Conference Call with Murdo MacLean (Client Investment Manager with Walter Scott and Partners)
Featuring Murdo MacLean, where we discuss Trump's second term, AI and its impact on the markets, and Walter Scott's global equity portfolio.
Transcript of the Hebb Advisory Group’s May 2025 Conference Call
[00:00:07.480] - Intro
All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen, and welcome to this month's conference call with Derek Hebb from CIBC Wood Gundy. Please be advised that this call is being recorded. I would like to turn the call over to Mr. Derek Hebb, Senior Wealth Advisor. Please go ahead, Mr. Hebb.
[00:00:29.570] - Derek Hebb
Thank you, Patrick. Today, we're joined by Murdo MacLean, Client Investment Manager with Walter Scott and Partners in Edinburgh, Scotland. Murdo, who I last interviewed in February of 2024, joined Walter Scott in 2006 and spent 12 years on the research team focused on Japanese and US equities. He joined the Client Service Team in January 2019. Prior to Walter Scott, Murdo lived and worked in Japan for six years. He holds a BA (Honours) in Japanese and Marketing from the University of Stirling and Level One Japanese language proficiency test. Murdo, thank you for joining us this morning.
[00:01:11.650] - Murdo MacLean
My pleasure, Derek. How are you?
[00:01:13.390] - Derek Hebb
I'm doing well. It's great to talk to you again.
[00:01:17.130] - Murdo MacLean
I can't believe it's been a year already.
[00:01:18.860] - Derek Hebb
It's incredible. And there's been so much happen since we last spoke, in particular, year-to-date, to say the least. You know, Donald Trump's second term as President of United States - it began just over three months ago. What have we learned so far from this experience?
[00:01:43.760] - Murdo MacLean
Yes, indeed. It feels a lot longer than three months ago. I would say, first of all, I think that heading into the new presidency, I think there was a feeling that Donald Trump would be good for markets, good for the stock market for example, given that there were some signs of that in his previous presidency. I think there was a view that he ultimately wants the economy to kickstart, wants investment into the economy, and that that would generally be good. Obviously, what we've seen in the last few weeks, particularly, has been something much more on the opposite side of that. I think that has really come from the lack of visibility that has come from the White House around what potential tariffs might look like. And we've seen a lot of volatility. We've seen Liberation Day, which was billed as providing significant clarity following several weeks of toing and froing with Canada, with Mexico, and so on. But it was supposed to be a day in which we would all have that clarity that we've been craving. And of course, it set markets into a bit of a tailspin, and then culminating several days later with a postponement for a further three months, which initially was celebrated by markets.
[00:03:17.880] - Murdo MacLean
But ultimately, I don't think there's a huge cause for celebration when all that he really did was extend that period of uncertainty. And then now what we're seeing is dribs and drabs on a daily basis about specific trade relationships, around the Fed independence. It's really not helping what we're focused on, which is real companies. And so clearly, we continue to hope that there will be further clarity, that there will be a degree of common sense that will prevail. I think everyone is willing to accept Donald Trump's way of doing things is different from others, but ultimately, something as serious and significant as this needs to be handled very carefully, and perhaps thus far, it has not been handled particularly carefully. But I think what we do know is he was at least serious about what he said with regards to jobs being coming back to the US, continuing with the US first narrative. So I think we know that he wasn't bluffing. We just don't know across individual industries necessarily or countries with which they have trade relationships, what the likely outcome will be. So I would love to give you a definitive answer, but I think that's probably the most honest thing I can say at this stage.
[00:04:43.370] - Derek Hebb
Yeah, of course. It makes sense. Thanks, Murdo. If you look over the last couple of years, AI has really driven the markets. Have we now entered a different period for the markets?
[00:04:59.690] - Murdo MacLean
Yeah, I think you're right, certainly, that this time last year, it was really all that people we're talking about was AI. There's a lot of excitement around a pretty small number of companies that were deemed to be the most obvious initial beneficiaries of the massive Capex that has needed to be spent in order to ready the global economy for a deployment of AI. Since, really the back end of last year, we've seen a number of those companies go through a period of underperformance, not so much because their results have been poor, but just because it felt to some extent as if that trade was a bit long in the tooth. To use a sports analogy, some of those valuations were a bit over their skis. We all know that back in the days of the first phase of the Internet being rolled out, there was a lot of money being spent, but it took a while, or some cases never came through, that there was a return on the end of that. And I think the more money that was spent, the gradual realization was at the market level that we're not seeing returns yet here.
