Beutel Goodman's 3 Key Questions on Markets in 2024

Beutel Goodman’s 3 Key Questions on Markets in 2024

27 February 2024

In this webinar (moderated by Jessi Helm, Assistant Vice President, Managed Assets), Kathy Tausz, Vice President, Fixed Income; Ryan Fitzgerald, Vice President, U.S. & International Equities; and Vim Thasan, Vice President, Canadian Equities provided their market perspectives for 2024.

Kathy, Ryan and Vim discussed:

What are the prospects for a rate cut by central banks at their March meetings and what could this mean for bond markets?
A small number of large companies (the Magnificent Seven) drove a lot of the S&P 500’s performance last year; what are some possible implications of this increased index concentration on markets and investors?
What factors are anticipated to impact the environment for Canadian equities in 2024?

This recording took place on February 22, 2024. The following transcript is edited for clarity.

Note: The information in this transcript and recording is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice. This is not an invitation to purchase or trade any securities. Beutel, Goodman & Company Ltd. does not endorse or recommend any referenced securities.

Jessi Helm: Hello everyone and thank you for joining us for our first 3 Key Questions webinar of 2024. My name is Jessi Helm and I’m the Assistant Vice President of the Managed Assets group. For many investors, 2023 felt like a rollercoaster ride marked by U.S. regional bank failures, global instability with respect to war, thematic investing, sticky inflation, and countless hours spent pondering when the central bank might cut rates. As the famous saying goes, history doesn’t repeat itself, but it often rhymes. And it’s with this in mind that we’re excited to dive into some of these key themes that have set the stage for investors in 2024 and has provided both opportunities and challenges in both the fixed income and the equity space.

Before we begin today, I’d like to take a moment to thank everyone on the call for their support of Beutel Goodman’s investment strategies. And I’d like to take a moment to bring you a quick legal disclaimer from my esteemed colleagues on our legal team.

The information in this webinar is not intended and should not be relied upon to provide legal, financial, accounting, tax, investment, or other advice. This is not an invitation to purchase or trade any securities. Beutel Goodman and Company Limited does not endorse or recommend any referenced securities.

Now, with that being said, I’d like to introduce our speakers to you today. I have the pleasure of speaking with three of Beutel Goodman’s portfolio managers. Joining me today is Kathy Tausz, Vice President, Fixed income, Ryan Fitzgerald, Vice President, U.S. & International Equities, and Vin Thasan, Vice President, Canadian Equities. Following our 3 Key Questions, we’ll also have a short question and answer session where we invite you to participate by typing any of your questions in the Q&A box below, and we’ll get back to you as soon as we can. So, without further ado, Kathy, this is the first question for you.

What are the prospects for a rate cut by central banks at their March meetings? And what could this mean for bond markets?

Kathy Tausz: Thanks, Jessi. That’s certainly something that bond markets have been wrestling with since the end of last year, and really, there appears to be a lack of consensus to your question and it’s causing a lot of volatility in the rates market. The only thing that the rates market and central banks seem to agree upon is that 2024 will be the year of rate cuts. But the magnitude and the timing, they’re still up for debate. So, the Federal Reserve Bank in the U.S. and the Bank of Canada have been pretty clear that it’s soon time to normalize policy. This means that they want to lower the policy rate as inflation has come down over the last year and they hope to engineer what they term is a soft landing. And what’s really important here is that neither central bank is messaging that 2024 rate cuts are being intended to explicitly ease policy. So the rate cuts that these central banks are talking about are not in reaction to an expectation of an economic slowdown, a slowdown in growth, or labour market weakness. What they are is more what we term maintenance cuts, and that’s to maintain the current level of restrictiveness of monetary policy.

