FOCUS 2026: CIO insights: What lies ahead - Andrew Marchese

Andrew Marchese offers his perspective on the trends, risks and opportunities defining the investment landscape.

Transcript

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Subtitles are AI Generated

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Good morning, everyone.

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Pleasure to be here, and hello to everybody on the line

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today.

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I'm going to take about the next 35 to 40 minutes to

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walk you through kind of what I typically do, a look back on

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the market, where we've come from, where I think we are today

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and where we're going to go. Hopefully, I'm to dovetail that

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with some of the things that you heard yesterday from our

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speakers and the speakers that we have later on this morning.

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We got a lot to go through today.

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I think, you know, in preparing some of these slides...

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We talk about AI almost endlessly, because we have to talk

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about A.I. But when you look at the other stuff, it's

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actually a fairly kind of benign

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environment.

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And we're dealing with a lot of noise day in and day

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out, a lot opinions, geopolitical,

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financial.

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Unfortunately, it makes our jobs as advisors,

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as money managers, a lot more challenging, because you gotta

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sift through a lot more to get to the heart of what really

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matters. And so as I always do, I think

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the market, equities in particular, but other risk

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assets. We'll talk a little bit about fixed income.

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We'll a little about total portfolios.

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It really comes down to these things, always these things.

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So I'm going to really focus on these four things,

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corporate profits, interest rates, money supply,

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and valuation. And we're gonna weave

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in between all those, because the two things in the middle,

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liquidity and interest rates, affect the two things at the

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end, which are corporate profits and valuation.

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So hopefully, by the end of this, what I've done for you is

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painted a mosaic that leaves you with a lot of talking

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points to take to your clients, answer a lot questions

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that your clients may have, and so that you can

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make the best investment decisions going forward,

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knowing full well that really good investing isn't

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exercise of certainty.

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But rather one of a probabilistic exercise.

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We wanna really stack our chips, so

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to speak, in one direction where we think the greatest

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likelihood of success is.

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And hopefully, this deck and these slides will help

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illustrate that.

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So where we are today, for those of you who heard me at the

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start of the year, I said coming into the year the economy

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looked pretty good and we're gonna show you some data to

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actually support that. Things from an economic perspective.

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Have actually come to fruition, particularly in North

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America. Lot of it AI driven, but it has

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been diffusive throughout other industries and sectors.

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So that's really good to see.

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We had a very accommodative monetary backdrop and

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that may be transitioning a little bit from kind of an

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early cycle playbook to something that resembles more

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of a mid cycle play book.

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And all the while, the backdrop for things like employment

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and other macroeconomic indicators, I would say, are

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quite stable right now.

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So what we thought was gonna happen to start the year is

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actually playing out, so that's good.

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There have been a tonne of positive revisions

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in North America when looking at corporate profits.

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Okay, so we came into the year, Bloomberg forecasts were

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basically for about 12 to 14% earnings growth

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in the S&P 500.

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That number is now over 30% as

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we look forward to year end, and about 12% to

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13% for 2027.

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So the bar keeps getting ratcheting higher.

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Now, a lot of that in the IT space, namely

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about 44 companies that I

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would say are either strongly or loosely correlated with

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AI are driving that.

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Combined or aggregate earnings growth has been

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about 41% or at least forecasted to be 41%

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by year end. But the other stuff in sectors like

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transportation, capital goods, some things

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in the consumer space, some things and the financial space

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additionally have been quite strong.

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So that's all good.

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Valuation is not your friend, but it's not

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anything to get too alarmed about right now.

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In fact, it's getting a little bit better.

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You heard from some of our speakers yesterday that

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while technology-related PE

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multiples are expanding and moving up,

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the equal weighted S&P or non-related or

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unrelated to technology stocks, their valuation

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multiples are actually compressing.

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That's really normal at this part

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of the cycle. And we're gonna go through reasons why that may

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be occurring.

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Obviously Today,

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the most topical talking point is bond yields moving higher.

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That further compresses the equity risk premium.

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And the concern would be twofold.

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One, bonds and equities are increasingly correlated.

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If bond yields back up, that's bad for equities.

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It's also bad for fixed income.

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It speaks to diversification away from those two asset

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classes. So we're going to touch on that a little bit.

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And I think the greatest risk in the market in general is

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AI. There is a lot of hope.

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There is lot of spending.

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It seems insatiable from a capex perspective.

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I think it touches a lot more than the average investor

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truly appreciates.

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If this thing was to go south, and I'm not saying it will go

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south. But if it were to go South,

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the correlation in all risk assets is really gonna rise.

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And I think that's kind of a really unappreciated risk

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going out there. So we're gonna touch on all that.

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So firstly, The graph that you see before you here

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is a line graph around North American

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manufacturing and service PMIs.

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I'll call your attention to the start of the year.

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So December, 2025, and I said, you know, things are gonna

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look better from an economic standpoint, and indeed that's

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come to fruition.

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When you're below the 50 line of

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the PMI index, you're contracting, when you're above

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it, you're expanding, we're in expansionary phase.

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There's been talk about having to cool the economy a little

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bit, concerns about inflation.

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I'm going to take the other side of that.

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I think that is actually a misplaced topic

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of discussion.

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So right now, the market is implying about 100 basis points

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higher in short-term rates for both the United States

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and Canada.

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That might be a little aggressive.

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Back in 2022,

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There was a lot of conjecture in the market. We were coming

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off of a very strong 21.

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And I said...

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Market implied policy rate at the time was for about 100 to

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125 basis points of rate hikes.

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That was way too low.

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I made the claim then is the greatest risk in the marketplace

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was highly valued, high PE stocks.

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We don't have that same monetary backdrop

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that we need to worry about with respect to PE

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multiples. I'll call your attention to something else on this

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graph, which is very noteworthy, which is how you may want to

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think about your total portfolios.

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If you look at the blue line and focus on the blue line in

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periods like 2014, 2015, you see

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kind of that line contracting a little bit, falling below

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50. You see other times, 2008,

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obviously, the global financial crisis.

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Periods like that where things start to

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end in a cycle, quality in terms

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of equities start to outperform.

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So you move from a cyclical-based leadership in the

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marketplace. To something where quality, low

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volatility earnings, certainty of cash

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flow matter more, people pay up for that.

