The closing months of 2024 were a time of cautious optimism and apprehension, a strange dichotomy indeed. On the one hand, equity markets reached record levels supported by resilient corporate earnings and economic momentum in the United States. On the other, concerns about valuations and threats of tariffs by President-elect Donald Trump prompted a general sense of foreboding, leading many to question the sustainability of these record highs in 2025.
We have seen periods like this before and then, as now, our response is to be prepared. Just as airline passengers review safety protocols at the start of a flight, we plan our contingencies based on prudent assumptions. This does not signal our expectation of an imminent correction, any more than those airline passengers expect to need life rafts, but it does give us the confidence to navigate market turbulence if and when it arrives.
We believe that the economy can’t be consistently forecast, nor the markets consistently timed. We conclude from this that the only practical way to capture the premium long-term return of equities is to ride out their frequent, sometime significant, but historically always temporary declines. Historically, Coleford’s ownership of structurally-advantaged companies has led to lower downside volatility when markets become challenging. Therefore, we can sit back and have a more comfortable flight.
Global Markets: Shifting Policies and Transformative Tech
During the quarter, central banks around the world took steps to support their economies as inflation eased. The U.S. Federal Reserve Board cut rates twice. Between June and December, the Bank of Canada reduced its benchmark rate twice, with double-sized rate cuts from 4.25% to 3.25%, providing a boost to Canadian consumer spending and real estate activity. China’s government pledged additional spending and monetary easing to sustain growth and offset potential trade headwinds.
Despite recession-like slowdowns in other regions, the U.S. economy expanded at an annualized pace of 3.1%. Continued resilience in consumer spending, along with massive investment in artificial intelligence (AI) infrastructure and U.S. deficit spending, kept the U.S. business cycle from sliding into a downturn. Canada’s economy grew modestly at an annualized rate of 1.0%, and although jobs continue to be created, the unemployment rate (6.8% in November and 6.7% in December) remains a concern.
On a global basis, equity markets posted mixed performance over the quarter, shaped by changing monetary policies, ongoing trade uncertainties, and emerging technological shifts. In North America, markets reacted positively to expectations of pro-business policy changes from the incoming U.S. administration, although as noted, the threat of tariffs – particularly against Canadian exports – introduced uncertainty and anxiety.
The U.S. technology sector, once viewed as speculative, is now recognized as having some of the market’s highest-quality companies. Technological advancements in large U.S. tech stocks have eclipsed other equally remarkable breakthroughs in Energy, Healthcare and Electric Vehicle (EV) companies. For perspective, Energy equities only represent about 3% of the S&P 500’s market capitalization, while Information Technology represents approximately 32%.
It is worth noting however, that in the Energy sector, the hydraulic fracking revolution of two decades ago served to unlock abundant, low-cost natural gas from shale-rock formations. This offered U.S. industries a significant competitive edge, an advantage that continues to support the growth of energy-consumption industries such as EVs and hyperscale datacenters.
Then there is artificial intelligence. Much like the early days of fracking, it is difficult to predict how annual investments of ~$500B in AI research and development will reshape products and services over the next five to ten years.
What appears true is that the transformative potential of AI could significantly influence the trajectory of global markets and economies in the years ahead.
Trump Bump?
In the immediate aftermath of President Trump’s election victory, there was widespread consensus that a pro-business administration would further boost asset prices. Indeed, the “Trump Bump” initially captured headlines as markets welcomed the prospect of lower taxes and deregulation. However, from Election Day in November through year-end, the S&P 500 rose just 1.7%. This relatively modest gain suggests that much of the market’s optimism had already been priced in after a strong year-to-date performance leading up to the election. Elevated valuations also tempered further upside, hinting that investors were taking a more cautious stance while awaiting tangible policy developments.
Historical analysis suggests that periods following significant gains often require recalibrated expectations, with more modest returns and increased volatility likely in the year ahead. In short, today’s higher valuations and positive sentiment may temper future returns.
EQUITIES
During the quarter, we made the decision to sell our positions in BCE (Bell Canada) and Rogers. The Canadian telecommunications sector has faced numerous headwinds over the past five years, including slower growth, higher capital expenditures for upgrade and replacement purposes, and the need to satisfy yield-hungry shareholders. While some investors are willing to accept stagnant share prices in exchange for dividends, the free cash flow generated by these two businesses has proven insufficient to sustain current dividend levels, leading to increased balance sheet stress.
Although the recent sale of its minority stake in Maple Leaf Sports & Entertainment was expected to bolster its balance sheet, the subsequent acquisition of a U.S. fiber company for a similar amount raised concerns about BCE’s financial stability. Analysts widely anticipate a dividend cut in 2025, despite management’s steadfast determination to maintain the payout.
While Canada’s immigration policies have provided a tailwind for the telecom sector in recent years, proposed restrictions on immigration could negatively impact top-line growth in the near to medium term. In addition, satellite technologies such as Starlink present significant competitive threats for traditional telecom providers.
