Quarterly Check-in and 2025 Outlook – January 2025

In our 2025 Outlook presentation, we address economic risks for 2025, why high growth expectations are worrisome and the case for investing in Canadian stocks that are exposed to the global economy.

In our 2025 Outlook presentation, Portfolio Manager Sam LaBell addresses economic risks for 2025, including U.S. fiscal deficits exceeding 5% of GDP, potential 25% tariffs on Canadian goods, and the yield curve inversion. He also analyzes market valuations, noting that U.S. growth expectations remain high at 16%+ while Canadian expectations outside energy and materials have decreased to about 9%. He concludes by laying out the case for investing in Canadian stocks that are exposed to the global economy and have the potential to grow faster than expectations.

(0:00) Investment Philosophy and Performance

Sam explains Veritas’s core values and investment approach, emphasizing funds that reduce volatility and charge low fees. The Veritas Canadian Equity Fund has beaten the iShares Core S&P/TSX Capped Composite Index ETF over the past three years with 18% lower volatility. The Veritas Absolute Return Fund has a 0.29 correlation to the index with reduced volatility. The Veritas Next Edge Premium Yield fund manages downside risk and volatility through a strategic option overlay. He highlights successful recent long and short investments.

(15:45) Economic Risks and U.S. Fiscal Policy

Sam’s presentation addresses major economic risks for 2025, focusing on U.S. fiscal deficits exceeding 5% of GDP and growing mandatory spending pressures (Medicare, Medicaid, Social Security, etc.). He also discusses how the yield curve has recently uninverted, which signals an economic slowdown (for more on that subject, he recommends listening to a Fact Finder podcast with Veritas Group President and CEO Anthony Scilipoti and Professor Campbell Harvey, the academic Canadian who discovered how an inverted yield curve correctly predicts recessions). “It’s a signal to at least think about that risk in the market hasn’t gone away and that it might be a little higher than people anticipate.”

(22:50) Trade Relations and Tariff Impacts

Sam analyzes the potential impact of proposed 25% tariffs on Canadian exports to the U.S., examining trade balances across sectors. He notes that 21% of Canadian GDP is tied to U.S. exports, with significant exposure in primary industries and energy products. “The key here is that a lot of it is in the primary industries, in metal and non-metallic mineral products, farming, fishing, intermediate food products and energy products. We’re selling a lot of things that are inputs to the U.S. economy. So if you tax that you may expect a slowdown in the U.S. economy.” He also discusses the threat to the U.S. jobs picture if trade jobs are lost and various studies of impacts on U.S. GDP from tariff retaliation.

(28:15) Market Valuations and Growth Expectations

Sam examines market valuations and earnings growth expectations, noting U.S. earnings growth forecasts are above 16% versus Canadian expectations of 9% outside energy and materials. Stocks are trading at high multiples, pushed up by growth expectations that investors think will continue for many years. “In our view, that is really the risk. If you want to do well in a stock, you hope for both multiple expansion and earnings growth. We could get the earnings growth, but we could get multiple contraction given where multiples stand on both sides of the border.” He presents various scenarios for S&P 500 returns, ranging from potential high single-digit gains to possible declines depending on earnings growth and interest rates. “The key here is that as value investors, we don’t want to chase these high multiples and high growth rates in the U.S. because they carry a risk of coming down both on the expectation level of growth and the overall multiple. We think we can find undervalued low multiple names in the TSX that have the potential to grow faster than people expect, particularly companies that have global footprints that are not strictly exposed to U.S. trade. We’re looking for globally diversified names that have opportunities for growth around the world. We can find a lot of good companies that are trading at reasonable valuations that we think can earn through anything that might happen.”

(39:30) Summary and Questions

Sam thinks high expectations could lead to volatile markets. “We’ve got a track record of showing that in sideways and down markets, we will protect capital and do very well.”

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