North American Equities: Looking ahead to 2025

Transcript

Good day, everyone. Happy New Year! Pete Hofstra here with an update on North American equities.

It is January 6th, 2025. Remember January 6th from four years ago? Isn't there a trial with the name January 6th? Anyway, Trump 2.0 is about to get underway, but let's not take the spotlight off Canadian politics.

What Freeland started last month, I guess, has come to completion sort of held back on recording this to see what the right honourable Justin was going to do. And yes, he is going to resign. As leader of the Liberal Party, funny, when we when you know the companies we track, when the CEO resigns, you’re used to see a stock reaction up or down. It can be quite dramatic. One way or the other, I think this is one where the stock of the Liberal Party probably goes up with Justin stepping down and think a lot of Canadians were pretty tired of what he has to do and Canada frankly does need some reform. Productivity has been extremely weak. GDP per person has actually been declining, so a lot of policy needs to be revisited from immigration to tax. Government payroll has grown dramatically the last few. There's not always the most efficient way to spend, so lots to be revisited, Mark Carney's, a name that gets tossed around. But I think appropriately, they'll be full process here of the, you know a competitive process to appoint the next Liberal leader. But certainly big news for Canadian politics, and it deserves some headlines. Of course because Trump is so good at grabbing the headlines. His inauguration. Will soon be upon us and look in anyone who thinks they can know what's going to happen this year, both from a policy, let alone markets, point of view. Yeah, I would. I would run the other way. No one knows how this is necessarily going to play out. No one knows what the feedback mechanisms are going to be. You know, if policies put in place and the market goes down, do we reverse policy? You know, I really have to see how this plays through in order tariffs and negotiating tool or are they something that is more permanent? It's just a tax by another name, right? And Trump was actually just going to use that to offset other revenue reductions, if he wants to cut corporate tax or whatever else it is, so we'll see how this all plays through. Always remember the link from whatever the policy is to the broader market is the most important number in all financial markets, which is short term US interest rates, a decision made by a small number of people, by the way that anyone else get this Christmas cold. I apologize if my voice is a bit scratchy, but anyway that most important number is what then causes the pricing of basically all other financial assets, currencies, bonds and of course equities.

And if you know the tariff policy turns out to be inflationary, they'll have to be a reaction. But if that's offset by mass government layoffs or maybe increased energy production, so a reduction in oil, maybe there isn't a net inflationary impact from tariffs. So anyway, a lot to see play through. Keep an eye on central Bank, the US in particular. We'll see how that impacts markets, but I think as we look at 2025 that we've had two really good years. I mean, the US has been up mid 20s two years in a row after a tough 2022, 23 and 24 very strong. Similar in Canada are 2022 wasn't as bad. Negative years sort of broadly, but Canada out perform the US that year quite bit. 2023 was OK, sort of just 12 percentage, I think for Canada and then again low 20s last year. So interestingly, if you actually compound both markets over the last three years. Think you'll find the US is up just over 9% annualized Canada up about 8 1/2 percent annualized over three years. So kind of on trend for both of them, frankly and that's sort of where we sit. So I think all of that to say probably not realistic to think we're going to see another 20% plus market returns for equity. But it also put to you that the idea that the market is crazy overvalued. Probably not. Again, you've got these 10 foot tall kids in the kindergarten class and we're doing a height weighted, you know, average mark for the class. Of course, the 10 foot tall kids are the only ones that matter, but the mag 7 there is great businesses in there growing cash flow like crazy. And so they deserve higher multiples than the rest of the market is probably valued around its long run average. So now that’s not all to say it's not easy returns from here, but you know we're kind of not too far off trends. So probably more trend like returns are more realistic in terms of what to expect. But we do think there's going to be volatility, where we can we'll be actively hedging, even some of our broader portfolios, things like the global income and growth we've been putting on puts. We've certainly been doing a lot of that in our liquid alternatives and even in innovators, buying puts against the tech market. Expecting certainly volatility as we move ahead. So you know, that's kind of how we would look out for 2025. The AI spending should be OK, the applications we're reading about and hearing about are just getting going, things like mapping every cell in the human body as an embryo forms to a fetus, to a human being. How does every cell specialize? Excuse me. We're now able to map all of that.

For you wine drinkers out there, what they're able to do now is have someone in Australia using virtual reality glasses, control a robot that's in a vineyard in France, control the robot to pick the grapes, and the robot is then learning how to pick the grapes from how it's being basically influenced by that Australian grape picker. And that's critical as the grape picking season has been shortened, shortened by, by climate change. So anyway, we're just getting started in what we can do with the compute power that's available and how we've reconstituted how we're able to digest massive data sets. So we're going from the LLMs to large language models to now the LBMS large behavior models where you can literally turn physical behavior into activity. So lots of exciting things happening in that space. So again, I don't think some of the trends that we're seeing from last year break. In terms of where the spending is, IT budgets look OK. Uh, you know, we don't see a recession. So big fears I don't think are out there. Employment picture seems pretty robust. Yeah, Canada may be in a position to get a bit of an overhaul. It would be truly a competitive election, depending on who the Liberals appoint. So I know lots to go on. Let's stay on our toes. Let's not anchor to one forecast. Let's just accept that there's going to be a lot of uncertainty. And that linkage is always through that policy set by central banks. So well, pay close attention there as well anyway, so that bit of a look forward bit of a look back. Exciting times. Hope you're well again. Health, wealth and happiness to all of you, and we'll connect in a month.

Here's a summary of the podcast:

Pete Hofstra provides an update on North American equities, discussing political changes, economic trends, and market forecasts for 2025.

• Political Changes in Canada: Justin Trudeau is set to resign as the leader of the Liberal Party, which may positively impact the party's standing. This change is expected to bring about necessary reforms in Canada's policies on immigration, tax, and government payroll.
• U.S. Political Landscape: Trump's second term is about to commence, creating uncertainties regarding policy impacts on markets. The key factor to watch will be short-term US interest rates set by central banks.
• Economic Performance: The US and Canadian markets have shown strong performance over the past two years, with the US market up over 9% annualized and Canada up about 8.5% annualized over three years.
• Market Valuation: Despite recent strong performance, it is unlikely that markets will see another 20% plus return in the near future. The market is not considered to be overvalued, and trend-like returns are more realistic.
• Volatility and Hedging: Volatility is expected in 2025, and active hedging will be employed in broader portfolios, including the use of puts in liquid alternatives and tech markets.3
• Advancements in AI: AI spending is anticipated to remain strong, with advancements such as virtual reality-controlled robots for grape picking and mapping of human cell specialization.
• General Outlook: The overall outlook for 2025 includes a stable employment picture and no significant fears of recession, with a focus on monitoring central bank policies