[00:06:15.290] - Murdo MacLean
So how much longer can you spend without returns coming on the other side of that? And then we've also obviously witnessed the deep seek announcement, and whether that was truly accurate or not, it did place an element of doubt into the market around the dominance of, say, those US tech companies. What are the barriers to entry, really, for those businesses? Can the Chinese compete here? They clearly want to. And just enough to place a seed of doubt in investors' minds, particularly when they've been asked to pay pretty high multiples. So all of that, I think, in addition to just investors belief in the US market had run very hot for very long, and that we've seen a little bit of that unwinding. By no means do I think that that means that AI is not going to be everything that it was billed to be. I just think that such as was the case of the Internet, it's going to take a bit of time to see the returns on that investment. It's going to take a bit of time for the infrastructure to be deployed and for companies in the real world and consumers for that matter, to reap the benefits of this.
[00:07:31.550] - Murdo MacLean
We, as a house right now, are continuing to hold a lot of the companies that we think are very well exposed to AI. AI, fortunately, was never the primary reason for investing in those companies, but it was their position in the supply chain for semiconductors, for example, that meant that whatever the application was, those companies are well positioned. And then at the margin, we've been discussing a few more newer ideas that we also think are long term winners in this space that might have come unstuck in the recent volatility. So yes, there's question marks around global supply chains. Yes, there's question marks around tariff. But I think something of the significance of AI is something to be very excited about. I just think that we were saying this a year ago that you're not going to get an immediate return, and it's not going to line up perfectly. But if you're in the right companies, they will be there, thereabouts when things start to really move here. And so I think we continue to be excited about the space. Valuation consideration is very important. Identifying the real winners, those that hold the keys, if you will, to the future of this is exactly what we want to try and make sure we're exposed to. So, yeah, I think often things come and go. I think AI is probably almost certainly here to stay, but it's going to take a little bit longer to play out as the market is hoping for.
[00:08:59.000] - Derek Hebb
Thank you, Murdo. If you look year to date, it's a great example of the importance of diversification, which we always emphasize in portfolio construction, and that includes geographic diversification. On that note, with Europe starting the year strongly, is US exceptionalism dead, would you say?
[00:09:25.390] - Murdo MacLean
So a couple of things on this, I think I would say. Ultimately, valuation must never be forgotten as being crucially important in whatever you invest in. The US has historically traded at a premium to the international markets for many, many years, usually 20, 30, 40 % premium, something of that magnitude. Towards the end of last year, the relative valuation of the US versus the rest of the world was pretty much at an all time high as well as concentration levels in markets around that seven or so companies in the US. And at some point, that has to give because otherwise, investors are completely dispensing with common sense and just continuing to buy the states on whatever valuation. That's not sustainable. So we saw that hitting around 80% premium over international, and a US that accounted for about 75 % of the global index, which was just incredibly high, too high, really, as we now know. And I think it's begun to return, not back to where it was, but certainly has come back down quite a bit, which makes sense. So a degree of mean reversion has been seen. We would always impress upon our clients the need for geographic and sector diversification, but not to the extent where you lower the quality of your portfolio.
[00:10:51.830] - Murdo MacLean
So I think there's a balance to be struck there. And I believe that we want to invest in countries where there are companies that have a comparative advantage, wherever that may be. If the best company in robotics is Japanese, then that is the one that you might want to own. If the best business in pharmaceuticals is in Switzerland, that's the one that you probably want to own. But of course, providing the valuation is supportive. So I think the cheaper the US gets, the more interesting the US becomes, ultimately, if you are focused on quality businesses, growth businesses for the long term. We will continue to make sure that the portfolio is geographically diversified because we look far and wide for those best companies with those comparative advantages. But I don't think that we are significantly altering the nature of the portfolio because the US got to those levels. We were on the way and have been on the way in the United States for pretty much all of our history. And so to that extent, I think we were expecting a bit of a pullback at some point here. But if that provides opportunities and they happen to be American and that's the right thing to do in the portfolio, then doubtless, we will deploy some capital to add those businesses to the portfolio just in the same way that we would for any region.
[00:12:09.280] - Derek Hebb
Thanks, Murdo. So what is your general outlook for Walter Scott's global equity portfolio?
[00:12:17.680] - Murdo MacLean
Yeah. So in the long term, we're always asked, are you bullish? Are you bearish? We would always say, when it comes to the market, we're pretty neutral. It's hard to say, because the market encompasses so many businesses, so many industries, the good, the bad, the ugly. It's difficult to form an aggregate view of all of that that's going on. But we have a 50 stock portfolio, the global growth portfolio, And it's a great deal easier to come to a long term conclusion on that because we've deliberately selected those businesses. They're in there for a reason, and that's because we think they're in possession of really dominant market positions. They're in great industries, and they happen to be driving the growth in those industries in many ways. So we can always be more bullish on the portfolio than we can be on the market. Even though you tend to hear on a daily basis people talking about the market, what do they even mean by that? It's too broad a cross-section of companies to make generalizations. As it pertains to the rest of this year, it's extremely hard. If you listen to company CEOs at the moment on the earnings calls, some of them are giving no guidance for the rest of the year.
