Trusting the Process: Our Core Investment Beliefs for Q2 2023

As long-term investors, we take a long view on the economy and markets—a perspective that helped us successfully navigate a volatile start to the year, and will continue to as we move through the balance of what could be an equally turbulent quarter ahead.

Cameron Scrivens
Portfolio Manager and President 

Kai Lam
Chief Investment Officer

Luxury goods maker LVMH recently surpassed a stock market value of half a trillion dollars, becoming the first European firm to hit that milestone. It is a good news story for the company, no doubt, but for us, as well. We’ve been big believers for awhile, and have invested accordingly. Their continued success this year on the back of the Chinese consumer’s accelerating rebound represents a validation of sorts for our process.

LVMH is one position that’s helped cap a rewarding first quarter for JCIC Asset Management. And as we look out to the balance of 2023, and the prospect of more challenging economic conditions and perhaps continued market volatility, we’ll be leaning into our process all the more to continue to deliver value for clients.

We like our prospects and believe we are well positioned. But before we get into any outlook for the remainder of the year, we’ll share a few words on our approach, which begins with transparency—a transparency that’s found in everything we do, from our fees to our investment objectives.

Our Process

We are not day traders—we are long term holders of high-quality companies and assess them on multiple criteria including earnings visibility, secular growth, free cash flow generation, balance sheet strength and management team track record to name a few.

We screen holdings against those criteria that fit our time horizon of between three to five years. Successful names that make it into the portfolio aren’t sold or divested because they’ve had a difficult quarter or couple of quarters. Quite the opposite. When valuations decline on companies we’ve identified as medium- to long-term opportunities, we often buy more.  

In a year like 2022 and through stretches of 2023, it can be challenging, because there is, at times, acute pressure to make changes—pressure from strategist reports saying do this or do that, or from the media. And of course, from clients. In over 20 years in this business, we’ve learned a valuable lesson: stick to your process. Often, the optimal time to buy–when the sell-off is bottoming –is when you’re feeling the most pressure.

Another lesson: take emotion out of it. Our model rationalizes decision-making, which is also based on our relentless pursuit of information—we evaluate an array of market and economic indicators each day. Our complete Q1 recap report (available by request) underscores our deep commitment to thorough fundamental analysis of markets and the economy.  

Let’s look at how the process worked in the first quarter before touching upon how we will be applying it to the rest of the year.

First Quarter

Looking back, September and October of last year were two very bleak, very tough months in the market. Wall and Bay Street strategists were rife with depressing outlooks, while everybody thought it was going to get very bad, very soon.

Despite the challenging outlook, we felt the market discounted too much of a negative outlook as valuation reached extremely low levels, even accounting for an expected decline in earnings estimates. Labour markets were simply exhibiting too much underlying strength and employed households had, and to some extent still have, pandemic-era savings to fall back on. Those conditions held firm through the entire first quarter, and continue to support what’s been a very resilient economic backdrop, with employment across major economies at or near historical lows.

Employment Held Firm in Advanced Economies

Source: JCIC Asset Management

For us, the consumer is the linchpin from an indicator standpoint. Within developed markets, household consumption is approximately two thirds of GDP. If the consumer starts to falter, we will have to change tack. But right now, the consumer is holding in. And that's positive.

Within our equity holdings, our conviction was that growth stocks with strong underlying businesses would climb materially off their punishing 2022 troughs. That view was rewarded with holdings like Alphabet Inc. gaining about 25% from the November lows through the first quarter.

GOOG Rebounded Off Nov. Lows

Source: JCIC Asset Management (Nov. 3, 2022-April 24, 2023)

As Q1 progressed, we also kept on increasing our fixed income exposure because yields kept going up. The March banking crisis that began with Silicon Valley Bank rattled markets sufficiently to send yields back down. And as a result, we’re content with not doing anything more on that side of our portfolios for the time being. In short, Through the first three months of the year, we stuck with our patient, data-dependent process.

Outlook

Unfortunately, one downside to low unemployment is stubbornly high inflation. Right now, the market is looking at interest rate cuts from central banks in the late summer-early fall period. We’re not sold that that will be the case, given how sticky inflation is proving to be—and it can stay resilient as long as the job market is tight.

Global Consumer Prices Remain Well Above 2% Target

Housing continues to be challenging. But the real key here is that folks are still employed, and wages continue to tick up.

Our base case is that we see a mild recession in developed markets, but that has now been pushed out later than what our view was at the beginning of the year. We still believe it will be a shallow contraction, given that the labour market is really tight, and the participation rate is lower than it was pre-pandemic. For the year, GDP growth will still track above zero.

We expect markets to remain volatile, which means we remain overweight cash relative to other asset classes, to give us a little bit of buffer.

Overall, we like the way we are positioned— we're taking a barbell approach to the portfolios, which is to say, we hold both defensive companies with more resilient earnings during a recession; and we own select companies with secular tailwinds that provide growth in a low growth environment. It’s an approach that saw the portfolios respond well through the volatility of the first quarter, and will likely continue to do the same over remaining months of the year.

For JCIC Asset Management’s in-depth analysis on the first quarter and 2023 outlook, please see our webinar here.

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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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