Foresight - Spring 2024

As we look forward through 2024, we see a number of potentially positive trends for our portfolios. Even if interest rates stay higher, bond portfolios are enjoying significantly higher yields in the 4-5% range, up from near 0-1.5% not long ago. This increase in yield for the fixed income side will have a significant positive impact on overall portfolio returns. Higher interest rates also have a negative impact on valuation multiples in the stock market, especially for high-yield stocks like banks, utilities and large/small capitalization high-multiple growth. For utilities stocks, especially in renewable energy, the higher discount rate applied to their cash flows over their long term contracts caused the values of these shares to come down significantly. These companies have very strong organic growth in both revenues and earnings in the foreseeable future which should bode well for share price recovery in the coming years. For growth stocks, whether or not interest rates come down to give these stocks a valuation boost due a higher multiples, the underlying growth in earnings will underpin the increased value of these companies. Canadian bank stocks have also been negatively affected by the fear of a Canadian recession with corresponding loan loss provisions. Canadian banks have a history of being very conservative when it comes to provisioning for potential loan losses in an economic downturn. Today, Canadian banks are trading in a very reasonable range of 10-11 times their price/earnings ratio. They also have very attractive dividend yields of 4-6.5%, with the potential to not only grow earnings organically in the years ahead, but also, potentially, to add back unrealized loan loss provisions.

For the 19th year, the Spring issue always includes data on the most recent calendar year end. The back-page chart summarizes three broad indices and all of the world’s sectors. It was a great year; however, the Fall issue discussed the important perspective of “productive” returns and “recovery” and “correction” returns that occur between back-to-back years… and the back-page chart shows that 2023 was a “recovery” year from 2022. That Fall article went on to embrace further return data of 3-year and 5-year annual compound returns, not to mention  life-time annual compound return. Further, the table below provides some perspective on cumulative returns (price-only) since 2013.    

	All-World	US S&P 500	Japan	Europe	Canada
4 years to Spring  2017	67%	64%	70%	2%	24%
6 years hence	86%	120%	88%	34%	36%

 A Global Approach….

At Trivest, we take a global approach to investing in equity markets as part of our diversification strategy. Volatility in these international investment returns can be exacerbated, or  mitigated, by currency fluctuations. When investors buy an investment in a country, or ‘union of countries’ (as in Europe), they also implicitly are buying the underlying currency. At the end of an investing year, the investor’s return is equal to that foreign market’s return, plus-or-minus the exchange conversion back into the investor’s home currency. Therefore, for a  Canadian investor, an appreciation of the loonie is “bad”, ie lowers the international return. As you can see below, in any given year, the cross-currency exchange movements between two countries can be significant.

The following chart shows the last five years of exchange fluctuations:

Historical Annual Change in Canadian Exchange Rates

From Canadian dollar to:

	2023	2022	2021	2020	2019
US $	+2.40%	-6.39%	+0.43%	+2.01%	+5.04%
Euro	-1.16%	-0.46%	+8.46%	-6.56%	+7.06%
Japanese Yen	+9.84%	7.21%	+12.17%	-3.16%	+3.76%

(“+“ means a rise of the Canadian $)

We continue to augment your foreign content with a list of international ETFs that are “hedged” to remove the currency impact of international investing, and they span geographic regions and industrial sectors. You may see them on your NBIN statement by their ticker symbols, including XHC,  XCD, XGI, XQQ, VUS, XEH, XIN, CJP, XSP, XSU and VEF.

The shaded returns across the diagonal in the chart below show the calendar 2023 domestic equity price returns (ie excluding dividends) in the major economies. All of the other entries include the currency impact on these returns to show the effective returns for investors who are branching out internationally from their own domestic market. Global markets performed exceedingly well across the board, with double digit returns in Canada, U.S, Europe and Japan. The left hand column shows the 2023 currency-adjusted returns for Canadian investors branching out across the globe.

Quarterly data that we track show that, over the past 17 years, the U.S./Canadian foreign exchange movements contributed approx. 8% of total return.   

Annual Equity Index Price Returns that include Foreign Exchange Changes – Calendar 2023

Country/     Equity Index	Canadian Investor	American Investor	European Investor	Japanese Investor
Canada /TSX 60	12.05%	14.45%	10.89%	21.89%
U.S./S&P 500	23.94%	26.29%	23.33%	33.88%
Europe/Euro 350	17.99%	19.87%	16.82%	27.69%
Japan/Japan 150	21.70%	23.61%	20.86%	30.66%

The following chart shows on the right the last five years of price-only returns for a Canadian investing around the world. It also shows, on the far left column, the 19 year annual compound returns (2005-23). The difference between that and the Domestic International returns column to its immediate right, highlights the 19 year geometric currency impact on Canadians investing internationally. You can see that these 19 years of currency volatility have contributed somewhat to the Canadian investor returns abroad.