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So that kind of paints a roadmap from a macroeconomic

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standpoint about what you should be looking for from

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your portfolio managers or your choice of product

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when offering that to your clients in a total

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multi-asset portfolio.

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So the economy is good and expanding.

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Many of you have seen this chart before.

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So it's basically the global economic cycle.

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When reading from left to right, you talk about early cycle

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expansion. Monetary backdrop is extremely

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accommodative.

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GDP numbers move up.

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Inflation starts to build.

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You migrate through the mid-cycle.

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Inflations really starts to bill.

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And then it's incumbent upon global central banks to then

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rein in the money supply, slow down inflation,

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slow down growth. You get into the late cycle, and then

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if you do it properly, you just softly land.

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If it's very hard and restrictive, you

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get a recession.

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This is noteworthy because it tells you, A, where we are

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today, but B, certain groups of stocks

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tend to do better at different times in the cycle.

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And right now, we clearly have a mid-cycle

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kind of backdrop for both Canada.

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And the United States.

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That might be hard to say a little bit with respect

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to Canada because economic numbers have been poor.

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But if you look at the behaviour of

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stocks and what's actually led, it resembled year

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to date more of an early cycle backdrop.

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And if we get into a regime where you have more

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interest rate hikes, that will transition away

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from those stocks that have been successful this year.

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Think early cycle stocks like transportation, right?

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Names like in trucking, in rails,

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some things in capital goods, certainly things

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in the consumer discretionary side which have

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posted very strong numbers.

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That stuff will tend to run its course and you'll start to

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move more into a mid cycle backdrop.

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Consistent with all that, you'll have the secular backdrop

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in IT which is kind of

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moving to its own drum beat and we'll talk a little bit more

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about that. But right now.

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Kind of a mid-cycle backdrop for most of North America.

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This chart, a little busy, but I'll focus on two things.

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The dark navy blue line is the performance of the S&P.

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The earnings I really want you to focus on

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are in the orange line, which is the third one down,

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and the green line, okay?

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So the orange one would be the forecast for earnings growth

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in 2026.

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Okay, you can see how far that number has been ratcheted up

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since the start of the year.

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So at this time last year, we were looking at about 11, 12%

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growth, which is kind of where we're at right now for 2027.

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And largely speaking, earnings growth has

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met that, XAI related, and those 44

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stocks that I talked about that are either strongly or

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loosely correlated to the AI CapEx bubble,

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they've really driven earnings growth themselves in excess of

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40%. So what we have to ask ourselves as investors

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is does that number get?

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Incrementally better from this point because the bar is

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really high. You heard yesterday like one of the

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great investment theses

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is a story that's bad and getting less

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bad. The corollary or the opposite is also true.

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Things that have been great and are not necessarily falling

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apart but aren't quite as good as what they

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used to be. And so the market will start anticipating

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kind of rolling over in second or third order

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effects. So these numbers are gonna be really critical

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to meet as we move into 2027.

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At the start of the year, I said that the returns in the

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marketplace would be most governed by earnings growth because

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we had little to no room for valuation expansion.

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Moreover, we were probably in a flat type of interest

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rate environment, and now we're actually in a tightening

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interest rate environments.

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So as we moved forward into 2077,

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And once again, I think that the The fate of the

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market or the trajectory of the market will be predominantly

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driven by earnings growth.

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And you're starting to see the multiple compression as we

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speak.

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So to put that into context, why

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I think we might not be going up as much in interest rates

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as some are forecasting.

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If you look at this chart, the gold line is the natural rate

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of interest, which you can't observe really in real time.

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Kind of gonna go back and look at it.

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But it's the interest rate at where growth and inflation

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are perfectly balanced.

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If short-term rates are above that gold line, you're in

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a restrictive monetary environment.

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If you're below the line, you're a very accommodative

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environment. Clearly, things are nice when you're an

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accommodative of environment.

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But if you look back to 1983 on this chart,

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you can see for prolonged periods of restricted monetary

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backdrop, Eventually, you get a cooling of

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the economy, and at times, then, a recession.

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So look, in 1999, we had the NASDAQ

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bubble being built.

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It was a capex-driven bubble that eventually

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rise in interest rates, short-circuited

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the whole thing.

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We were restricted for about, call it about five to six years

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of that period of time before the interest rates truly bit,

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and the capex cycle ran its course.

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But we've largely been living in an accommodative backdrop.

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That brings with it many other problems, which I'll

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touch upon in a moment, but suffice it

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to say right now, we're in an accommodate backdrop and I

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don't really see the need for rates to

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go up for what market, if you look at Bloomberg,

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market implied policy rates say about 100 basis points higher

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in both the U.S.

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And Canada.

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And I tend to think, personally I believe it's a little

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excessive at this point.

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One, because I do think inflation is transient.

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And as Urien touched upon yesterday,

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there might be more going on from a technical perspective

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when talking about the US 10-year yield than there is real

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kind of economic theory behind what's

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going on. So suffice it to say, we're still in a

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accommodative backdrop. I don't know if we're going to get

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into a restricted period of time.

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And this basically is the market implied policy rates for

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the U.S. Going forward.

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You can see that the Fed Titan came

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off a little bit. That spurred some of that earnings

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growth that I talked about in the non-AI and cyclical sectors

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of the economy. And now the forecast is for a

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little higher as we go forward into next year.

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If we do get a settling down in the marketplace and

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this number kind of comes in under, I think

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that will be in general statement, good for

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risk assets.

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So, this is the question I've been getting probably

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the most for the last four weeks or so and we've

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seen a real move up in the 10-year yield.

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There's a lot of reason for that.

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We talked about the technical reasons yesterday.

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This is kind of the ascending triangle.

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We've painted on this graph that Urien talked about

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yesterday, so there's a technical reason why it may move

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higher, and that's causing a correlation between

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both equities in fixed income.

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Um Few things going on here.

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The real yield, when you look at it, is about 2.8%,

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a little bit higher than when we first kind of published this

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graph at 2.45.

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Nominal GDP, I'm sorry, real GDP is probably closer

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to 2.5%, so that's a little cumbersome.

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If you look back to 1999, people asked me, well, 10-year

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yields were in excess of 6% back then.

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Nominal and real GDP was much higher back then too.

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So I think you kind of cap out here.

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There's a few things going on that are more cyclical and

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secular. On the cyclical side, it would not surprise me if

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this number kind of came off a little bit.

