Investment Commentary and Outlook

April 2024

 

The first quarter of 2024 saw most equity markets climb the proverbial “wall of worry,” overcoming inflationary pressures and geopolitical tensions to post gains. Underlying economic strength, including impressive employment figures and positive corporate outlooks, gave investors confidence that a deep recession was unlikely, even after interest rate hikes in 2022 and 2023. Concerns about inflation and the timing of interest rate cuts by central banks contributed to occasional market jitters, but strong corporate earnings, remarkable technological innovation and a resurgence of “industrial America” contributed to the North American markets’ rise.

While short-term challenges and concerns have grabbed many headlines, the fundamental positives have prevailed. The U.S. remains strong and appears to have achieved a soft landing scenario. Corporate earnings have been better than expected, and while the Magnificent Seven continue to be the top performers, nearly 75% of the S&P 500 constituents have reported better-than-expected earnings. As a result, the S&P 500 reached all-time highs, rising above 5,000 for the first time in February. Consumption continued to drive growth, as inflation-adjusted annualized Gross Domestic Product rose above 3% in the fourth quarter, while unemployment remained below its long-term average. Finally, Purchasing Managers’ Indexes (PMIs) pointed to expansion in both the services and manufacturing sectors.

In the first quarter of 2024, Canadian capital markets also continued to navigate the evolving economic cross-currents of inflationary pressures, monetary and fiscal policies, and slowing domestic economic growth. Commodity prices, particularly oil and gold, reacted to tensions in the Middle East and inflationary fears, but robust corporate fundamentals also helped drive other sectors of the market. Smaller companies outperformed their larger capitalization brethren as continued growth combined with attractive valuations began to catch the eye of investors.

As is almost always the case, while pessimists fretted about the risk of recession and political instability, business leaders plowed ahead. Spending on artificial intelligence research and application development is boosting the technology sector, homebuilders continue to take advantage of the structural housing shortage in North America, and well-funded companies across a range of sectors are consolidating their competitors. Powerful trends, such as the on/near-shoring of manufacturing and technology-driven productivity gains, also offer a wealth of opportunities for forward-looking investors.

In Pembroke’s view, the macroeconomic picture remains murky. Investors seeking clarity are largely remembering the past with hindsight bias, and the outlook is never certain. Indeed, Pembroke’s portfolio managers view macroeconomic data as a minefield of distractions from the firm’s core focus of identifying high-quality growth companies run by shareholder-focused management teams.

The investment team continues to source new investments in sectors ranging from Industrials to Financials and is impressed by how many management teams have used their strong balance sheets to make acquisitions, invest in research, and distribution and buy back shares. Like Pembroke, they are not letting the 24-hour news cycle distract them from their long-term goals.

After difficult markets, such as those experienced in 2022 and much of 2023, history suggests there is reason for optimism. Just as bull markets overreach and reflect investor exuberance, bear markets fall to irrational lows and reflect investor fear. These market declines have generally presented opportunities for those with a multi-year view. The economy is moving forward, corporate profits are growing, and human ingenuity and ambition continue to drive innovation. For these reasons, we remain generally optimistic about the future and, as always, advise clients to take a balanced view.

 

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