These risks underscore our view that the Canadian telecom space offers limited growth potential and heightened downside risks. Other investors may find opportunities in the sector, but we believe caution is warranted given the current landscape. In context, our combined investments in BCE and Rogers represented less than half of a normal position in our model portfolio.
FIXED INCOME
Interest rate expectations play a crucial role in shaping the value of currencies in the foreign exchange (FX) market. When market participants anticipate that a central bank will raise rates, they often shift funds into that country’s currency to capitalize on higher returns. This capital inflow typically drives demand for the currency, causing it to appreciate. Conversely, if expectations turn toward lower interest rates, investors are less inclined to hold that currency (as yields become less attractive), leading to weakness.
These swings in sentiment tend to occur before actual rate decisions are implemented, as traders and investors continuously evaluate a broad set of economic indicators, as well as central bank communications, and other signals. As a result, FX rates can react immediately to economic data releases – such as inflation or employment figures – that portend a future change in monetary policy. While interest rate announcements themselves are still influential, the market frequently “prices in” anticipated moves well ahead of time, highlighting the powerful influence of expectations in driving short-term exchange rate fluctuations. While interest rate expectations in Canada changed little during the fourth quarter, in the U.S. the market began “pricing in” higher interest rates.
The graphic illustrates this, as the market-implied overnight interest rate for Canada (in blue) moved little between September and December of 2024, while the market-implied overnight interest rate for the U.S. (in red) moved significantly higher.
Market-Implied Interest Rate Expectations
The widening gap between the red and blue lines at year end represents the market pricing in a future where the overnight interest rate in the U.S. is ~2.5% higher than in Canada. This movement is reflected in the value of the Canadian Dollar relative to the U.S. Dollar. The Canadian Dollar approached the lows last seen during the COVID-19 pandemic in March 2020, and the oil price crash in January 2016.
CLOSING THOUGHTS
As 2025 begins, we encourage our clients to maintain perspective. It is not possible to predict the future of the economy or capital markets. However, disciplined planning, diversified portfolios, and adherence to long-term objectives remain the bedrock of successful investing.
Just as safety protocols are a part of every flight, our comprehensive planning ensures that clients are prepared for the unexpected while enjoying the benefits of a well-constructed financial plan. We remain committed to helping our clients achieve their financial goals, no matter what the markets bring next.
Activity is the enemy of investment returns.
– Warren Buffett –
2024 Q4 Coleford Quarterly Commentary
Quarterly Commentary
FOURTH QUARTER 2024
Executive Summary
Conservative. Consistent. Committed.
PORTFOLIO MANAGEMENT TEAM
MACRO ENVIRONMENT
The closing months of 2024 were a time of cautious optimism and apprehension, a strange dichotomy indeed. On the one hand, equity markets reached record levels supported by resilient corporate earnings and economic momentum in the United States. On the other, concerns about valuations and threats of tariffs by President-elect Donald Trump prompted a general sense of foreboding, leading many to question the sustainability of these record highs in 2025.
We have seen periods like this before and then, as now, our response is to be prepared. Just as airline passengers review safety protocols at the start of a flight, we plan our contingencies based on prudent assumptions. This does not signal our expectation of an imminent correction, any more than those airline passengers expect to need life rafts, but it does give us the confidence to navigate market turbulence if and when it arrives.
We believe that the economy can’t be consistently forecast, nor the markets consistently timed. We conclude from this that the only practical way to capture the premium long-term return of equities is to ride out their frequent, sometime significant, but historically always temporary declines. Historically, Coleford’s ownership of structurally-advantaged companies has led to lower downside volatility when markets become challenging. Therefore, we can sit back and have a more comfortable flight.
Global Markets: Shifting Policies and Transformative Tech
During the quarter, central banks around the world took steps to support their economies as inflation eased. The U.S. Federal Reserve Board cut rates twice. Between June and December, the Bank of Canada reduced its benchmark rate twice, with double-sized rate cuts from 4.25% to 3.25%, providing a boost to Canadian consumer spending and real estate activity. China’s government pledged additional spending and monetary easing to sustain growth and offset potential trade headwinds.
Despite recession-like slowdowns in other regions, the U.S. economy expanded at an annualized pace of 3.1%. Continued resilience in consumer spending, along with massive investment in artificial intelligence (AI) infrastructure and U.S. deficit spending, kept the U.S. business cycle from sliding into a downturn. Canada’s economy grew modestly at an annualized rate of 1.0%, and although jobs continue to be created, the unemployment rate (6.8% in November and 6.7% in December) remains a concern.
On a global basis, equity markets posted mixed performance over the quarter, shaped by changing monetary policies, ongoing trade uncertainties, and emerging technological shifts. In North America, markets reacted positively to expectations of pro-business policy changes from the incoming U.S. administration, although as noted, the threat of tariffs – particularly against Canadian exports – introduced uncertainty and anxiety.