15:52.584 --> 15:55.154

And I think from a fixed income perspective, if you were to

15:55.154 --> 15:58.691

ask me, are the next 100 basis points higher or

15:58.691 --> 16:01.327

lower in terms of bond yields, I think there's a greater

16:01.327 --> 16:03.996

probability it's actually lower, not higher.

16:03.996 --> 16:07.032

And because of the convexity of fixed income, I think

16:07.032 --> 16:09.201

probabilistically, that is a word,

16:10.536 --> 16:11.937

I would take... Thank you.

16:11.937 --> 16:14.106

Fixed income on a cyclical basis.

16:14.106 --> 16:17.309

That being said, on a secular basis, there is

16:17.309 --> 16:20.279

way too much money sloshing around in the system.

16:20.279 --> 16:23.749

We have issues like dollar debasement, an onslaught

16:23.749 --> 16:26.251

on fiat currencies, U.S.

16:26.251 --> 16:29.121

Deficits and U. S. Government debt that are off the charts

16:29.121 --> 16:32.391

that all put this number at

16:32.391 --> 16:35.794

risk of actually on a secular basis moving much higher.

16:36.962 --> 16:40.032

The reason it wouldn't is actually, in

16:40.032 --> 16:42.201

my opinion, tied to AI.

16:42.201 --> 16:44.770

And I think that's the holy grail that a lot of people might

16:44.770 --> 16:46.805

not be talking about.

16:46.805 --> 16:50.009

So in the interim, on a cyclical basis, I think there's

16:50.009 --> 16:52.878

room for kind of fixed income getting better, but on a

16:52.878 --> 16:56.115

multi-year basis, the structural things

16:56.115 --> 16:59.151

going on in the economy point to a number that would actually

16:59.151 --> 17:02.221

be higher. All the reason more for, and I

17:02.221 --> 17:05.491

agree with Yuri in 100% that a balanced

17:05.491 --> 17:08.827

portfolio is no longer a 60-40 portfolio,

17:08.827 --> 17:11.897

but a 60 20 20 portfolio, where the additional

17:11.897 --> 17:15.467

20 comes from your fixed income allocation

17:15.467 --> 17:18.604

and goes into things that are completely uncorrelated

17:18.604 --> 17:21.607

with both fixed income and equities, namely hard assets.

17:23.275 --> 17:26.011

This chart tells you though, the credit backdrop is actually

17:26.011 --> 17:29.181

quite benign right now. So if you focus your attention on

17:29.181 --> 17:32.251

the light blue line and the shaded blue area, you can see

17:32.251 --> 17:34.720

that credit spreads are actually quite been benign.

17:34.720 --> 17:37.823

We've drawn this chart back to 1990, and there's not

17:37.823 --> 17:40.926

much going on right now, but the dark blue line,

17:40.926 --> 17:42.761

again, talking about the four pillars,

17:44.029 --> 17:47.266

paints a picture of there is zero equity risk

17:47.266 --> 17:50.669

premium right now if you take the earnings yield of the S&P

17:50.669 --> 17:52.571

minus 10 year bond yield.

17:52.571 --> 17:54.740

You get a number that's extremely close to zero.

17:54.740 --> 17:57.776

You can see it really the last time and

17:57.776 --> 18:00.813

only time really in history where it went negative was

18:00.813 --> 18:02.748

during the dot com bubble.

18:02.748 --> 18:04.983

So you don't wanna repeat that.

18:04.983 --> 18:07.319

When I was in business school, we used to talk about equity

18:07.319 --> 18:09.254

risk premiums at 6%.

18:09.254 --> 18:12.691

We used to run our

18:12.691 --> 18:16.595

cap end models all off of 6%, which seems like

18:16.595 --> 18:19.264

that's gone the way of the dodo bird and whatnot.

18:19.264 --> 18:22.468

So with monetary repression, and

18:22.468 --> 18:25.637

a lot of other factors at play, huge amount of

18:25.637 --> 18:28.340

money supply, I would envision that this number, other than

18:28.340 --> 18:31.410

in times of deep crises, probably continues

18:31.410 --> 18:35.080

to gravitate in that zero to 200 basis points,

18:35.080 --> 18:36.615

positively range.

18:38.951 --> 18:42.020

The other question we got is people getting concerned about

18:42.020 --> 18:46.458

the fact that equity markets have been particularly strong.

18:46.458 --> 18:49.695

And I was speaking at an event in London,

18:49.695 --> 18:52.965

Ontario, about 12, 13 months ago,

18:52.965 --> 18:55.701

and it was one of the questions I had because five-year

18:55.701 --> 18:59.805

returns for a lot of markets were about 15%,

18:59.805 --> 19:03.208

compounded over a five- year basis, and

19:03.208 --> 19:05.978

said there's no way things could get better, I was saying at

19:05.978 --> 19:08.480

the time. Things actually look like they're gonna get better,

19:08.480 --> 19:11.250

and we've had a pretty good 12 months since that point in

19:11.250 --> 19:14.686

time. So it kinda just, sometimes you just wanna use

19:14.686 --> 19:17.789

a sanity check about where you are in this world, and you

19:17.789 --> 19:21.293

can see right now that the five year CAGR for the S&P,

19:21.293 --> 19:24.463

despite all the extremism going on in the IT sector

19:24.463 --> 19:27.599

and some other parts of the market, it's actually

19:27.599 --> 19:29.735

not that bad historically.

19:29.735 --> 19:32.905

So the five-year rolling compound

19:32.905 --> 19:36.608

annual return for the SMP is 10.4%.

19:36.642 --> 19:38.610

And we're just modestly above that.

19:38.610 --> 19:40.479

So it's always a good sanity check.

19:40.479 --> 19:43.048

That doesn't tell you where we're going on a multi-year

19:43.048 --> 19:45.951

basis. It doesn't you what the next 12 months is gonna look

19:45.951 --> 19:50.022

like if it's double digits, single digits, negative returns.

