Thoughts on the Market: November Edition
Trump 2.0
The sweeping Republican win in the United States election was a clear signal that voters demand change. Despite numerous reasons not to vote for Trump, the vote shifted red across most of the country. Figure 1 illustrates this shift in margin in terms of raw votes. Notably, large metro centers like New York City, Southern California, Chicago, Houston, Miami, and Minneapolis are some of the darkest red areas on the map. Please see the full article from NPR.
Figure 1. Major metro areas shifted red in the 2024 Election
Source: NPR
With control of the House and Senate, the Trump Administration (Trump 2.0) is free to implement measures it believes will generate growth. Some may be controversial, some will work, and some will not. On the surface, it feels like higher volatility should be expected. However, the Volatility Index (VIX) fell to its lowest level in the past decade in 2017 during the first year of Trump 1.0, when markets rallied on corporate tax cuts. As expectations build for new economy-focused reforms, we expect the rally to continue if the new administration delivers.
At this stage, they must deliver. New Treasury Secretary Scott Bessent’s 3-3-3 plan aims to reduce the budget deficit to 3% with help from Elon Musk’s Department of Government Efficiency (DOGE), increase U.S. oil production to 3 million barrels per day and boost GDP growth to 3% through deregulation. If successful, these measures could significantly increase business and consumer confidence.
However, each item faces external forces beyond U.S. government control. DOGE may find it difficult to swiftly reduce social security/healthcare entitlements, interest payments or defense spending, which make up over 80% of government expenditures.
Energy-producing companies are already slowing production growth with oil prices languishing below $70 per barrel, as evidenced by U.S. oil major Chevron’s announcement that its Permian Field will see production plateau later this decade. Three percent GDP growth is the most achievable given that U.S GDP growth clocked in at 2.8% in the most recent quarter.
Equity markets are trading near their highs from 2021. P/E multiples are elevated, surpassed only by the technology bubble of the late 90s. While valuations are elevated, baby boomers are wealthier than previous generations and are spending or transferring wealth to the next generation. Inflation is declining, interest rate policy is accommodating, and corporate and personal balance sheets are in strong shape. Additionally, European equities remain below historical multiples yet trade in line with U.S. peers when considering the factors like growth rate, profitability and sector exposure. This lends credence to the idea that U.S. equity markets reflect the stronger growth and profitability of U.S. companies.
We are aware of the risks of overpaying for even great companies, staying disciplined in our view that Price/Earnings ratios should be justified by earnings growth. Companies with the highest multiples, like Adyen (41x) or Broadcom (29x) in our portfolio, are justified with earnings growth rates greater than 20% and low associated capital spending. Our Global Equity Growth Fund sports a P/E ratio of 15.3x versus its benchmark of 18x with similar EPS growth expected.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund rose 3.9% in November, below the 5.1% rise in its benchmark. Year-to-date, the Fund has returned 27.8% versus the benchmark return of 28.6%. The Fund’s top three performers in the month were Air Canada (32%), 3i Group (+17%) and Morgan Stanley (+14%), while BMW (-6%), LVMH (-5%) and Adyen (-5%) were the biggest detractors.
Portfolio Managers Summary
Earnings season has wrapped up, with several companies seeing their shares move higher in response to strong results. Air Canada has recovered over 50% from its summer lows, and with its first investor day post-pandemic on December 17, we look for further growth. Other companies posting strong results included 3i Group, which owns a majority stake in Action, a European discount retailer that continues to take market share throughout continental Europe.
Aside from 3i, our European holdings underperformed in the month, due to both a weak Euro and economic and political upheaval. We prefer European companies with either a low-cost position like Adyen (in payments) or a global revenue base like BMW or LVMH (in consumer products).
INCOME GROWTH FUND
The MWG Income Growth Fund rose 5.2% in November, below the 6.3% increase in its benchmark. The Fund is higher by 26.1% year-to-date versus the benchmark increase of 27.8%. European Residential (+25%), Doman Building Materials (+19%) and IGM Financial (+13%) were the top performers, while Kingfisher (-16%), BCE (-15%) and Pfizer (-5%) were the top detractors. The fund yield was 5.7% at month-end.
Portfolio Managers Summary
We added shares in two battered names in November, Wajax and Northland Power.
Wajax is a Canadian heavy equipment provider that offers heavy equipment sales and rentals across Canada. The company reported poor results for the 3rd quarter, with softer demand and greater competition affecting profits. As interest rates in Canada decline, we expect industrial activity to improve, leading to stronger demand for Wajax’s products and services. Earnings per share of $2.70 are expected in 2025, well covering its dividend of $1.70 (good for a 6% yield).
Similarly, Northland Power (NPI) is emerging from a turbulent two years with interest in renewable power declining. NPI owns interests in a diverse set of renewable projects that generate EBITDA of approximately $1.2 billion per year. Additionally, three new projects will come onstream by 2027, adding nearly 50% contracted cash flow growth. As recently as early December, the company was without a permanent CEO and CFO. That, combined with some construction issues on new projects, dragged the shares down to a 7-year low. However, Christine Healy, a global energy executive and Canadian Natural Resources Board Member, will take the reins in early 2025 and we look for a renewed message for shareholder value creation. We believe the shares offer good value with a 6% yield.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.