We've had a 30-day reprieve.
But in 30 days, he might say, you know what? We haven't done enough on the border. He might come back and say, you know what? OK. Forget about the fentanyl and illegal immigrants. Now we're going after your agriculture and your banking sector. So you've got to start to get rid of that uncertainty. The Canadian dollar recovers. And then if we see the US feds start to reduce rates as well, so we reduce the difference between the Bank of Canada rate and US fed. Both those things would be positive for the Canadian dollars.
Chiara: OK. And on the bear's case, weaker Canadian dollar means higher costs for imports and potential economic headwinds. How should investors think about currency risk in their portfolios?
Trevor: I don't want to date this, but I would say something very interesting happened on Tuesday, the 4th of February, 2025. And that's a day after the announcement of the reprieve. And that's a day when the Canadian dollar to the US dollar appreciated by nearly $0.02 at one point. That's a huge move in the currency exchange.
And what it meant to investors is that if you had-- broadly speaking, if you had unhedged US exposure on that day, even though the US markets were higher, you lost money as a Canadian because the currency drag actually outweighed, or it sort of outdid the actual underlying increase in value of those assets.
Now, we shouldn't make decisions based on a single day of currency move or market move and things like this. But what I would share with the listeners, maybe, is to think about currency hedging in its broadest terms.
When you hedge everything, when you hedge the entirety of your US exposure, for instance, you're making a call. It's very explicit. I think this is going to happen-- stronger loonie, weaker USD. I need to hedge.
If you hedge nothing at all, you are still making a currency call. It's just implied. You might not specifically be saying, I think the loonie is falling or the greenback is going to go higher. But if you don't hedge anything, you're making a currency call whether you know it or not.
And so one of the things I think people should think about and give some thought about, again, is spreading around those risks, diversifying things around. Is there some ratio of currency hedged to unhedged exposure within your portfolio that makes sense?
And so many years ago, what I saw a lot of was hedging 50% of your US exposure, you know? So if you had a 60/40 portfolio, and, let's say 30% of the 60 was invested in US equities, maybe you go 15% hedged, 15% unhedged, something like this.
And the reason that might make some sense or there might be some application there is because you're never going to be more than half wrong. It's kind of glib, but you'll never be more than half wrong on the direction of currencies. If you hedge everything and the loonie falls, you don't benefit from that. If you hedge nothing and the loonie strengthens, be prepared because that's going to be a big drag on your returns.
If you hedge half of your exposure, you temper or you moderate some of that FX risk. You don't get rid of it. But that would be an idea, perhaps, to further diversify portfolios.
Chiara: Amazing. I think that's a really good takeaway for our listeners. And what I'm constantly hearing is diversification. It's a common thread amongst all these topics.
Shifting gears to crypto, it's a topic I feel like everybody wants to get an input on. You've seen crypto reach or bitcoin reach all-time highs. Talk to us about bitcoin.
Michael: I'm no bitcoin expert. And we all know bitcoin is very, very speculative, very, very volatile. But if I'm going to make a bull case on bitcoin, it's this. So bitcoin is only ever going to be 21 million bitcoins mined, ever. We're at about 19 million now. They estimate probably about 3 to 4 million have been lost over time. So there's going to be some number less than 21 million, ultimately. There will never be new bitcoin issued.
So when you think about currency, governments issue new currency all the time. In the case of bitcoin, you're never going to get new currency. But the number of people who are interested in buying bitcoin over time probably increases with the population growth, if nothing else.
So you've got a situation where you've got supply flat. So it's not increasing, and demand is increasing. That's this formula for increasing prices over time. Again, very volatile, but that's the way I think about it.
Chiara: And on the bear side of things, you see the run-ups in bitcoin. But then, like you mentioned, there's so much volatility, right? And when people are thinking about portfolio construction, what is the bears case for this?
Trevor: Yeah. I too cannot claim to be a crypto expert in any means. Call me a skeptic. Maybe it's famous last words, but I think what crypto tends to do is add to the volatility of portfolios without necessarily improving the risk-adjusted returns or even the returns because there is so much volatility out there. Let's call it uncompensated risk in many instances.