19:50.022 --> 19:53.158

But it's a sanity check to at least say things haven't been

19:53.158 --> 19:56.395

as bubbly as you might think they are and sometimes as

19:56.395 --> 19:59.631

they feel. Because a lot of the rhetoric has to

19:59.631 --> 20:03.101

do with things on the technology side referencing

20:03.101 --> 20:06.338

1999, you know,

20:06.338 --> 20:08.507

a lot of concern about what's going on in the general

20:08.507 --> 20:11.543

economy, trade wars, geopolitical

20:11.543 --> 20:14.846

risk, and you kind of think, well, things maybe are just

20:14.846 --> 20:17.649

poised to reverse very quickly because things have been too

20:17.649 --> 20:19.284

good for too long.

20:19.284 --> 20:21.119

According to this chart, not necessarily so.

20:21.119 --> 20:23.855

So it's nothing more than a sanity check to make sure we're

20:23.855 --> 20:26.892

kind of focused on some of the right things.

20:26.892 --> 20:30.028

So if we turn our attention back to one of

20:30.028 --> 20:32.564

the pillars, which is liquidity and money supply,

20:33.632 --> 20:36.401

This is what's driving asset prices.

20:36.401 --> 20:38.737

I'm very convicted in this.

20:38.737 --> 20:41.840

And I think if you think about all the risk assets

20:41.840 --> 20:44.977

in the world, we think about them and price them in

20:44.977 --> 20:47.212

nominal terms. We don't price them real terms.

20:47.212 --> 20:50.148

We may think about and analyse them in real terms, but we

20:50.148 --> 20:52.150

price them in nominal turns.

20:52.150 --> 20:55.921

And when you put this much money in the system,

20:55.921 --> 20:59.124

you have no choice to go out in the risk curve and it bids up

20:59.124 --> 21:02.294

the nominal price of equities and real estate and land

21:02.294 --> 21:04.029

and so on and so forth.

21:04.029 --> 21:06.198

Commodities to a certain degree.

21:06.198 --> 21:09.301

And so the chart on the left just basically shows you that in

21:09.301 --> 21:12.838

times of crises, whether it's big or small,

21:12.838 --> 21:16.208

central banks have been poised to cut rates

21:16.208 --> 21:18.310

and really hard.

21:18.310 --> 21:21.013

Obviously we saw that in the GFC and save the financial

21:21.013 --> 21:24.049

system. We saw it in COVID, but we really never took

21:24.049 --> 21:25.951

capital out of the system.

21:25.951 --> 21:29.021

And the amount of liquidity that we pumped into the

21:29.021 --> 21:32.658

system during the pandemic was about 4 to 5x

21:32.658 --> 21:36.094

higher. Than what occurred during the global financial

21:36.094 --> 21:37.963

crisis. Think about that for a second.

21:37.963 --> 21:40.198

And we really never extracted it.

21:41.700 --> 21:44.836

So people like Dan DuPont, who will point to the market being

21:44.836 --> 21:47.973

expensive, the graph on the right is one of the

21:47.973 --> 21:51.076

things you look at. So they look at not a conventional PE

21:51.076 --> 21:54.279

multiple, but a price to book multiple that is

21:54.279 --> 21:57.149

in excess of the high that we saw in March of 2000.

21:57.182 --> 21:59.318

So...

21:59.318 --> 22:01.353

Some would say this is justified.

22:01.353 --> 22:05.023

The constituency of the S&P 500 is

22:05.023 --> 22:08.393

much better in terms of ROE than

22:08.393 --> 22:11.530

say it was in the 70s or 80s and therefore these are

22:11.530 --> 22:14.833

higher ROE business, higher ROIC businesses, and

22:14.833 --> 22:18.036

therefore should trade at a higher multiple on

22:18.036 --> 22:19.137

a price to book basis.

22:21.673 --> 22:23.508

I can get behind that a little bit.

22:23.508 --> 22:26.545

There's a little but of flaws in that, but suffice to say

22:26.545 --> 22:29.748

certain things are not cheap and are priced for basically

22:29.748 --> 22:33.018

a continuation of the ROE backdrop that you

22:33.018 --> 22:36.088

have seen into perpetuity and maybe that's where

22:36.088 --> 22:39.691

the flaw is. If we look at it on an earnings basis,

22:39.691 --> 22:43.028

the overall S&P right now is 21 times.

22:43.061 --> 22:44.596

It's neither here nor there.

22:44.596 --> 22:46.498

It's not too hot, not too cold.

22:46.498 --> 22:48.500

You could argue maybe probably in the top quartile.

22:48.500 --> 22:51.670

But the kind of the

22:51.670 --> 22:55.006

equal weighted S&P, taking out the tech influence,

22:55.006 --> 22:57.542

is somewhere closer to 17, 16 times.

22:57.542 --> 22:58.844

So that's not bad at all.

23:00.045 --> 23:03.415

Again, you can't really hope for too much multiple expansion

23:03.415 --> 23:06.284

in an environment where the next interest rate move is

23:06.284 --> 23:07.619

probably higher.

23:07.619 --> 23:10.222

So the return off your investments, particularly on the

23:10.222 --> 23:13.024

equity side, are going to have to come from corporate profit

23:13.024 --> 23:16.261

growth that exceeds estimates, and therefore

23:16.261 --> 23:18.797

the stock is a lot cheaper than what you might think it is.

23:20.699 --> 23:23.702

This is another way of looking at the effects that money

23:23.702 --> 23:26.371

supply has on the overall market.

23:26.371 --> 23:29.408

So the dark line, dark black line is basically the

23:29.408 --> 23:32.778

MSCI equity index.

23:32.778 --> 23:35.814

And you can see all the growth in the money supply in

23:35.814 --> 23:38.784

the orange line, a pretty tight correlation.

23:38.784 --> 23:41.987

Again, injecting capital into the system, I

23:41.987 --> 23:45.424

think has been one of the foibles of keeping asset prices

23:45.424 --> 23:47.292

afloat here.

23:47.292 --> 23:50.095

We never really retracted it in a big way.

23:50.095 --> 23:52.531

And so that just lets you know what's going on.

23:52.531 --> 23:55.634

The other thing I look at are other asset

23:55.634 --> 23:58.837

classes. We saw this coming out of the pandemic and

23:58.837 --> 24:01.239

we're starting to see it again.

24:01.239 --> 24:05.610

Things at auctions like jewellery,

24:05.610 --> 24:09.014

automobiles, art are starting to get crazy

24:09.014 --> 24:10.415

priced again.

24:10.415 --> 24:13.618

And it's just a symptom of good times and money looking

24:13.618 --> 24:16.288

for other homes to diversify.

