This edition of Market Factors discusses the Canada Investment Summit as a potential inflection point for the domestic economy, starting with the biggest winners from the tax changes. I then summarize a long talk I had with a former investment banker and good friend during which we discussed what we want to see from new investment - notably a forward-looking emphasis and not the ideal plan for 1965. The diversion covers a potential disastrous idea from the Trump family and we have Quick Hits as always.
Equity sectors
Summit winners
It is not an exaggeration to see this week’s Canada Investment Summit as a potential watershed moment for the domestic economy. There were executives representing trillions of investment dollars at the Four Seasons this week, with Blackstone president and chief operating officer Jon Gray calling our country “a bit of a sleeping giant, economically.”
Rosenberg Research senior economist Robert Embree published a report attempting to uncover the biggest beneficiaries of the new growth initiatives, notably the tax changes encouraging fresh capital investment. In sector terms, the expected winners are transportation and warehousing, energy, mining, construction, agriculture, fishing and forestry.
The marginal effective tax rate [METR] for the capital-heavy transportation and warehousing sector falls more than 15 percentage points from 13.3 percent cent to -2.3 per cent. Construction gets a smaller but still significant break in METR, which falls from 18.3 per cent on average to 13.0 per cent.
In the energy sector, pipeline builders will benefit (this is potentially important for reasons discussed in section two below) with LNG equipment a particular standout.
I’ll try and get to individual stock names next week and hopefully I can find some that are not in old economy industries.
Economy
Where the investment should go
RBC Capital Markets chief economist and head of investment strategy research Eric Lascelles detailed Canada’s failure to improve productivity over the past four decades. He estimates Canadian prosperity as roughly equal to the U.S. in the 1980s and falling to roughly 73 per cent as wealthy as the Americans now (as measured by real output per hour worked.)
The Canada Investment Summit was the catalyst for the discussion. As it happens I had a long conversation on the topic with a friend who previously led an investment banking group for a major German bank focused on industrials. He currently lives in Berlin so I happily chided him for ideas that for me reflected his lack of memory as to how central planning has failed here in the past.
We both agreed that LNG to Europe should be a layup, albeit an expensive one requiring new infrastructure. Europeans are rightly uncomfortable buying gas from Russia and have not yet replaced that entire supply. Europe has ramped up imports from the U.S. and hopefully we can convince them to pull back on that a bit.
My friend’s key emphasis was using domestic advantages - education, resources as key examples - to create businesses that will be relevant in the future, not perfectly suited to the economy of the manufacturing past (although we can still do some of that).
Why, he asked, couldn’t the Telesat framework be expanded to eventually launch satellites covering the north in telephony? How can we prevent our best technology and telecom engineers from moving immediately to Palo Alto after graduation?
Creating Trade diversification was among the seven potential growth drivers for Canada listed by Macquarie economist David Doyle in a research report last week. The others were interprovincial trade (contentious, evidentment), fixed business investment in infrastructure, energy, critical minerals, data centres and AI, and defence spending.
The summit was fortuitously timed with most of the world irritated (at least) with the Americans. Opportunities abound for investment so let’s hope Canadians can capitalize. We know we have the skills required.
Diversions
An absolutely terrible idea
Let’s just agree that robot armies equipped with AI are a bad idea off the jump. There are those, unfortunately, that think differently and are debuting prototype robot soldiers that are downright terrifying.
Futurism reports that the Pentagon recently agreed to pay a company called Foundation US$24-million to continue developing its Phantom MK1 robot. The MK1 is an appropriately blacked out monstrosity that is already walking and capable of shooting guns. What could possibly go wrong?
My mind immediately jumped to the Orc hordes at Helm’s Deep when I read the story. The Orcs were an obedient, manufactured fighting force just like the MK1. Each fighting robot costs US$150,000 and some of the 10 demonstration models are doing simple tasks in the Ukraine.
The idea of robots taking on dangerous tasks in war zones has appeal as a lifesaving strategy but it also makes the decision to use force on other nations potentially too attractive.
I am mollified by the fact that Foundation is backed by Eric Trump and that this apparent graft by the president and his family is likely to end with his tenure.
The essentials
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Globe Investor highlights
Are dividend stocks in trouble given rising bond yields? David Berman shares some thoughts
Americans have never been richer, and it’s largely down to the soaraway stock market. Jamie McGeever explains why that presents some serious economic risks
Hedge funds have been stepping up their bets against consumer stocks
Quick hits
I’m never sure what to do with pie-in-the-sky ideas like autonomous vehicles. It’s plausible that all taxis will be driverless and autonomous car services will dominate traffic, I suppose - I just have trouble seeing it. BofA Securities thematic investment analyst Haim Israel did a full road trip marketing the idea, emphasizing his belief that the industry is at an inflection point thanks to AI. His summary report provides interesting technological details but I didn’t find much mention of how the roadshow was received by investors.
Read this week’s earnings and economic calendar here