For me, personally, I guess I would say an asset has to be productive somehow. I need a dividend or I need earnings that are growing behind the asset for it to make sense for me personally. I need more of a reason or a thesis to buy something above and beyond, number go up. It can't be that it's going up, and that's why I want it because behaviorally, that's greed. And there are a bunch of different things you can do to satisfy that urge.
So I'm not sure that crypto has a place in all portfolios. There's definitely some people who have been really, really successful with it. I find it more amusing than anything, so I try to pay attention where I can. But on a personal level, we don't have any exposure in our own accounts that are-- at our household, anyways. And maybe I'm missing the boat on that, right?
So if my mantra of this podcast is diversify, diversify, diversify, yeah, I should probably put that on the list of candidates. It's just not something I've done personally yet.
Chiara: And I like the point that you made about volatility, uncompensated risk. And often, when we're thinking about investment solutions, you've got to think about the long-term game and portfolio construction. Can you stomach those downturns? Right? I think that's what you really have to ask yourself.
Michael: That's a good point because I actually said it in a previous call. It is that the pain you feel from a downturn or a negative return on your market hurts you more than twice as much as the market moving up. So yeah, you really need to be prepared for that.
Chiara: And that takes away from your opportunity to, for example, invest in equities and compound on. Because, like you said, stomaching that, it might turn you away from being invested at all. And then you mess up on the upside.
Now, last topic I want to cover is healthcare-- Ozempic, Eli Lilly. What is the outlook on healthcare? Will this pharma trend continue?
Trevor: So I'll take a stab first, maybe, and I'll say a couple of things, right? Novo Nordisk for a time was the largest company in Europe by market cap. I don't know, honestly. I should look this up, if it still is. But that stock, if I charted it in Canadian dollar terms, it's negative in the last six months. If I looked at the price of Eli Lilly, the other giant in the space, it is flat in the last six months.
I think what I would want investors to be mindful of is just the fact that good businesses don't necessarily translate to good investments. And maybe this is my attempt to remind everyone that the markets, the equity markets in particular, are forward looking.
So if you look at today's price of any drug manufacturer, for example, or any business involved in health care, the thesis goes that all of the available information is factored in. So in theory, it should be factored in that everybody's using these things or they're wildly popular, or they're going to go from an injectable to a pill format, and so on and so forth.
I think what investors should do is still have health care in their portfolios. It's one of the largest sectors in the markets, certainly in the US markets in particular. It's one of the best performing sectors over the medium term and the long term. So I think it's a good idea.
But again, diversify. Spread it around. Maybe think about a basket approach to health care where you've got some drug companies, but you've also got some medical device companies. Perhaps you have some services companies, and so on and so forth, all in one.
Michael: Yeah, I agree with Trevor. Healthcare is-- the way we think about it is a secular growth industry. The Western world population is getting older. I am one of the older people. And I can tell you that healthcare is needed more and more as you get older. This is definitely a growing industry.
But like Trevor says, you know, that there's a big difference between good companies and good stock investments. It's risky to take a bet on just one or two companies. So you're obviously better off diversifying in a broader basket, whether that's healthcare or whether that's financials, whether that's commodities. You really want to have that diversification in your portfolio.
Chiara: And would you say that Trump's current policies are pro-health care?
Michael: His policies are pro-market. So you're going to get the benefit of the stock market. If he goes, follows through on his reduction in regulations, so health care's sector has lots of regulations. We will have a discussion another time about whether we should be removing those regulations given drugs can be bad for you as well as good. But reducing regulation would help companies become more profitable. You talk about reducing taxes. That's obviously good.
And then I'll go back to my other statement I made earlier. AI is also expected to be a huge beneficiary for healthcare companies, both on the cost side and the revenue side. AI can look through reams of data a lot faster than people can and spot things that people wouldn't notice. So I don't know if I'd say Trump is particularly a health care beneficiary, but I would say there's a lot of things happening in the market that together should benefit healthcare.
Chiara: Yeah, so lots of tailwinds there. To our listeners, thank you for tuning in to the ETF Experience podcast. Until next time, stay informed, stay invested, and keep your ETF game strong.
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