24:16.288 --> 24:19.658

So there is certain amount of speculation

24:19.658 --> 24:22.627

in the system. That's why when you get into a tightening

24:22.627 --> 24:25.831

regime, it can be really hard, at least on

24:25.831 --> 24:28.900

a short term basis, to the price of risk assets, namely

24:28.900 --> 24:30.168

here, equities.

24:34.706 --> 24:37.876

So, last thing to say on interest

24:37.876 --> 24:41.079

rates and money supply affecting valuations.

24:41.079 --> 24:42.647

The two are working in lockstep.

24:42.647 --> 24:46.284

Here we have a graph of the

24:46.284 --> 24:49.521

US equity market and almost a

24:49.521 --> 24:51.723

one-to-one correlation with margin debt.

24:52.791 --> 24:55.927

You borrow, you carry, your returns

24:55.927 --> 24:59.498

relative to the cost of carry are much higher and Therefore,

24:59.498 --> 25:00.765

it makes sense to do so.

25:02.701 --> 25:05.537

And you can see how it just spawns changes in the markets

25:05.537 --> 25:07.539

almost on a one-on-one basis.

25:07.539 --> 25:10.342

This is very noteworthy because I think it helps to explain

25:10.342 --> 25:13.478

also to your clients what's actually going on in

25:13.478 --> 25:16.548

the present. We used to get a lot of feedback

25:16.548 --> 25:18.850

from advisors saying, you know, a certain number of my

25:18.850 --> 25:21.720

clients are looking at their neighbours or people they know

25:21.720 --> 25:24.890

and wondering if they're in the right investments

25:24.890 --> 25:28.293

a lot of times because their returns are

25:28.293 --> 25:31.263

modest while other people are enjoying kind of the.

25:31.263 --> 25:34.900

The tail ends of kind of speculation and all that

25:34.900 --> 25:35.901

entails.

25:36.468 --> 25:39.804

My point, a lot of this is, a lot this speculation

25:39.804 --> 25:41.406

is really governed by this.

25:41.406 --> 25:44.476

When this starts to dry up, the speculation dries up with

25:44.476 --> 25:47.479

it. So it's noteworthy.

25:47.479 --> 25:50.882

We deal with it every day as PMs and

25:50.882 --> 25:52.951

thinking about stocks.

25:52.951 --> 25:56.021

And I don't think this changes for a while,

25:56.021 --> 25:59.124

quite frankly, because the forces that be from a

25:59.124 --> 26:02.394

monetary and fiscal perspective to change this doesn't really

26:02.394 --> 26:04.963

exist. This is the world we're living in.

26:04.963 --> 26:08.166

The cycles will change, but I think I don't

26:08.166 --> 26:11.269

know however you kind of withdraw all the

26:11.269 --> 26:13.805

capital from the monetary system.

26:13.805 --> 26:16.841

That kind of leads us into some

26:16.841 --> 26:19.978

of the diversification strategies we have to employ.

26:19.978 --> 26:21.980

So I talked about the 60, 2020.

26:23.715 --> 26:25.584

One of the things that's going on is gold.

26:25.584 --> 26:28.486

Obviously, we had a tremendous bull market in bullion last

26:28.486 --> 26:31.856

year. Bullion was up about 61% last year,

26:31.856 --> 26:34.259

the stocks were up actually a lot more.

26:34.259 --> 26:37.395

I think the TSX gold index, which at the time

26:37.395 --> 26:40.765

closed the year at about 15% of the TSx,

26:40.765 --> 26:44.502

it's about up, I think it returned about 131%.

26:44.502 --> 26:45.503

So.

26:46.237 --> 26:49.307

As long as money supply is out there in

26:49.307 --> 26:52.410

the fashion and of the magnitude it is, I think

26:52.410 --> 26:55.614

there is a long-term bull thesis around gold.

26:55.614 --> 26:58.249

Urien talked a little bit about Bitcoin yesterday.

26:59.718 --> 27:02.854

I'm a little less comfortable with that and it's

27:02.854 --> 27:06.257

actually related to technology.

27:06.257 --> 27:09.894

I actually think there will come a day where

27:09.894 --> 27:11.630

you can hack Bitcoin.

27:11.630 --> 27:14.699

And I always worry that it's hard to talk about a

27:14.699 --> 27:17.936

store of value. That is off the

27:17.936 --> 27:21.072

grid in the financial system, but to

27:21.072 --> 27:24.442

use it, you would theory have to bring it into the grid.

27:24.442 --> 27:27.612

So out of cold storage, and if you can hack

27:27.612 --> 27:30.048

it, is it really a store of value?

27:30.081 --> 27:32.651

I worry about that, there's no evidence or proof to

27:32.651 --> 27:35.787

substantiate that opinion today, but I

27:35.787 --> 27:38.657

think it's actually a really real risk, whereas if you got

27:38.657 --> 27:41.493

something you can touch, and you gotta take out in a

27:41.493 --> 27:44.496

wheelbarrow from wherever you got it stored.

27:45.930 --> 27:49.200

I think it has a lot more support around it.

27:49.200 --> 27:51.269

Land would also fall into this bucket.

27:52.570 --> 27:55.640

So anything that's a hard asset would support

27:55.640 --> 27:59.277

the fact that we're living in a very egregious

27:59.277 --> 28:02.580

monetary backdrop and the price of

28:02.580 --> 28:05.650

that hard assets, commodities, other forms of currency,

28:05.650 --> 28:09.054

which is gold, things like land should rise

28:09.054 --> 28:10.055

over time.

28:12.490 --> 28:14.959

And so as we talked about yesterday,

28:16.561 --> 28:18.830

you can't talk about any.

28:18.830 --> 28:22.000

The rule about AI is you always have to talk about AI.

28:22.000 --> 28:23.601

So when does this all end?

28:23.601 --> 28:25.970

And I think you heard from multiple people yesterday.

28:25.970 --> 28:28.306

Nobody really knows. I would concur with that.

28:28.306 --> 28:31.910

I don't think anybody really knows I thought Steve Dufour

28:31.910 --> 28:33.078

said something really.

28:35.346 --> 28:37.716

President, and I think he's right,

28:38.750 --> 28:41.653

the use of tokens is only gonna climb.