And we can measure this using the real rate of interest. So, we look at the real rate of interest, which is the nominal policy rate minus the rate of inflation. For example, right now the policy rate in Canada is 5%, and you have inflation running at roughly 3%. So that brings your real rate of interest to roughly 2%. And this real rate has gone higher as inflation has come down, because that difference has increased. If the Fed doesn’t want to become more and more restrictive over time, as inflation comes down, they actually have to lower that policy rate or normalize policy. And they’re trying to dance this fine line between lowering rates so that real rates don’t become overly restrictive on one hand, but then also they don’t want to become overly accommodative and reignite the flames of inflation on the other hand. If anyone’s interested in a more detailed look into this, we actually just wrote a report, and it’s on our website, in the Insight section, about real rates. For anyone looking for a deeper dive into what this means. But what this means, as far as the March rate cut goes, is that bond markets have really whipsawed around, pricing in and out the probability of a March rate cut.

If we look at Q3/2023, there was a near zero probability of a March rate cut, and by the end of the year there was almost an 80% chance of a rate cut. And now we’ve gone sort of full circle and the market’s pricing in only about a 5% chance of a March rate cut. We’ve held the belief for some time now that a March rate cut seems premature. Even Fed Chair Powell came out in his January month-end press conference and said it’s unlikely that they have enough confidence on inflation to have a rate cut in March. And also since then, we’ve had an elevated inflation print in U.S. core inflation, still running at 3.9%, which is well above their target. So, this gives us more confidence in our view that March is too premature [for a cut]. And from the Bank of Canada’s perspective, we also think that March is too premature. The growth backdrop in Canada looks much weaker. However, inflation is still very sticky. It’s led by structural issues in housing. And this goes beyond just the elevated mortgage interest costs that we’re seeing. Other costs associated with housing are also keeping consumer price inflation higher.

We did have a promising inflation print just two days ago. We had headline inflation come down to 2.9%, so within reach of their 2% target. But if we dig a little bit deeper, the core levels are still elevated, still running at about 3.3 to 3.4%. And another interesting statistic is on core services inflation, removing housing. So really looking into the service sector of the economy, which is still running at 4.3%. So, this is well above the Bank of Canada’s target. And since we’re headed into the peak seasonal time period for housing in May, we think that for this reason too, it’ll be unlikely the Bank of Canada will cut in March. They don’t want to be seen to be stoking the housing market even further. So, at this point, we think that a mid-year rate cut makes more sense for Canada and the U.S. with about 75 to 100 basis points of cuts later in the year. Anything after mid year, we think you enter into the U.S. election period. And so, if they did cut right before the election, there’s a possibility that they would come under fire for bolstering the economy right before the election.

So, they may stay away from that. We would have this blackout period between September to November. If we look at a December start to rate cuts, for us, it just seems a bit too late, because that would mean that real rates are staying restrictive for even longer. And that’s where we could enter into some financial stability risks. So mid-year cuts with cuts every meeting, keeping that real rate sort of consistent would be very consistent to what we’re seeing and consistent with Fed messaging. What does this all mean for bond markets? Well, our analysis of historical cycles does show that during central bank pauses — that’s the time period after the bank stops raising the policy rate — tends to be very positive for bond returns. But we think that we’ll still experience a lot of rate volatility in the near future because that curve is so deeply inverted. What that means is that a lot of rate cuts are already priced in. So for bond yields to go lower, you actually need even more rate cuts to be priced in beyond the current expectations. And we believe that this would have to be on the back of weakening economic data, especially data with respect to the labor market backdrop and the inflation backdrop.

We’re keeping a very close eye on numbers. But at this point, the data doesn’t seem to justify a cut. So March is probably too soon, but we’re expecting that mid-year cut from both the Bank of Canada and the U.S. Fed.

Jessi Helm: Great. Thanks Kathy. It sounds like you’ll be needing a crystal ball. But what is clear is that both markets and the central bank seem to agree that 2024 will be the year of a rate cut. Moving on to U.S. equities, Ryan, this next question is for you.

A small number of large companies, the Magnificent Seven, drove a lot of S&P 500 performance last year. What are some of the possible implications of this increased index concentration on markets and investors?

