The Market

In Q3 2024, global growth slowed further under the weight of previous interest rate hikes, however September brought some relief with the U.S. Federal Reserve cutting rates by an outsized 50bps, joining the Bank of Canada and other central banks as inflation began to ease. This policy shift provided some breathing room for households and businesses grappling with higher borrowing costs. While the future of inflation and rates remains uncertain, we’re now seeing a shift towards an easing phase in this cycle.

Equity markets performed well this quarter, with interest rate sensitive sectors like real estate, utilities, and financials driving several indices to new highs. However, tech stocks, particularly those riding the artificial intelligence (AI) wave, relatively lagged as investors questioned high valuations.

Compared to last quarter, Canadian equities led the charge, benefiting from their exposure to rate-sensitive industries, followed by Europe, Japan, and emerging markets, which got a lift from a weaker U.S. dollar. Meanwhile, Chinese stimulus measures sparked a late-quarter rally for some companies, and bond markets bounced back after two quarters of rising yields.

The table below shows the market performance as of September 30, 2024, in Canadian dollar terms:

Performance

The table below compares the YouFirst portfolio composites with their respective FPX Benchmarks:

Both YouFirst Growth and Conservative Growth composites underperformed their relative benchmarks this quarter and year-to-date, primarily due to the difficulty in keeping pace with hot US markets which are being driven by a few high-flying AI stocks. 

Overall, all YouFirst portfolios are underweight fixed income which has also led to the relative underperformance; however we are closing the gap to our benchmarks as yields fall and we opportunistically build up our bond positions.  Many of our holdings of hybrid debt securities such as minimum rate-reset preferred shares and convertible debentures have begun to recover from the doldrums of 2023 as investors search for yield since high interest savings accounts are no longer providing required returns.

Portfolio Activity

We continue to increase our allocation to BMO Aggregate Bond Index ETF (ZAG:TSX) for balanced and conservative growth clients. ZAG is invested in a diverse range of debt securities with an average term of 10 years and an approximate yield to maturity of 3.5%. It encompasses a broad spectrum of the Canadian investment-grade fixed income market, including Federal, Provincial, and corporate bonds.

We exchanged holdings of Mawer Global Small Cap (MAW150) with iShares ESG Aware MSCI USA Small-Cap ETF (ESML:US) to continue with optimizing our portfolios while reducing management expense ratios (MERs) for our clients.  Interest rate decreases are often a boon for small caps and we expect that the added risk will continue to compensate investors with a long-term growth investment profile.

Finally, the Firm Capital 5.3% convertible debenture (FC.DB.H:TSX) matured on August 31, 2024 at par.  We will continue to let convertible debentures mature and redirect proceeds into dividend paying equities or fixed income ETFs to maintain asset allocation targets.

Outlook

They say a rising tide lifts all ships.  This was certainly true with the behaviour of global equity markets this quarter led by the exuberance of AI related and adjacent companies in the US. This quarter, as inflation slowed, the market continued its upward trend with gains broadening beyond the AI play to more rate sensitive sectors such as utilities, telecoms, real estate, and financials as interest rate policy took a more dovish tone globally.

If inflation and interest rates continue their downward trend, markets stand to gain, with the OECD highlighting that lower rates and rising real wages should support global growth through 2024 and 2025. As rates drop, cash becomes less appealing, which is reigniting interest in dividend growth stocks and bonds.  We expect the YouFirst portfolios to further benefit from this tailwind.

It is important to highlight that tighter credit spreads and all-time highs for several equity markets may suggest that investors have already priced in a low probability of a recession and a further decline in interest rates.  Any deviation from this expectation would create an air pocket in the market.  This was observed in August with the S&P500 and Nasdaq both hitting correction territory with a greater than 10% pullback.

We are mindful that US equity markets overall have been a very strong performer this year which has created a gap in performance.  However, prudent risk management is even more important as we enter a period of escalating geopolitical tensions in the Middle East and an upcoming November US presidential election which could put a damper on the optimism as we enter Q4. Investors will be balancing potential gains from easing financial conditions with the uncertainties on the global stage.  We continue to maintain a diversified approach with our portfolios by investing in wealth-creating businesses with strong balance sheets and proven management teams which should help preserve capital and lead to attractive risk-adjusted returns over the long term for our clients.

Thank you for your continued trust in our team.  We welcome the opportunity to discuss your portfolio should you have any questions or concerns.

Yours Sincerely,

Simon Chun, P.Eng., CFA
President, Portfolio Manager

Doug Garner, P.Eng., CFA
Chairman, Senior Portfolio Manager

Jane Garner, BA, EPC
Client Experience

¹ BENCHMARK DISCLOSURE

Monitoring your portfolio’s performance by comparing it to a relevant benchmark is essential. A benchmark is an independent standard for evaluating performance, often represented by indices like the S&P/TSX for Canadian stocks, DEX Universe for Canadian bonds, or S&P 500 for U.S. stocks. To ensure meaningful comparisons, the benchmark should closely reflect the asset classes and allocation in your portfolio since most investors don’t have 100% of their portfolio in bonds or stocks alone.

Given that most investors have diversified portfolios, a percentage return alone doesn’t indicate true value. Comparing your portfolio against a passive benchmark provides a clearer picture of its performance. For example, if the benchmark returned 7% and your portfolio 8%, your portfolio performed well.

At YouFirst Financial, we use the Financial Post Index Benchmarks publicized by the Croft Group, specifically the FPX Balanced and FPX Growth. These benchmarks reflect commonly accepted asset mixes: 10% cash, 40% fixed income, and 50% equity for balanced investors, and 10% cash, 20% fixed income, and 70% equity for growth investors. They are rebalanced at least annually and exclude management fees and other charges.  Both benchmarks are presented in Canadian Dollars and on a total return basis.

For more information about comparing your portfolio’s return to a benchmark, please contact us.