28:41.653 --> 28:44.689

And here's the positive feedback loop for continued

28:44.689 --> 28:48.159

CapEx growth by the hyperscalers,

28:49.494 --> 28:52.731

is basically the utility of these tokens and AI

28:52.731 --> 28:56.000

models rises, which drives down the

28:56.000 --> 28:59.137

cost of tokens, which spawns more

28:59.137 --> 29:01.673

investment in AI.

29:01.673 --> 29:04.743

Users of AI see its utility and can

29:04.743 --> 29:06.544

justify a return.

29:06.544 --> 29:09.781

As you get more investment, price should fall with

29:09.781 --> 29:12.250

more utility, and so on and so forth.

29:12.250 --> 29:15.320

And you get this positive feedback loop.

29:15.320 --> 29:18.757

But the key is that the token costs need to fall.

29:18.757 --> 29:22.160

And they only fall as the utility rises.

29:22.160 --> 29:25.363

At some point, we have to demonstrate that

29:25.363 --> 29:28.600

there is a meaningful return on invested

29:28.600 --> 29:31.703

capital. That exceeds the cost of capital

29:31.703 --> 29:33.638

for all of this stuff.

29:33.638 --> 29:36.741

And so I don't know what models win at the end

29:36.741 --> 29:38.209

of the day.

29:38.209 --> 29:41.579

I'm not so sure we should even care.

29:41.579 --> 29:44.749

Because the question that I think we really need to

29:44.749 --> 29:47.652

ask ourselves at the of the end

29:49.687 --> 29:52.457

I get asked the question, does this remind you of 99?

29:52.457 --> 29:55.260

And there are some similarities, and there are some

29:55.260 --> 29:56.261

differences.

29:58.596 --> 30:01.800

But the thing that reminds me the most of 99 is we spent an

30:01.800 --> 30:05.470

inordinate amount of time of talking about companies who

30:05.470 --> 30:08.339

led the internet build out.

30:08.339 --> 30:11.976

Cisco, EMC,

30:11.976 --> 30:14.045

Nortel, Worldcom,

30:15.079 --> 30:18.149

these companies are either gone or

30:18.149 --> 30:20.185

a shell of themselves.

30:20.185 --> 30:24.522

And the true beneficiaries and all the economic returns

30:24.522 --> 30:27.859

fell to the users of the internet, which on new

30:27.859 --> 30:29.160

industries.

30:29.160 --> 30:33.164

New companies that weren't even on the map in 2000,

30:33.164 --> 30:35.900

and allowed us to live and work in a way that we couldn't

30:35.900 --> 30:38.536

possibly dream of 10 years before that.

30:38.536 --> 30:41.639

And the productivity to society was off the

30:41.639 --> 30:44.909

charts. So the thing I think about with AI is not

30:44.909 --> 30:47.779

really the picks and shovels of the world, the

30:47.779 --> 30:51.649

semiconductors, memory chips and

30:51.649 --> 30:54.652

that kind of stuff. It's really about finding the next great

30:54.652 --> 30:56.988

businesses who can use this.

30:56.988 --> 31:00.325

At a time when it's really ready for prime time,

31:00.325 --> 31:03.895

and also all the other changes that it could potentially

31:03.895 --> 31:07.065

unleash on society, which, taken

31:07.065 --> 31:10.301

to its full extent, obviously all paths always lead

31:10.301 --> 31:12.637

to universal basic income.

31:12.637 --> 31:16.441

Are we replaced by machines and models and computers,

31:16.441 --> 31:18.710

and it carves out jobs?

31:18.710 --> 31:21.479

I've talked about in the past, the most logical one is...

31:22.714 --> 31:25.984

Do we have less radiologists in the future, because AI

31:25.984 --> 31:28.686

quite frankly examines the scan far better than the human

31:28.686 --> 31:32.223

does, and that's true today, and more

31:32.223 --> 31:35.326

nurses who needs to take care of patients

31:35.326 --> 31:37.028

as we age as a society.

31:37.028 --> 31:40.932

And it changes the demographic of the workplace.

31:40.932 --> 31:43.234

It does that in certain sectors like healthcare, but it's

31:43.234 --> 31:46.771

gonna happen in financial services, law,

31:46.771 --> 31:48.740

manufacturing, everywhere.

31:48.740 --> 31:50.675

Technology itself.

31:50.675 --> 31:53.177

That's what I'm most concerned about.

31:53.177 --> 31:56.281

So we can talk about the pitfalls, the

31:56.281 --> 31:59.017

risks and the reward of investing in the picks and shovels

31:59.017 --> 32:02.020

today around AI and what that can really mean.

32:02.020 --> 32:04.923

But I think the opportunities longer term are gonna be

32:04.923 --> 32:08.059

unleashed in businesses and

32:08.059 --> 32:11.129

industries that we can't even fathom what they

32:11.162 --> 32:14.299

look at today. And that is the thing that reminds

32:14.299 --> 32:18.336

me the most of 1999 and 2000.

32:18.336 --> 32:21.139

The other thing I think with AI, and this is where it comes

32:21.139 --> 32:24.509

back to the chart I showed you about the 10-year bond yield.

32:24.542 --> 32:27.612

So I think I've talked about money

32:27.612 --> 32:30.882

supply, dollar debasement,

32:32.016 --> 32:35.019

U.S. Government wrecking itself on debt and whatnot.

32:36.054 --> 32:39.157

And during the global financial crisis, I can remember

32:39.157 --> 32:42.860

having conversations with many of my fellow colleagues.

32:44.228 --> 32:48.366

Affidavit saying there's only two ways out of this mess.

32:48.366 --> 32:51.269

You either got to grow your way out of it or you got to

32:51.269 --> 32:54.205

inflate your way of it. And we kind of looked around and

32:54.205 --> 32:57.909

said, there is no kind of invention or

32:57.909 --> 33:01.212

innovation that will allow us to grow

33:01.212 --> 33:04.282

as a society to erase all the debt that's

33:04.282 --> 33:07.452

been built up as a result of the global financial crisis.

33:07.452 --> 33:09.687

So you got inflate you're way.

33:09.687 --> 33:13.124

And we, you know, obviously left interest rates extremely

33:13.124 --> 33:16.561

low. Flooded the system with money supply,

33:16.561 --> 33:19.664

three forms of QE in the United States,

33:21.065 --> 33:22.967

really didn't lead to much inflation.