Canadian Investor International Returns 2005-2023

	Cdn   19 yr cpd	Dom Int’l 19 yr cpd	2023	2022	2021	2020	2019
TSX 60	7.02%	7.02%	12.05%	-6.24%	28.05%	5.56%	18.11%
S&P 500	10.37%	8.90%	23.94%	-11.28%	28.29%	16.43%	24.08%
Euro 350	5.98%	5.81%	17.99%	-8.12%	18.27%	4.23%	15.99%
Japan	4.96%	5.03%	21.70%	-10.14%	3.86%	13.52%	12.62%

Investors have an affinity towards high returns. It makes them feel better, and fortifies their feeling of financial comfort. Investment management isn’t just about generating returns.... it is about generating returns relative to risk. Risk-and-return operate asymmetrically...meaning that achieving higher returns probably means that one has taken on more risk, but conversely, taking on more risk does not guarantee higher returns. One of the sub-characteristics of a portfolio is its volatility: how much does it fluctuate in value – in the short run, but more importantly, in the long run. One of the markers for this is the statistical measure called standard deviation. In the following chart, we have calculated the 19 year standard deviations from the historical return data in the Annual Equity Index Returns chart. The numbers on the right represent the standard deviation for each of the geographic domestic markets. The numbers on the left represent the standard deviation for a Canadian investing in those markets, factoring in the currency aspect. 

Standard deviation	Canadian investor	Domestic Int’l
TSX 60	15.41%	15.41%
S&P 500	13.48%	17.16%
Euro 350	15.14%	17.76%
Japan 150	13.99%	21.31%

Here, we see that the 19 year currency fluctuations acted to reduce the volatility for a Canadian international investor. This analysis can be fine-tuned by creating a mock portfolio where a Canadian investor invests across all of these geographic markets (simulating what we actually do). This mock portfolio would produce a 19 year annual compound equity price return of 7.72% to a balanced global portfolio, with a standard deviation of 12.54%. The dividend yield adds approx. 2%. Always beware of “lies, damned-lies and statistics”! These analyses are only based upon the 19 years that we have been tracking this data. Prudent investing always needs a long term perspective.

Twelve month sectoral results for 2023

The chart below shows our annual report on how the industrial sectors performed in Canada, the U.S. and globally for 2023 (Annual historical comparatives on sector data can be found on our website). These are price returns, which means they include the price appreciation (or decline) year-over-year, but exclude dividend income (approx. 2%). The Canadian results are reported in our domestic currency. The U.S. S&P returns are reflected in USD rather than our currency, so that the foreign exchange movement does not contaminate a comparison. Global returns of course reflect a myriad of the world’s currencies, which here are consolidated in USD; thus, there is some foreign exchange element to that data. The top line “WHOLE INDEX” return data in the chart below result from applying sector weightings to the sector returns. These weightings are different in the three regions. The 2022 comparative WHOLE INDEX returns appear in (brackets) below.

All three markets posted strongly positive WHOLE INDEX returns, with Canada lagging. All of the 2023 WHOLE INDEX data recovered from the previous year’s significant losses (in brackets). As such, the large 2023 returns are what we termed in the Summer Foresight as Recovery returns, such that the annual, two-year compound return was approx. zero. However, going back one year further, 2021 was a strong year, as was 2019, resulting in very healthy annual, five-year compound return.

In the Table, 7 out of the 30 sector data points had negative returns, and three of those were utilities  around the globe. All Canadian sectors broadly followed the global returns, except Canadian materials, consumer discretionary & staples and telecom, which fared poorer.

In the global markets, four of the ten sector returns were significantly lower than the Whole Index. Investors need to understand that investing isn't just “buying the market”; rather, it includes selective sector picking. We monitor these sectoral movements and re-balance at various points in the year to realize the appreciation in leading sectors, and seek buying opportunities in the lagging ones.

For the year 2023 (2022) SECTOR	Annualized Price Returns for S&P Global 1200 Index Sectors (in US dollars)	Annualized Price Returns for US S&P 500 Index Sectors (in US dollars)	Annualized Price  Returns for Cdn. Composite Index Sectors (in Canadian dollars)
WHOLE INDEX	20.7% (-18.7%)	24.2% (-19.7%)	8.1% (-9.0%)
Energy	0.0%	-4.8%	1.0%
Materials	11.3%	10.2%	-3.3%
Industrials	19.6%	16.0%	10.5%
Consumer Discretionary	28.8%	41.0%	8.5%
Consumer Staples	0.1%	-2.2%	10.5%
Health Care	2.0%	0.3%	15.6%
Financials	11.7%	9.9%	9.1%
Information Technology	52.8%	56.4%	68.8%
Telecommunications	38.3%	54.4%	-9.2%
Utilities	-2.9%	-10.2%	-4.3%