Ryan Fitzgerald: Thanks, Jessi. Maybe before jumping into the consequences of such high concentration, which the U.S. stock market has not seen in the last 50 years, it’s helpful to understand that the underpinnings of this situation have been in play for many years. If we think of the Magnificent Seven — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla, they share three obvious similarities. One, they’re all U.S. companies. Two, they’re all tech growth investments, and three, they’re all very large companies. And these factors go a long way in explaining why these stocks and others that share the same characteristics outperformed even before the recent euphoria. So, let’s take U.S. versus the world: capital flows into the U.S. has been a long-term trend and not a surprise considering the superior growth relative to other developed markets over the years. Let’s take the second largest geography and with most global indices, which is Europe. We can go back to the Global Financial Crisis, and Europe has consistently had very sluggish growth due to a variety of factors. First, you had the European sovereign debt crisis about ten years ago and the related banking problems that followed; you had political turmoil, such as with Brexit; and also very poor demographics.

In addition, European indices are dominated by old economy type stocks. Meanwhile, you have the U.S., which has kept chugging along, posting very good GDP growth for the most part. And the U.S. is also home to world class tech companies that are very appealing to investors. And so these circumstances acted to concentrate capital into the U.S. If we move to the second factor, growth versus value, I think everybody is familiar with the story there. Value investments or certain parts of traditional value investments such as commodities extraction, banks, these are more economically sensitive sectors compared to mega cap growth stocks, which to a certain extent have their own drivers that are independent from the economic backdrop. And so where economic growth has been unsteady, especially outside of U.S. borders, this has also acted to funnel capital into U.S.-domiciled tech stocks and mega cap tech stocks. And the same types of comments could be said for large companies versus small companies. Small companies are far more susceptible to negative performance against an uneven economic backdrop. And we’ve seen a lot of that outside of the U.S. These three factors, we can look back, stretch over the last ten years.

And these three factors, we think, contributed to a lot of the outperformance of a very narrow subset of stocks, of which the Magnificent Seven are really the poster children of large cap U.S.-domiciled tech stocks. But added to all of this, you have the rise of passive investing. And so, as capital concentrates into a narrow set of geographies, companies and themes, active managers will struggle to keep up with the benchmarks, since they typically run more diversified portfolios and are usually at least somewhat valuation sensitive. So this leads to outperformance of passives, which encourages more flows, which further narrows breadth, which leads to more outperformance, which encourages yet more flows. And so you have this positive feedback loop that sends a narrow set of stocks, in this case the Magnificent Seven, and valuations skyward. All of these conditions were in place long before COVID and its immediate aftermath. What is different over the last couple of years is that we have added the most exciting story that the stock market has seen in the last 25 years, really since the dawn of the internet. And that, of course, is artificial intelligence. And to be sure, there will be winners and losers as AI gradually changes many aspects of our lives.

But at this point, it’s hard to know exactly who these winners and losers are going to be. And so investors have flocked into the obvious candidates, which are well represented in the Magnificent Seven, be it Microsoft with their AI tools and cloud offerings, or Nvidia, that obviously sells data center GPUs [graphics processing unit]. The AI theme has acted to pour gasoline onto a fire that was already burning very strongly. And so where does that leave us today? From the viewpoint of a value investor, we think that there are two main consequences. First, we do believe the valuation risk has built up within the Magnificent Seven. Take Apple, for instance. Apple seems to us to be trading at a valuation that is reflective of what has already happened over the last 10 to 15 years, as opposed to what is going to happen. Over the last 10 to 15 years, the world adopted the iPhone, the price of which went from something like $200 all the way up to approximately $1,400. This is a set of conditions that we don’t think is likely to repeat. Likewise, take a look at Tesla. Tesla trades at a very high valuation, something that we just can’t reconcile with the unfolding competitive dynamic in the electric vehicle space.