[00:13:31.200] - Murdo MacLean
Some of them are painting a pretty bleak picture, but dearly crossing their fingers that things are a bit better than that. So in the near term, there's no doubt uncertainty is very high. It's rarely been poorer in terms of visibility in my career. That should not dissuade a long term investor. These are also the points where you must hold your nerve. These are the points where you are given opportunities to pick up great businesses that will do the job for you in the long term. So very often the moments to buy and certainly to hold are those moments that seem the most bleak, if you will. So I think we're bullish on the portfolio, particularly if we go into an environment where economic growth is low or negative and where companies in possession of more sustainable growth start to be rewarded for that. That quality, that sustainability of their growth, that great profitability, that balance sheet, that dividend that has been somewhat overlooked in favour of the high flying red hot thematic stocks, they'll come back again. And when they do, I think this portfolio is exceptionally well positioned, and the team is working super hard right now to make sure that we take as many opportunities as we can from what's on offer right now in the equity space.
[00:14:47.460] - Derek Hebb
That's great, Murdo. We'll leave it there. This has certainly been a timely and valuable discussion. In the interest of time, this will conclude today's call. If anyone has questions about the information that Murdo just discussed, please contact me. Thanks to everyone for listening in. And Murdo, thank you again for joining us on this month's call.
[00:15:10.730] - Murdo MacLean
Thank you, Derek. It's always a pleasure. And thank you very much to you and your clients for the support.
[00:15:15.260] - Derek Hebb
Thank you so much. Take care.
Disclaimers
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2025.
Murdo MacLean is Client Investment Manager with Walter Scott and Partners. The views of Murdo MacLean do not necessarily reflect those of CIBC World Markets Inc.
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January 2025 Conference Call with Michael O’Callaghan
Michael and I discuss challenges and opportunities in 2025
[00:00:06.290] - Intro
Good afternoon, ladies and gentlemen, and welcome to this month's conference call with Derek Hebb from CIBC Wood Gundy. Please be advised that the call is being recorded. I would now like to turn the call over to Mr. Derek Hebb, Senior Wealth Advisor. Please go ahead.
[00:00:21.570] - Derek Hebb
Oh, thank you, Chris. Today, we're joined by Michael O'Callaghan, Director of CIBC Private Wealth Management's Investment Strategy Group. Michael, who I interviewed last April, joined CIBC in 2011 and is responsible for providing market commentary, portfolio strategies, and investment recommendations to CIBC Wood Gundy Investment Advisors and their clients. Michael is a graduate of the Richard Ivy School of Business's MBA program, and he is a CFA charter holder. He has more than 16 years of experience in the financial services industry. Michael, thank you for joining us this afternoon.
[00:01:03.150] - Michael O'Callaghan
Thank you very much for having me. It's a pleasure to be here.
[00:01:05.400] - Derek Hebb
It's great to have you on the call. Michael, to get us started, can you just spend a couple of minutes talking about the economy? How are we doing?
[00:01:17.440] - Michael O'Callaghan
Well, we're not doing too badly. I mean, the CIBC Economics group has been forecasting the real GDP growth in Canada and the US, and they're estimating will come in with modest growth of 1. 1% in Canada, but that will rise to roughly 2.5% by the end of 2026. The US economy obviously is doing better than that in Canada. Growth is estimated to be about 2.7% in the US by our Economics group, and that should stay roughly in that range to the end of 2026. So overall, it seems we're doing pretty decently. If you look at the unemployment rate, which is another gauge that people use, keep in mind that if unemployment gets down to 5%, economists widely look on that as an economy operating at full capacity. So, in the United States, we've been well below that level for quite some time. We're at roughly about 4.1% right now, so we're very, very red hot on the labour market, and that's expected to continue to be at that level, roughly at the end of 2026 in the US. It's a very, very tight labour market, very, very well-employed consumer with good job prospects willing to spend.
[00:02:21.820] - Michael O'Callaghan
In Canada, not so much. We're expecting to come to the end, and when the numbers come in, that 2024 will have an unemployment rate of about 6.3%, but that's expected to fall to about 5.8% courtesy of bank rate cuts by the end of 2026. So, although we're not doing tremendously well in Canada, unemployment-wise, labour-market-wise, we're okay for now. Nothing recessionary to point to on the rise there.
