A Bottle of Red, a Bottle of White; It All Depends on Your Appetite

A few years ago I had taken a vacation and when I returned to work, a client told me “ David, every time you leave the market goes up, so do us all a favour and take more vacation”. The streak continue this year, although this correlation has no actual causation. On that subject, let’s identify some of the cause and effect that’s developed over the last few weeks. 

Currency

You really feel the impact of the weak currency when you travel. While a plate of pasta used to cost 10 euro before the pandemic, at 1.4 it would still equate to $14. This time around, the pasta cost 18 euro and at 1.62 that comes out to about $29. What explains this? Well, Canada is feeling the impact of the tariffs;  we had our largest drop in exports since the pandemic throughout the month of April which contributed to a record $7.1 billion deficit for the month. Our central bank has been cutting interest rates for a year now, with the first rate cut of this cycle taking place in June 2024. We’ve seen the Bank of Canada’s benchmark interest rate go from 5% to 2.75% and it’s important to establish that typically, these kind of interest moves make our currency weaker.

How exactly does that work? Well, holders of Canadian debt (currency) are less enthused to hold Canadian denominated bonds when other countries such as the US, have similar levels of risk and are offering higher returns. This keeps foreign demand of the Canadian dollar low which equates to a weak currency value. Why exactly is the Canadian dollar depreciating against the Euro when the ECB is also cutting interest rates and dealing with tepid growth prospects? The Euro represents close to 20% of allocated global foreign exchange reserves; when the global economic system suffers form shocks, such as the current one associated with trade, investors’ demand for cash increases. Typically, the USD is the greatest beneficiary of this dynamic but because the US is also the main source of the volatility today, the Euro has been the greater beneficiary of this uncertainty. I had recently read that many Canadians are avoiding travelling to the US this summer, with Europe being a beneficiary of this movement; so be prepared to pay! 

Earnings

Two of our largest holdings reported in the last 7 days and they are both related to AI: Nvidia reported on May 31st while Broadcom reported yesterday. Both companies have suffered through some serious volatility this year from the ‘Deepseek’ moment in January which saw their shares drop more than 15% in a single trading session or, like most growth-oriented companies, during the tariff-related sell-off throughout March and April. Despite this, both firms are posting year to date gains that exceed the S&P 500 with AVGO up 12% and NVDA up 4% against 1% for index. The reaction to earnings was lukewarm; bulls were thrilled to hear the positive outlook and the raw numbers behind the results were impressive while bears will point to slowing growth. As we see it, there are still many that have unrealistic expectations about their growth while there are too many who cannot admit that they were wrong about the AI buildout.

It is important to temper expectations; with what we know today, it is unlikely to see these firms register earnings growth of 50-60% in the next few years, hence some of the unrealistic growth expectations. These firms both play critical roles in their fields which increases the probability of them being able to increase their sales and even pass along price increases to their customers and still grow at above average rates which is why they deserve their (modest) premium valuation. Anticipating macro weakness having an impact on markets in the upcoming months, we would be buyers of both these names, especially if they sell off more than the broader index.

CFA Montréal

Last night, Leon and I attended the annual CFA Montréal forecast dinner. Robyn Grew of Man Group and Rick Rieder of BlackRock were the evening’s panelists with Kristina Partsinevelos of CNBC as the moderator. What they discussed was essentially what we are asking ourselves every other day as your portfolio managers: what’s going on; trying to distinguish between noise and substance; responding to data as opposed to the market and what to do in such a particular environment. I’m going to take a brief moment to put aside humility and lean into validation as both panelists sounded very similar to how we do in our conversations. They were both enthused by AI, the were both cautious about the current macro environment and they both stressed that this is a trading market because of the sharp reversals we are seeing on a daily basis. Throughout the months of March and April we traded heavily across our discretionary portfolios and so far, the results have paid off.

It did not hurt to buy some more Broadcom when the shares were at $180, while today, they sit at $250. Same thing with GEV, a company I had been eyeing for some time but only kept going up. After it corrected 30%, we did some modest buying and now we’re up between 35-45% within two months. These are not opportunities we can pursue without having the authority to trade in a timely manner. Yes, this is an advertisement for our discretionary asset management services. We do our absolute best to trade across all our accounts; we’ve reached out as often as we could throughout the volatile period, but the reality is, there is a finite amount of trading hours per day and we often find ourselves playing phone tag in these instances where, by the time we speak, the opportunity is gone. We will continue to do our best for all our clients as our belief in active investment management applies equally across all our accounts. Hearing seasoned money managers say similar things that we are, validates our thinking but to bring this full circle; we are still going to remain very humble as your money managers. This role obliges us to be both confident when we make decisions but also, open minded to being wrong. More experienced and larger money managers get things wrong too; it’s how they respond to being wrong that matters most.

It is with a large smile on my face that I write this week’s Wrap Up. No matter how much I enjoy travel, I genuinely enjoy communicating our portfolio ideas as well as promoting financial literacy. We did a lot of work on our investment portfolios in the first half of the year, we have every intention to do the same in the second half. Accounts are all looking healthier than we would have forecasted just 2 months ago, let’s celebrate that win today!

Healthy Distraction

Our travels are often built around food as, along with finance and sports, it’s a true passion of mine. My efforts at finding the most interesting stories in the culinary world should not just be for me to enjoy, so let me share some of the most interesting experiences of our trip.

Casa Maria Luigia, the bed and breakfast operated by Massimo Bottura and his wife Lara Gilmore was the highlight of our trip. For those unacquainted, Massimo Bottura is the chef and owner of Osteria Francescana, thought by some to be the best restaurant in the world. His bed and breakfast has the same level of attentiveness to detail as his three Michelin star restaurant; everything is done with intention and it shows. The tasting menu at breakfast was just some of the privileges we were afforded during our stay and Lara was very present and often engaged with us during our stay. We also dinned at Francescana at Maria Luigia and at Al Gatto Verde, both situated on the property. What’s extra special about Al Gatto Verde (along with all the food at Maria Luigia) is it is overseen by Montreal’s own chef Jessica Rosval. She was kind enough to greet us as we were leaving Al Gatto Verde; she did not want to miss the opportunity to welcome her Montreal-based guests. In chatting with her, she shared one of her personal projects in Modena, a restaurant named Roots. Roots helps integrate migrant women by offering them culinary training and has built a menu inspired by these very same women. She was kind enough to invite us to Roots and we were very appreciative to try foods that we had never tried before.

Another part of our trip that we enjoyed, was visiting the Paltrinieri winery (a recommendation from Mr Bottura himself). We met the family who have been keeping the wine making tradition alive since 1926.  Started by chemist Achille, their story centers around Lambrusco di Sobrara, a red sparkling wine. What resonated with me, was that they created the market around their product; while often used in a blend, they decided to create the wine as is. My life has often revolved around the ‘road not taken’ where, like this brave family, I do what makes sense to me even if few people are doing it. While it’s served me well as professional, unfortunately that boldness has not translated into wine making abilities. I guess it’s not so bad, however, as we can leave that to the Paltrinieri family.

One more quick food story, as I can write for days on the subject, Verona was a pleasant culinary surprise. Their risotto all’amarone, horsemeat stew, polenta and gnocchi were just some of the standouts. While Verona may not be on everyone’s travel list, I would strongly recommend the city as a whole; very lively, a rich history and beautiful architecture…it has a lot to offer.

Wishing you all a great weekend!

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