So that’s the first consequence, valuation risk. The second consequence is that we believe investor portfolios in many cases have become unbalanced. Whereas before, an investor could allocate capital to some growth managers, some core, and some passive investments, and between those three buckets, they could have some decent diversification. We now think, because of the concentration in broad indices, that all three of these buckets now move on the same themes and sectors. In addition, in our opinion, there’s been style drift amongst value investors, leaving increased exposure to this very same factor set. And so, in our opinion, many investors don’t have the diversification that they think they have. And we believe that 2022 was a wake up call on both of these fronts, where the Magnificent Seven significantly underperformed broader indices. Did AI go away? No. Did the U.S. lose its pole position for developed world growth? No. These themes were and are well entrenched. And yet stocks still badly underperformed. The broader index and supposed diversified equity portfolios didn’t do very well. And so we think that we could eventually see a more lasting repeat of 2022, although it’s very difficult to say when that might be. But we think that in the meantime, investors would be well advised to closely examine their portfolios and see if they are truly as diversified as they think they are.

Jessi Helm: Thanks, Ryan. It’s fascinating to hear about the market’s excitement over AI, but what I’m hearing is that it’s not without a healthy dose of caution as it relates to valuation diversification and concentration risk. Okay, now, moving on to Canadian equities. Vim, the third question is yours.

What factors are anticipated to impact the environment for Canadian equities in 2024?

Vim Thasan: Thanks very much, Jessi. Well, the 2024 outlook is murky for Canadian equities. There are a lot of balls in the air tied to macroeconomic and geopolitical factors. But it’s important to recognize that the Canadian stock market, which is represented by the TSX Composite, is not monolithic. It’s made up of 225 different companies, and it reflects a market cap of approximately $3 trillion. As a side note, it’s really hard to believe that a country’s stock market cap is less than that of an individual companies like Apple or Microsoft. So, clearly there is a lot of value to be had in Canada. Now, to unpack the factors that will impact Canadian equities in 2024, we have to distinguish between two broad groups of Canadian companies. First are the domestic-oriented businesses such as grocery stores, telcos and banks, even though they’re increasingly becoming more diversified, which mostly serve Canadians. So the health of the Canadian economy is critical. But we also have another group of companies, these global champions, such as Couche-Tard, Restaurant Brands and Magna that we own in the portfolio that are influenced by what’s happening globally because of their global presence and position.

Canadian equities do not sit in a vacuum. Factors driving the Canadian stock market tie into the health of the Canadian economy and the overall health of the global economy, especially the U.S. market. Now, even as bottom-up investors, we acknowledge that macro drivers are clearly impacting market sentiment. We’ve seen this through the course of 2023 and over the last four or five years with the sharp movements, with the collapse and the V-shaped recovery coming out of the pandemic in 2020, the plus 20% or more rally in 2021, the collapse in 2022. And then of course, the quarter-over-quarter rally at the end of 2023, reflecting the volatility that we continue to experience in the market. Arguably, there are two things that the market’s focusing on. One is inflation, which will feed the central bank decisions around interest rates and will impact interest rate sensitive sectors in the stock market. And second is jobs, which underpins economic growth and acts as a trigger for defaults and could feed a recession that could impact Consumer Discretionary stocks and bank sectors. Now, if we focus on our domestic economy, there are a few Canadian-specific items worth noting.

One is around economic growth and this whole view around population growth, or the population trap with immigration policy. This ultimately drives more demand for grocery stores, for telcos and banks, as there’s a bigger population, as long as it does not impact inflation. The second is the oil and gas or the energy market. The Energy sector represents about 17% of the TSX. This compares to 4% in the U.S. market. So it’s not only important to the identity of Canada and the Canadian economy, but also the Canadian stock market. And there’s different sources of uncertainty around supply and demand. And of course, politics is always in play. The social license to operate and the impact of government policy on M&A and profitability and cost actions is certainly in the headlines now. More precisely, the focus is on the health of the Canadian consumer. And this ties back to earlier comments around elevated housing price, how it impacts the level of affordability and the refinancing risk, which will be helped by lower rates. And that’s a focus on banks. Also consumer debt and consumer spending levels. With higher rates and higher level of debt, there is a difference versus the U.S. market, which has 30-year mortgages, versus our typical refinancing of a five-year mortgage that impacts disposable income.

