Q2 2024 Investment Report: Rate Cuts Begin as Markets Build on Strong Momentum
The Canadian central bank has initiated its interest rate-cutting cycle. With additional cuts anticipated throughout the remainder of this year and into next, independent portfolio managers are presented with highly attractive opportunities to optimize and grow client portfolios.
Executive Summary: Key Takeaways
Rate Cycle Pivot: The Bank of Canada led developed markets with a 25 basis point rate cut, followed shortly by the European Central Bank. The U.S. Federal Reserve remains highly cautious, indicating a "higher-for-longer" stance with only a single cut expected in 2024.
Stellar Portfolio Performance: The JCIC Balanced Fund returned +3.7% in Q2 (+10.1% YTD), while the JCIC Equity Fund returned +3.1% (+13.3% YTD).
Benchmark Outperformance: All three of JCIC's specialized segregated equity models materially outperformed their respective benchmarks in the first half of the year, driven by strategic exposure to secular mega-themes.
Economic Resilience: Sticky inflation and tight labor markets have kept the consumer resilient. However, global economic surprise indices are softening, pointing to a slow-growth environment that requires strict fundamental stock-picking rather than passive indexing.
Performance & Mandate Review
The second quarter of 2024 continued to build upon the solid foundation established in the first three months of the year. JCIC’s active, fundamental approach to stock selection allowed our portfolios to systematically outpace domestic and global benchmarks.
Consolidated Performance Table (First Half 2024)
| Mandate / Strategy | Q2 Return | Year-to-Date (YTD) | Benchmark Performance (YTD) | Excess Return vs. Benchmark |
|---|---|---|---|---|
| JCIC Equity Fund | +3.1% | +13.3% | — | — |
| JCIC Balanced Fund | +3.7% | +10.1% | — | — |
| U.S. Equity Model | — | +30.6% | +19.4% (S&P 500 Total Return) | +11.2% |
| International Equity Model | — | +15.4% | +9.1% (MSCI EAFE Total Return) | +6.3% |
| Canadian Equity Model | — | +11.2% | +6.1% (TSX Total Return) | +5.1% |
Note: All performance figures are reported in Canadian Dollar (CAD) terms.
Individual Stock Highlights
Despite a negative overall return for the broader TSX Index in the second quarter, our individual Canadian equity selections performed exceptionally well, driven by strong earnings and corporate execution.
Canadian Leaders: Performance was led by Dollarama Inc. ($+21.2%), Cameco Corporation (+14.8%), and Agnico Eagle Mines Ltd. (+11.4%).
United States Leaders: Performance in our unconstrained U.S. mandate was driven by major technology and corporate innovators, including NVIDIA Corp. (+38.2%), Apple Inc. (+24.3%), and Alphabet Inc. (+21.9%).
International Leaders: In developed overseas markets, our top performers for the quarter were Taiwan Semiconductor Manufacturing Co. (+29.5%) and Novo Nordisk A/S (+12.3%).
Macroeconomic Analysis: Interest Rates & Inflation
1. The Central Bank Pivot Begins
During the second quarter, central banks officially crossed the Rubicon into monetary easing. The Bank of Canada was the first major developed central bank to move, executing a 25 basis point cut. The European Central Bank (ECB) followed shortly after with its own 25 basis point reduction.
However, policy makers have set an incredibly cautious, data-dependent tone regarding any aggressive future cuts. Crucially, the U.S. Federal Reserve has indicated that due to the persistent strength of the U.S. consumer, they expect only a single rate cut in 2024.
Macro Insight (Interest Rate Policy): Bloomberg market data highlights that while the path toward lower rates is established, central banks will not rush. Portfolios must be structured to thrive in a "higher-for-longer" yield environment, rather than banking on a rapid return to near-zero borrowing costs.
Central bank rates (Source: Bloomberg)
2. Sticky Inflation Challenges Targets
While inflation has come a long way down from its post-pandemic peaks, it remains structurally sticky and sits stabilized slightly above the central banks' target of 2% across most developed economies.
To see a significant, permanent reduction in inflation back to long-term targets, economic activity must slow down further. Consequently, future rate decisions will remain highly sensitive to incoming economic data.
(Source: Bloomberg)
3. Tight Labor Markets Fuel Consumer Resilience
A primary engine behind economic resilience in this cycle has been the labor market. Unemployment rates have only increased modestly across Canada and the United States, remaining near historic lows.
Tightness in the labor market is further exacerbated by a structural decline in the labor participation rate. As long as employment remains stable, consumers will continue to spend, supporting corporate earnings but also keeping upward pressure on core service inflation.
(Source: Bloomberg)
Figure 4.
(Source: Bloomberg)
Portfolio Strategy: Where Do We Go From Here?
Given the confluence of a resilient economy, sticky inflation, and cautious, modest rate cuts, JCIC’s portfolio positioning remains highly active and selective.
Fixed Income Strategy: Yield Maximization
On the fixed income side, we continue to capture attractive yields by keeping our primary exposure in shorter-term high-quality corporate and government bonds. We maintain a highly tactical and opportunistic approach to long-term bonds, as long-term yields have remained in a highly volatile trading range for the past two years.
Equity Strategy: Capturing Global Secular Mega-Themes
Within our equity portfolios, we are positioning client capital to benefit directly from powerful, multi-decade secular growth trends.
The Global Advantage: This strategy has borne massive fruit in our U.S. and International portfolios, where we maintain direct exposure to the two dominant global mega-themes of this cycle: Artificial Intelligence (AI) infrastructure and GLP-1 obesity drug treatments. These high-growth themes are virtually non-existent in the heavily concentrated Canadian index.
The Canadian Strategy: In Canada, we have successfully generated strong performance by ignoring the broader index components and focusing strictly on high-quality companies with positive fundamental outlooks and clear upside according to our internal valuations. In a slow-growth domestic market, performance is as much about avoiding structural torpedoes (leveraged utilities and struggling retail banks) as it is about owning the right stocks.
Looking Forward: Profit Taking and Reinvestment
While the global economy has proven resilient to rate hikes, we do not expect a return to boom-era growth. In fact, global economic surprise indices—which measure economic data releases against consensus expectations—have recently turned negative across the United States, Europe, and China.
As inflation moderates toward official targets over the coming year, we expect additional rate cuts to unfold steadily in 2025.
In alignment with our disciplined, fundamental process, we have actively taken profits in some of our strongest-performing, highly appreciated stock positions during this market surge. We are systematically redeploying this cash to initiate positions in high-quality, dividend-paying companies that have been temporarily beaten down by macro factors such as high interest rates and volatile bond yields. We expect these undervalued companies to perform exceptionally well as monetary policy continues to moderate.
If you have questions about any of this information, please don’t hesitate to reach out to us.
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