33:22.967 --> 33:25.603

Now, eventually you gotta believe that catches to some

33:25.603 --> 33:28.773

degree. But what AI could be,

33:28.773 --> 33:32.577

and we don't know, is the productivity and growth engine,

33:32.577 --> 33:34.145

I'm talking in very kind of big terms,

33:35.747 --> 33:37.982

that we were looking for back in 2008.

33:37.982 --> 33:41.919

If you get that, if you get those productivity gains,

33:41.919 --> 33:44.956

If you unleash the tools and in

33:44.956 --> 33:48.059

two to five years, they're really ready for prime time

33:48.059 --> 33:51.529

in a way we can't dream of today,

33:51.529 --> 33:54.732

you could see an escalation in corporate profits to the

33:54.732 --> 33:56.067

like we couldn't imagine.

33:57.368 --> 34:00.905

Much higher ROEs, which means valuations

34:00.905 --> 34:03.908

for equities rise in certain industries among certain

34:03.908 --> 34:04.909

securities.

34:05.610 --> 34:09.447

And you get growth without inflation, which

34:09.447 --> 34:10.815

tends to take...

34:10.815 --> 34:13.684

Your fixed income problem out of the equation a little bit.

34:14.685 --> 34:16.487

So it's something to think about.

34:16.487 --> 34:19.490

So we're all focused on, you know, the average investor is

34:19.490 --> 34:23.027

focused on semiconductors and memory chips and

34:23.027 --> 34:25.463

all these good things, hyperscalers and all this kind of

34:25.463 --> 34:28.699

jazz. I actually think the question is far more existential

34:28.699 --> 34:30.001

and far bigger.

34:30.001 --> 34:33.171

If you take it to even 75% of what we dream

34:33.171 --> 34:36.307

it could be, it has huge ramifications,

34:36.307 --> 34:39.744

both at a macro level, a societal level and

34:39.744 --> 34:42.914

a work level. And that, I think, is where we should

34:42.914 --> 34:45.983

focus our attention kind of going forward, which means

34:45.983 --> 34:49.454

talks like this or interviews with our portfolio managers

34:49.454 --> 34:52.056

in five years are probably going to be a lot more

34:52.056 --> 34:55.393

complicated, both exciting and uncertain.

34:55.393 --> 34:58.729

So I think those are things to really kind of

34:58.729 --> 35:00.531

focus your attention on AI.

35:00.531 --> 35:02.700

The present's going to take care of the present.

35:02.700 --> 35:05.970

We're going to monitor all the CapEx numbers

35:05.970 --> 35:08.339

kind of coming through and really what it means for the

35:08.339 --> 35:09.841

underlying security.

35:09.841 --> 35:11.375

And the economy as a whole.

35:11.375 --> 35:14.645

But I think the bigger questions are far more exciting,

35:14.645 --> 35:17.949

a little bit more existential, but have huge

35:17.982 --> 35:21.552

impacts in terms of corporate profitability going forward.

35:21.552 --> 35:24.489

So the other thing I wanted to touch on with respect to this

35:24.522 --> 35:28.259

is we've talked a lot about fundamental

35:28.259 --> 35:30.795

investing and looking at corporate profits and how you

35:30.795 --> 35:33.431

dovetail valuation and coming out with the right price for

35:33.431 --> 35:34.432

security.

35:35.366 --> 35:38.069

The other thing I wanted to mention, and you heard from Bobby

35:38.069 --> 35:41.506

Barnes yesterday, is really on factor-based investing,

35:41.506 --> 35:44.542

quantitative ETFs, so on and so forth.

35:44.542 --> 35:47.678

And I think it's very important for investors to appreciate,

35:47.678 --> 35:49.313

and we deal with it every day.

35:50.748 --> 35:55.119

If I think back to 1980, if you took a

35:55.119 --> 35:58.322

gauge of what, how a decision was made

35:58.322 --> 36:01.592

in the stock market about how to buy and sell a

36:01.592 --> 36:04.462

security, it was generally done from a fundamental

36:04.462 --> 36:08.399

standpoint. You believed a security was either overpriced

36:08.399 --> 36:12.436

or underpricing. You had some kind of outlook for

36:12.436 --> 36:15.339

corporate profits, and you acted in kind.

36:15.339 --> 36:17.575

If you thought the security price was too low, you bought.

36:17.575 --> 36:20.244

If you though it was too high, you sold.

36:20.244 --> 36:24.115

And the lion's share of the decisions made in 1980,

36:24.115 --> 36:27.318

or the early 80s, were done on

36:27.318 --> 36:28.653

a fundamental basis.

36:28.653 --> 36:31.289

Call it 90 plus percent of the marketplace were fundamental

36:31.289 --> 36:34.559

investors. And as time went on, you saw the advent

36:34.592 --> 36:36.494

of passive investing.

36:36.494 --> 36:39.730

And then, quantitative modelling around

36:39.730 --> 36:43.034

certain aspects that were highly correlated

36:43.034 --> 36:45.269

with stock prices.

36:45.269 --> 36:47.538

So kind of predictive modelling

36:48.573 --> 36:52.677

where the information was gathered on a historical basis.

36:52.677 --> 36:55.813

And new products originated that were based on

36:55.813 --> 36:58.616

quantitative tools, correlations in the marketplace.

36:58.616 --> 36:59.951

Those are still used today.

36:59.951 --> 37:03.020

And as time went on, those models got far more

37:03.020 --> 37:06.457

sophisticated and far more complicated.

37:06.457 --> 37:09.927

And then we kind of got into smart beta and

37:09.927 --> 37:13.030

factor-based investing, so things like momentum

37:13.030 --> 37:16.500

and yield and size, growth,

37:16.500 --> 37:17.501

or value.

37:18.269 --> 37:21.339

And now I would argue that fundamental

37:21.339 --> 37:24.542

investing is probably less than 50% of the decision-making

37:24.542 --> 37:27.078

process in the market on a given day, and probably

37:27.078 --> 37:30.147

meaningfully less than 15%.

37:30.147 --> 37:33.384

On a day in and day out basis, Securities are doing

37:33.384 --> 37:34.385

a lot of things.

37:35.353 --> 37:37.488

For non-fundamental reasons.