And of course, jobs are key. Now, when we talk about these macro factors, it ultimately permeates into the key sectors of the Canadian stock market, including banks, energy stocks and of course, Shopify, which is now the third largest market cap, and is close to TD Bank. Now, I do want to take a minute to note two differences between the Canadian and U.S. markets. First, as Ryan mentioned, the Magnificent Seven technology stocks which drove approximately 60% of the returns in the U.S. market in 2023. But in Canada, we have the dynamic duo in technology of Constellation Software and Shopify that drove approximately 30% of the Canadian equity returns in 2023. Second, in the U.S. market, you have the GLP 1 or obesity drugs for weight loss that drove the Health Care sector. And in Canada, we have the Cannabis stocks that may actually lead you to gain weight rather than lose weight. Now, setting that aside, the reality is that the macro picture is constantly changing. And at Beutel Goodman, we are bottom-up value investors. So the Canadian equity portfolio is driven by our view on each individual company. And our rules-based process is meant to take advantage of these market dislocations that are created by fear tied to either macro or company specific events.

And there are specific pockets of fear in the Canadian market, notably banks, Consumer Discretionary stocks and certain commodity stocks. Overall, we are optimistic on the outlook in 2024 for the Beutel Goodman Canadian Equity portfolio, because this fear and uncertainty has allowed us to accumulate a portfolio of highly attractive franchises. We already have had four 1/3-driven process sales this quarter in 2024 in names that are more loved [stocks hitting our target prices and higher valuations] and we’re redeploying those proceeds into attractive opportunities. And as a reminder, a unique part of our investment process is that there is a requirement to sell 1/3 of our position when a stock hits our target price. It’s meant to sell into greed and reduce the valuation risk that Ryan referenced, while also acting as a source of funds for names that are kind of embedded in fear. So hopefully that frames the outlook for Canada in 2024 and also the specific outlook for the Beutel Goodman Canadian Equity portfolio because our portfolio is not reflective of the broader Canadian benchmark.

Jessi Helm: I really liked your analogy of Canada having a dynamic duo, whereas in the United States they have their Magnificent Seven. And I really appreciate that you’ve acknowledged that macro drivers do have an impact on market sentiment. However, as bottom-up investors, ultimately, it’s a view of each individual company rather than market sentiment for us.

Well, keeping an eye on the time, it looks like we have time for one more question. I’m going to pull one from our Q&A box. This one looks challenging. Ok, here’s the question.

It’s an election year in the U.S., and various other macro factors like wars and inflation could also lead to volatile markets. How do you manage this uncertainty as a bottom-up value investor?

Kathy, do you want to tackle that question?

Kathy Tausz: Sure. Thanks, Jessi. So that’s good to know the bottom-up value approach. We take a slightly different approach as bond investors because we can’t ignore the macro factors on the bond side. Macro factors are what drive interest rate movements and systematic moves in credit spreads. It’s something we do pay close attention to. We do, however, pair this with our rigorous bottom-up credit research that we do in selecting the individual corporate bond names that make their way into our portfolio. But right now, as the question asks, we are giving a lot of thought to these uncertainty factors, the geopolitical risks, inflation, and we find that managing this uncertainty is especially difficult right now because we’re seeing a big divergence into what’s priced into the rates market on one hand, and what’s priced into credit spreads on the other hand. For the rates market, the Fed is telegraphing this gradual normalization of policy in the hope of achieving that soft landing. And the rates market has expectations of 200 basis points of rate cuts. But we think the valuation of those 200 basis points of rate cuts really is moving beyond that maintenance cut normalization of policy. They’re actually pricing in some probability of a recessionary outcome. So we have rates markets pricing in that probability of a recessionary outcome and if we look at credit spreads on the other hand, they’re taking into consideration the best of both worlds. They’re taking into account the Fed’s hopes for a soft landing and also the lower rates backdrop, which is very supportive for asset prices. We think that there’s little consideration in the credit spreads that there is a risk that the Fed will not pull off the soft landing. And there could be flare ups in uncertainty. For example, we could have another flare up in the regional banking system or in commercial real estate, or in the geopolitical tensions that have been glowing globally. For us, the best way to manage this risk is through our credit strategy, especially if we’re considering what’s priced into rates markets versus the credit market. We focus on highly liquid credit names with strong balance sheets to weather all storms. And we’re also holding a sleeve of liquidity. And this liquidity is really important for us because it’ll allow us to change positions quickly if needed. It will also allow us to take advantage of opportunities if we do have a risk-off move.

