Quaterly Summary 

July 18th, 2021 by Team Chartier, Grandmaison

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The quarterly summary is prepared by our team and published 4 times a year, in January, April, July and October. It is a must read for all our clients who entrust us with the management of their investable assets as we present the main changes we have made to our model portfolios during the quarter, our views on economic trends and the impact they have on our investment decisions. 

Asset Allocation Strategy:

The main adjustment from the previous quarter is a slight decrease in the cash exposure and a few changes in other asset classes related to market movements:

Portfolio Model Revisions: 

We did not make any changes to the portfolio during the second quarter. We are confident in the current strategic allocation and feel that the individual stock selection is appropriate for the environment.

To mention a few, let's take ZLB (BMO Canadian Low Volatility Equity ETF), DGRO (iShares Core Dividend Growth ETF) and BNI Quebec Growth Fund as an example.

 

In the last year, the movements and uncertainty in the equity market have been driven by the global environment where there are fears of inflation, interest rate hikes and other pandemic-related emergencies. ZLB's underlying holdings are comprised of the 40 least market-sensitive of the 100 largest liquid Canadian stocks which makes it an excellent solution to lower risk in the portfolio

 

In a different style, but still focused on reducing volatility, DGRO will benefit from selecting U.S. stocks with a history of sustained dividend growth (at least 5 years). The strategy focuses on stocks that demonstrate a potential for future above market average dividend growth, while avoiding the risk of being exposed to high dividend companies, which can sometimes hide negative information.

 

The strategy is well diversified across a universe of mature companies within their industry and has low risk characteristics relative to its peers, also due to lower sensitivity to interest rate changes.

 

Dividend growth is not only an indicator of a company's financial health, but also a generator of growing and sustainable income in the portfolio.

 

Fonds de Solidarité FTQ vs. NBI Quebec Growth Fund

Finally, we wanted to focus on the NBI Quebec Growth Fund which stands out for its growing performance. It has been in our Canadian Equity investment strategy since 2017. This fund is an excellent alternative for strategies focused on Quebec SMEs, such as the well-known Fonds de Solidarité FTQ, which has not matched the returns of our solution despite their interesting tax benefit.

 

Let's take a look at the performance over 1, 3 and 5 years as of May 31, 2021. Obviously, the performance is far more attractive in the BNI Quebec Growth fund thanks to the active management process focused on growth that provides excess returns in our clients' portfolios.

 

2nd Quarter Highlights: 

Lion Electric IPO:

 

During Q2 2021, Lion Electric (LEV), which we added to the portfolio during the previous quarter via the Northern Genesis Acquisition SPAC (details in our last quarterly summary), went public on the New York and Toronto stock exchanges.

 

The transaction added approximately $490 million to Lion Electric's capital. This amount will be used, among other things, to expand its production capacity in the United States and to build a battery plant in Mirabel.

 

Inflation at the heart of the debate

 

We have seen a shift in the situation over the past three months, particularly in the bond market. Indeed, contrary to the first quarter when the correlation between inflation and the increase in US 10-year bond rates was positive, which led to a decrease in long-term bond yields, the second quarter was characterized by a decrease of those same rates, but with inflation still galloping.

 

Does this mean we should be worried about inflation or not? Some believe that it is a temporary post-pandemic situation and that things will stabilize, especially as the Federal Reserve begins to consider a possible normalization of its monetary policy.

 

Others argue that inflation is not a short-term story and is there for good, mainly because of structural, economic and political factors. These include the return of protectionism and tariffs that are driving prices up, the demographics of an aging population consuming more than producing, and the rise of digitalization and e-commerce looking for more profitability are pushing all players to raise prices.

 

In any case, let's remember that markets are forward-looking and have already anticipated their expectations to reflect a clear inflation, which will probably head towards higher levels than in the past but not necessarily worrying.

 

What we can also take away from the second quarter is the broad-based nature of the gains between the different market segments (stocks and bonds)

 

We believe that we are at the top of the economic growth curve in 2021, however, we are confident that the earnings of our portfolio companies will continue to grow and that the overall economic environment will continue to reward equity markets until the end of the year.

 

We are maintaining our strategy of diversification (geographic and sector), which is key to our long-term success, and we will continue to evaluate the situation to adjust our positioning in anticipation of the inflation effects and potential episodes of market volatility.

 

 

NBF may act as financial advisor, fiscal agent or underwriter for certain companies mentioned herein and may receive remuneration for its services. NBF and/or its officers, directors, representatives or associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time on the open market or otherwise. The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.

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