37:37.488 --> 37:40.524

And I say all this because I think the questions that you

37:40.524 --> 37:42.893

probably have to deal with as advisors for some of your

37:42.893 --> 37:46.464

clients who may be nervous and uncertain as what is going on,

37:46.464 --> 37:49.800

the day-to-day gyrations of the market are being influenced

37:49.800 --> 37:53.070

by things that have actually nothing to do with corporate

37:53.070 --> 37:54.071

profits.

37:55.039 --> 37:56.807

There's correlations taking place.

37:56.807 --> 37:58.242

There's a lot of baskets.

37:59.443 --> 38:01.345

So thematics.

38:01.345 --> 38:02.947

People want to invest in a space.

38:02.947 --> 38:05.483

They really don't do a lot of analysis behind it, but they

38:05.483 --> 38:08.019

know that the security falls into a basket with other

38:08.019 --> 38:10.321

securities that are like it.

38:10.321 --> 38:12.089

That basket goes up in price.

38:12.089 --> 38:15.393

Similarly, opposite baskets go down in price

38:15.393 --> 38:18.496

as a source of funds to fuel that.

38:18.496 --> 38:22.333

We have seen the highest concentration

38:22.333 --> 38:25.436

of securities, and it's roughly 30% of

38:25.436 --> 38:27.938

the market, have a...

38:27.972 --> 38:32.076

Beta of negative 0.5

38:32.076 --> 38:34.745

to 1 on any given day.

38:34.745 --> 38:38.115

It's the highest concentration of stocks that actually go

38:38.115 --> 38:41.352

down in a given day when

38:41.352 --> 38:42.720

the market's actually moving up.

38:43.721 --> 38:46.691

It's interesting. So we live in a kind of a barbell world.

38:46.691 --> 38:49.226

It's almost like a binary decision world.

38:49.226 --> 38:52.330

And so it further calls into the importance

38:52.330 --> 38:55.566

of diversifying one's portfolio and having a mid to

38:55.566 --> 38:56.567

long term.

38:57.535 --> 39:00.905

Horizon in terms of achieving one's goals.

39:00.905 --> 39:03.074

The world is going to get noisier.

39:03.074 --> 39:06.444

And our job as investors is really to break it down into

39:06.444 --> 39:10.181

signals that matter and ignore the noise.

39:10.181 --> 39:13.684

With all of these decisions being made by

39:13.684 --> 39:16.620

different methodologies, and I think the financial

39:16.620 --> 39:19.690

engineering in the marketplace will only escalate

39:19.690 --> 39:21.859

from this point in time.

39:21.859 --> 39:25.496

It's gonna get increasingly complicated on say a day-to-day,

39:25.496 --> 39:28.399

week-to week, even month-to month basis.

39:28.399 --> 39:31.936

So I think it's very important more so than ever,

39:31.936 --> 39:35.039

and increasingly so, to have your goals in mind,

39:36.073 --> 39:38.109

pick your horses so to speak, right?

39:38.109 --> 39:41.178

The fund managers you want to invest in, the styles that

39:41.178 --> 39:44.448

you wanna have, the goals for your clients you wanna

39:44.482 --> 39:45.449

to have in place.

39:46.517 --> 39:49.887

List out the spectrum of outcomes, assign some probability

39:49.887 --> 39:51.389

to all of them.

39:51.422 --> 39:53.190

And stay true to themselves.

39:54.358 --> 39:57.194

Trade less, not more.

39:57.194 --> 40:00.464

It may be tempting to do so because the opportunity

40:00.464 --> 40:03.734

for price discovery you think will be there with increasing

40:03.734 --> 40:05.403

volatility.

40:05.403 --> 40:07.671

I actually think it's better to do less.

40:07.671 --> 40:10.141

We've done that a little bit in our Canadian Discipline

40:10.141 --> 40:13.677

Equity Fund. We've actually had a pretty good year to date.

40:13.677 --> 40:16.113

And one of the things that I've kind of stressed to our

40:16.113 --> 40:19.183

analysts day in and day out is we need to do

40:19.183 --> 40:21.652

less, not more.

40:21.652 --> 40:24.288

Focus on what really matters.

40:24.321 --> 40:27.525

So with trade wars going on, geopolitical

40:27.525 --> 40:30.594

risks escalating, and people asking ourselves,

40:30.594 --> 40:33.230

are we reacting to any of this?

40:33.230 --> 40:35.533

Typically, when you're reacting, you're losing.

40:36.967 --> 40:39.670

Reaction is generally a losing exercise.

40:39.670 --> 40:42.173

Proactivity is a winning exercise.

40:42.173 --> 40:45.209

And so we wanted to have a really good game plan

40:45.209 --> 40:48.312

for what we thought was most likely to occur, and

40:48.312 --> 40:50.881

then really make sure we are fine-tuning.

40:50.881 --> 40:53.984

And honing in on each of the individual securities

40:53.984 --> 40:57.021

and all those fundamentals that we thought would come to

40:57.021 --> 40:59.557

fruition for them. And that's what's actually yielded some of

40:59.557 --> 41:02.092

the positive returns year to date.

41:02.092 --> 41:05.029

So suffice it to say, the world's gonna get more complicated.

41:05.029 --> 41:08.299

You have more investment decisions and tools and vehicles and

41:08.332 --> 41:11.135

products to look at each and every day.

41:11.135 --> 41:14.238

And we thank you as always for your support.

41:14.271 --> 41:17.308

We're here to answer questions that you have and that

41:17.308 --> 41:18.976

your clients may have.

41:18.976 --> 41:21.812

And we look forward to, I think, what the future brings.

41:21.812 --> 41:25.115

I think it's a really exciting time, a really, really

41:25.115 --> 41:28.252

exciting, time. But with that excitement's gonna come

41:28.252 --> 41:29.687

a lot of complexity.

41:29.687 --> 41:32.823

And so with that, I'm gonna welcome up our next speaker.

41:32.823 --> 41:35.559

Thank you all, and have a great Thanksgiving weekend.

41:35.559 --> 41:36.560

Take care, everyone.

41:38.729 --> 41:40.798

Thanks for watching or listening to

41:40.831 --> 41:43.033

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disclaimer.

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The views and opinions expressed on

42:17.334 --> 42:18.736

this podcast are those of the

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repeated.

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42:49.233 --> 42:50.768

Thanks again. We'll see you next

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time.

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FOCUS 2026: CIO insights: What lies ahead - Andrew Marchese

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