It is really important to mention at this point that we do see value in shorter maturity corporates, because of the extra carry they provide. And having those corporates at the front end of the curve means they have a lower duration. They would experience less volatility if spreads widen. And we also see a couple of tailwinds for credit on the horizon. For example, there’s over $6 trillion of money held in U.S. money market funds by retail and institutional investors, which is an all-time high level. As the Fed cuts interest rates, the interest paid on those money market funds is going to go down. We imagine that money could be deployed into other risk assets, into other asset classes, and we see some of that money potentially making its way into these front-end corporate credits. That would definitely be a tailwind for credit. The other tailwind is the still strong economic backdrop in the U.S., and we can’t totally discount the probability or possibility that the Fed may actually achieve that soft landing.

The question also mentioned the U.S. election. So, our playbook with respect to managing risk for the U.S. election, it’s a little bit different, and it’s more specific to our yield curve outlook. The way we’re looking at the U.S. election is that policy proposals so far by both frontrunners, they’ve been protectionist, and they’ve had proposals such as applying higher tariffs to goods on China and they’ve been pretty anti-immigration. Both of these proposals are actually inflationary. If we think about it, the limiting of immigration puts pressure on wages, the tariffs puts pressure on goods prices. And so the other consideration is that policies have been pointing toward continued elevated deficits. If we look at the Republicans, they’re in favor of tax cuts, corporate tax cuts, the Democrats are in favor of continued spending. And then another point is that Trump has actually been openly critical of [Fed Chair] Powell, and there seems to be a lot of political pressure to keep that front end anchored. If we consider how this looks with respect to the yield curve. You’ve got a front end that’s anchored and then a back end that could be elevated due to these inflationary forces and continued high deficits.

So for us, that points to a steeper yield curve. We really do see opportunity in that five-to-ten-year area of the yield curve. And this area of the curve, the belly, so to speak, tends to perform best in steepening environments. So that’s our playbook for looking at the macro risk from a credit perspective, and then specifically the yield curve outlook with respect to the U.S. election.

Jessi Helm: Thanks, Kathy. Now, from an equities perspective, Vim, do you have anything to add to that?

Vim Thasan: Thanks Jessi. Well, there are a lot of headlines to monitor in 2024, including this election cycle. There is an estimate that 60% of the world’s population will head to the polls in more than 75 countries. And this is with a backdrop of wars, populism, high rates, and there are elections in the U.S. and Mexico that can have a more direct impact into Canada because of its proximity. So it can be very confusing to keep track of all these moving macro pieces. It’s like juggling 100 balls. Now, we believe it’s important to have a process to keep you focused on the right balls and to separate the signals from the noise when it comes to investing. We’re cognizant that these macro factors will materially impact performance. As Kathy mentioned, rate cut expectations caused an 8% rally in Canadian equities in just the fourth quarter of 2023. But we also believe we have limited ability to forecast macro events and the economic outlook in timing and magnitude. Despite the uniqueness of the situation and uncertainty in 2024, we have been here before. And to take a line from Jessi, history does rhyme.