The U.S. technology sector, once viewed as speculative, is now recognized as having some of the market’s highest-quality companies. Technological advancements in large U.S. tech stocks have eclipsed other equally remarkable breakthroughs in Energy, Healthcare and Electric Vehicle (EV) companies. For perspective, Energy equities only represent about 3% of the S&P 500’s market capitalization, while Information Technology represents approximately 32%.
It is worth noting however, that in the Energy sector, the hydraulic fracking revolution of two decades ago served to unlock abundant, low-cost natural gas from shale-rock formations. This offered U.S. industries a significant competitive edge, an advantage that continues to support the growth of energy-consumption industries such as EVs and hyperscale datacenters.
Then there is artificial intelligence. Much like the early days of fracking, it is difficult to predict how annual investments of ~$500B in AI research and development will reshape products and services over the next five to ten years.
What appears true is that the transformative potential of AI could significantly influence the trajectory of global markets and economies in the years ahead.
Trump Bump?
In the immediate aftermath of President Trump’s election victory, there was widespread consensus that a pro-business administration would further boost asset prices. Indeed, the “Trump Bump” initially captured headlines as markets welcomed the prospect of lower taxes and deregulation. However, from Election Day in November through year-end, the S&P 500 rose just 1.7%. This relatively modest gain suggests that much of the market’s optimism had already been priced in after a strong year-to-date performance leading up to the election. Elevated valuations also tempered further upside, hinting that investors were taking a more cautious stance while awaiting tangible policy developments.
Historical analysis suggests that periods following significant gains often require recalibrated expectations, with more modest returns and increased volatility likely in the year ahead. In short, today’s higher valuations and positive sentiment may temper future returns.
EQUITIES
During the quarter, we made the decision to sell our positions in BCE (Bell Canada) and Rogers. The Canadian telecommunications sector has faced numerous headwinds over the past five years, including slower growth, higher capital expenditures for upgrade and replacement purposes, and the need to satisfy yield-hungry shareholders. While some investors are willing to accept stagnant share prices in exchange for dividends, the free cash flow generated by these two businesses has proven insufficient to sustain current dividend levels, leading to increased balance sheet stress.
Although the recent sale of its minority stake in Maple Leaf Sports & Entertainment was expected to bolster its balance sheet, the subsequent acquisition of a U.S. fiber company for a similar amount raised concerns about BCE’s financial stability. Analysts widely anticipate a dividend cut in 2025, despite management’s steadfast determination to maintain the payout.
While Canada’s immigration policies have provided a tailwind for the telecom sector in recent years, proposed restrictions on immigration could negatively impact top-line growth in the near to medium term. In addition, satellite technologies such as Starlink present significant competitive threats for traditional telecom providers.
These risks underscore our view that the Canadian telecom space offers limited growth potential and heightened downside risks. Other investors may find opportunities in the sector, but we believe caution is warranted given the current landscape. In context, our combined investments in BCE and Rogers represented less than half of a normal position in our model portfolio.
FIXED INCOME
Interest rate expectations play a crucial role in shaping the value of currencies in the foreign exchange (FX) market. When market participants anticipate that a central bank will raise rates, they often shift funds into that country’s currency to capitalize on higher returns. This capital inflow typically drives demand for the currency, causing it to appreciate. Conversely, if expectations turn toward lower interest rates, investors are less inclined to hold that currency (as yields become less attractive), leading to weakness.
These swings in sentiment tend to occur before actual rate decisions are implemented, as traders and investors continuously evaluate a broad set of economic indicators, as well as central bank communications, and other signals. As a result, FX rates can react immediately to economic data releases – such as inflation or employment figures – that portend a future change in monetary policy. While interest rate announcements themselves are still influential, the market frequently “prices in” anticipated moves well ahead of time, highlighting the powerful influence of expectations in driving short-term exchange rate fluctuations. While interest rate expectations in Canada changed little during the fourth quarter, in the U.S. the market began “pricing in” higher interest rates.
The graphic illustrates this, as the market-implied overnight interest rate for Canada (in blue) moved little between September and December of 2024, while the market-implied overnight interest rate for the U.S. (in red) moved significantly higher.
Market-Implied Interest Rate Expectations
The widening gap between the red and blue lines at year end represents the market pricing in a future where the overnight interest rate in the U.S. is ~2.5% higher than in Canada. This movement is reflected in the value of the Canadian Dollar relative to the U.S. Dollar. The Canadian Dollar approached the lows last seen during the COVID-19 pandemic in March 2020, and the oil price crash in January 2016.
CLOSING THOUGHTS
As 2025 begins, we encourage our clients to maintain perspective. It is not possible to predict the future of the economy or capital markets. However, disciplined planning, diversified portfolios, and adherence to long-term objectives remain the bedrock of successful investing.
Just as safety protocols are a part of every flight, our comprehensive planning ensures that clients are prepared for the unexpected while enjoying the benefits of a well-constructed financial plan. We remain committed to helping our clients achieve their financial goals, no matter what the markets bring next.