First Quarter Performance Report
The purpose of this regularly scheduled report is to provide a review of our portfolio performance over the first three months of this year. Given the dramatic nature of the market activity in the first week of April, we will also include that.
This report is presented by Kai Lam, JCIC’s Chief Investment Officer.
A strong start amid instability
For the first quarter of 2025, our core JCIC Balance Fund returned 0.1%. Given the significant volatility and headlines during the quarter, we are pleased with this outcome. Additionally, for the period ending December 31, 2024, the Fund achieved top quartile performance in the Global Equity Balanced Fund group relative to RBC's Pooled Fund Survey, delivering annualized returns of 19.0%, 17.1%, and 6.7% over one, two, and three-year periods, respectively (all figures are in Canadian dollars).
Over the past few quarters, we have taken steps to reduce the risk associated with tariffs. In equities, we minimized exposure to industries that are most affected by Canadian exports to the U.S. This includes avoiding sectors such as base metals (copper, nickel, aluminum), bulk commodities (coal), steel, agricultural products (fertilizer), lumber, transportation (trucking, rail, Canadian airlines), and automobiles (OEM and parts). We also reduced our exposure to banks, which tend to be more economically sensitive and have significant exposure to the U.S. Furthermore, we increased our cash position to maintain liquidity for emerging opportunities.
In our commentary for 2024, we noted that the considerable valuation discount of the MSCI EAFE Index could present substantial opportunities in 2025. This was evident in Q1, as our International Equity model rose by 14.4%, significantly outpacing the 7.0% total return of the benchmark MSCI EAFE Total Return Index (in CAD). While valuation itself may not act as a catalyst, fears surrounding the trade war contributed to slight downward revisions of earnings estimates in the U.S., which had been anticipating strong double-digit growth. By contrast, earnings growth estimates from international developed markets were initially in the low single digits but improved during the quarter. The combination of low valuation and rising earnings estimates from international stocks made them look relatively more attractive and drove positive performance.
Also, in our fourth-quarter commentary, we highlighted potential uncertainties that could lead to market volatility. In equities, U.S. valuations had risen to relatively high levels. Given these elevated valuations, it was reasonable to expect increased market volatility. Potential catalysts for this volatility included uncertainty surrounding President Trump's policy implementations, such as tariffs, protectionism, and possible retaliatory actions from other countries and regions, including China, Canada, Mexico, and Europe.
Unfortunately, this risk materialized as we entered the second quarter of 2025. As of this update, President Trump's "liberation day" has led to a far worse-than-expected trade war involving over 60 countries. He implemented reciprocal tariffs based on a formula that doesn't consider actual tariff levels, but rather trade deficits. Even countries with which the U.S. has a trade surplus are subject to a 10% tariff. Canada and Mexico were not included in this announcement, nor were certain items such as pharmaceuticals and semiconductors. It is important to note however, tariffs on some goods from Canada and Mexico remain in effect from previous measures.
The announcement of these tariffs resulted in a two-day decline of over 10% in the S&P 500 Index, making it one of the worst two-day declines in decades. Initially, some defensive sectors managed to show positive returns. However, as the realization set in that sustained tariffs and reciprocal actions from other countries would likely lead to lower estimates, reduced growth, and potentially higher inflation, the market sell-off extended across all sectors and global markets. The market dislikes uncertainty, and there is considerable uncertainty regarding how these tariffs will impact company earnings and overall growth. As shown in Figure 1, estimates for 2025 GDP growth were already deteriorating before the onset of this tariff-related uncertainty.
Figure 1.
Historical Context
In our long history, we have witnessed numerous periods of market declines and investor panic. Panic, however, is never a viable strategy. Each situation presents unique circumstances, but the market adjusts and recovers in every case. This particular market correction is a self-inflicted consequence of President Trump’s trade policy. It may be reversed if he decides to de-escalate tensions, particularly if recession risks rise or inflation accelerates significantly due to the tariffs.
While we anticipated potential risks from a trade war and adjusted accordingly, we did not foresee the extent of Trump's reciprocal tariffs. We are not immune to the resulting market volatility, especially as the correction has become widespread across all sectors and markets. However, we had positioned ourselves defensively and maintained elevated cash levels. Moreover, market valuations have fallen to attractive levels.
As illustrated in Figure 2, the forward Price/Earnings multiple for the S&P 500 dropped from 22.4x in mid-February to 18.2x as of April 7, 2025. Although earnings are vulnerable, and the 18.2x multiple is likely to increase as earnings estimates are revised downward, it is essential to note that valuations have contracted to levels significantly below the average of the past five years.
Figure 2.
When we analyze valuations in Canada (see Figure 3) and international markets (see Figure 4), we discover that these markets are trading significantly below their historical averages.
Figure 3.
Figure 4.
Final Thoughts
We need to clarify the direction of earnings estimates, as they will likely decline from their current levels. The key question is ‘by how much?’ and ‘what has market has already factored in?’
As mentioned, over the past few quarters, we have maintained elevated cash positions. Meanwhile valuations on all markets have dropped considerably, with many companies now sitting well below average levels. Therefore, we continue to monitor the market, maintain a watch list of stocks, and assess opportunities to deploy capital.
If you have questions about any of this information, please don’t hesitate to reach out to us:
Disclosure:
Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. The opinions expressed in the newsletter are those of JCIC Asset Management, its editors and contributors, and may change without notice. Any views or opinions expressed in the newsletter may not reflect those of the firm as a whole. The information in our newsletter may become outdated and we have no obligation to update it. The information in our newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. We strongly advise you to discuss your investment options with your Relationship Manager prior to making any investments, including whether any investment is suitable for your specific needs.
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* Performance percentages stated are gross of fees.