Look back to the last four years with the market turbulence, with the pandemic that was supposed to shut down the world, wars, inflation rate hikes, regional banking crisis. As bottom-up value investors, we’re anchored to a rules-based discipline to take advantage of the market cycles of fear and greed. Often it’s tied to economic views, thematic views or company views. But every year there’ll be different factors that drives the market. No one’s quite sure what it will be in 2024. We certainly have a number of things to look at, so we wait for these events. We have a watch list of names that we stand ready to buy on market overreactions. And let me share two examples. In 2023, there was a significant concern and there continues to be around commercial real estate and the fear of a commercial real estate crisis and the impact. We stepped in and we bought a very high-quality, top four global commercial real estate service provider that will benefit as things unwind. In 2022, when there was a tech wreck and rates were rising and Shopify was down 70% to 80%, we were able to find a high-quality IT consulting and services firm.

So that’s examples of how we take advantage of the uncertainty as bottom-up investors. And in fact, over the last four years, we’ve added twelve new names. And we are able to take advantage of these situations because of our independent research focus. So, we don’t simply consume the narratives and stories that’s in the media and time arbitrage. By looking out and modeling companies three to five years rather than three to five weeks, we can have a differentiated view that’s almost structural in nature. So, in short, we stand ready to buy quality companies that go on sale because of macro factors. We just don’t know when the Boxing Day sale, so to speak, will arrive every year. And ultimately, we are sector agnostic. We don’t care if it’s an energy company, or a tech company, or a bank. We have these rules that require a minimum of 50% return over three years, and a minimum two to one upside versus downside, to give us a skew of asymmetry in high-quality franchises when they’re hated and out of favor. So we are definitely macro aware and we recognize the events could potentially impact individual companies. We reflect that into the specific items that relate to each individual company. But these investment rules and the process of Beutel Goodman are what allows us to have clarity and to navigate through this continuous change in the macro environment, including the election cycle in 2024.

Jessi Helm: Thanks, Vim. I think we’re all excited about the sales. Ryan, from a U.S. equity perspective, do you have anything to add to that?

Ryan Fitzgerald: Sure. So we take a little bit of a different approach on the U.S. and International side, I think mostly because it’s a function of opportunity. When we come to macro variables, we really can put all the macro variables into one of two buckets. There’s what we would call pure macro, and these are things such as a commodity price or interest rates, these sorts of things that will, in many times, and in certain equities, override all of the other variables in determining the outcome of those investments. In a mining company, for example, you can spend lots of time trying to figure out all of the new mines that are going to open up potentially over time. However, if you get the commodity price wrong, that will sort of override pretty much all of the other analysis that you do. And so when there’s that type of macro variable involved in an investment, we typically just look elsewhere, since we have lots of other places to go globally. Having said that, every investment has some macro element to it, whether it’s consumer spending affecting Consumer Discretionary stocks or perhaps the auto cycle, and how that impacts certain Industrials.

And the way we deal with that really comes down to our contrarianism. We don’t mind cyclicality as long as the end market over time is structurally growing. By the time we get involved with an investment that has some cyclicality embedded to it, we don’t know if it’s the bottom of the cycle. But a lot of bad news has already come out. The stock is most likely trading at a highly depressed valuation. And so with our long-term time horizon, our analysis is based on a three-year time horizon, even though we sometimes own stocks far longer than that, we can look at previous cycles and say, okay, when you’re buying during the cyclical downturn, the cycle over a three-year period, while we won’t know exactly when it sorts itself out, and usually there’s plenty of margin of safety in the valuation by the time we’re buying anyway. So these are sort of the ways that we try to take the macro element out of the equation as much as possible in order to reduce complexity.

Jessi Helm: Great. Thanks all of you for addressing that tough question. It looks like we’re out of time today, so I’d like to thank you, Kathy, Vim and Ryan, for sharing all those valuable insights with us and for shedding some light on the important themes that investors are facing today.

For anyone that may have submitted a question in the Q&A box, I welcome you to contact your Beutel Goodman representative with that question, and they’ll get back to you directly. You can also visit our website at beutelgoodman.com, where you’ll find a library of white papers, Insight articles, and previously recorded webinars on a variety of investment themes.

Thanks again everybody for joining us today, and we look forward to seeing you on our next edition of our 3 Key Questions. Until then, take care, and we wish you a great afternoon.

Beutel, Goodman & Company Ltd.

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