[00:02:48.830] - Derek Hebb
Thanks, Michael. We're dealing with a great deal of uncertainty, especially with respect to potential tariffs. Are there sectors of the market that are well positioned for growth despite these threats?
[00:03:02.480] - Michael O'Callaghan
That's a good question. With just a few days into the Trump administration, and already there's a ton of executive orders that have come out, and people are very scared of what's going to happen. Are the tariffs going to hit uniformly across all sectors? And then what will the response be from Canada? But if you look at tariffs and you say, are certain things going to be tariff-immune or tariff proof? It's tough to find that there will be anything except those sectors of the economy that really may not pertain to be anything that is imported, that is crossing the border from Canada to the US. Let me give you an example. Real estate might be one. So, if you have a real estate company that might have lots of multifamily or single family dwellings in the United States, I would argue that those assets are already in the United States. You're not importing homes into the US or whatever. So, the question is, is that going to be exempt from this type of thing? Then you look at the Canadian telecommunications sector. All of those companies, Bell Canada, Rogers, TELUS, pretty well all their revenue is generated in Canada by Canadian for Canadians; no tariff impact there.
[00:04:03.130] - Michael O'Callaghan
But when it comes to things like energy, automotive parts, and stuff like that on the industrial front, agricultural products, it's a lot different of an equation. And there's where the uncertainty lies in terms of the impact on Canadians. And then what will the countervailing tariffs be that Canada imposes on the US? The result of all that will probably be to stoke inflationary forces. But then that begs the question as to whether or not the expected bank rate cuts that people want to see over the course of 2025 will be implemented to the extent that we think they will.
[00:04:36.880] - Derek Hebb
Thanks, Michael. So, what is your market outlook for 2025?
[00:04:41.870] - Michael O'Callaghan
Well, with the data we have right now, and of course, this is early days, we've had a tremendous market performance last year, 18% on the TSX Composite Index, and we had a north of 20%, again, on the US index, the S&P 500. We had mega-cap technology names driving US equity outperformance. In Canada, we had financials, materials, energy were driving contribution in Canada. This year, I would suggest that investors should temper their expectations. We're probably not going to see as robust a positive response in Canada and the US as we saw previously. But overall, we think that the direction will continue to be up, bolstered by that consumer who remains gainfully employed, is willing to spend money, and that is roughly 70% of your economy. So, that provides a good boost coming out of the gate. Will we see the broad sector participation in the markets moving up as we did last year? There are 11 GICS sectors as they call them, that make up the TSX Composite Index and the S&P 500 Index. For calendar 2024, all but one of those, that is 10 of these sectors in Canada, finished in positive territory. A very broad-based participation there, a very good year, and it was also 10 in the United States.
[00:05:57.460] - Michael O'Callaghan
We may not see the participation this year through as many sectors as we saw last year. But overall, so far, even though you've been off to a bit of a rocky start, it does look like the Trump initiatives are starting to stoke those mega cap technology names and optimism for economic growth south of the border, and we hope that that can lift the Canadian markets in tandem as well.
[00:06:20.420] - Derek Hebb
Thanks. Michael, you and your team have a very well-defined, multidisciplinary investment process. Can you provide an overview of your process and just talk about the various strategies that you manage?
[00:06:36.020] - Michael O'Callaghan
Yes. We have an approach that we think is quite unique. We use fundamental analysis, technical analysis, and quantitative analysis. So, for those that are not familiar with those terms, fundamental analysis is what we call the private detective work. So, we go on to a company's website, find out all about them. We review their corporate presentations. We look at their quarterly financial statements, their annual financial report. We read equity research on those companies to get a very good idea of who they are, what they do, how they make their money, how they get paid, and what competitive advantages they have. Then we overlay on top of that a technical discipline. That's a study of the actual stock price chart to give us an idea as to whether or not now is the right time to buy that stock and add it to the portfolio, or should we wait? On top of that, we overlay a quantitative model that our Portfolio Strategist, Ian de Verteuil, provides, and that gives us a quantitative score. That number is based on about 15 different variables that the quantitative model looks at. So, if we get a green light on all of three of those disciplines, we look on that as a stock that we probably should add to the portfolio.
[00:07:43.300] - Michael O'Callaghan
But since technicals and quantitative sometimes point in opposite directions, we allow ourselves to put equities into the portfolio that have a green light on two of those disciplines, provided it has a green light on fundamental. So, to get into the portfolio, green light on fundamental, technical, and quantitative, or fundamental and technical or fundamental and quantitative. And the reason for that is fundamental is important because that's about 70 to 75 % of our process. The technical and quantitative combined comprise the remaining 25, 20%.
[00:08:16.550] - Derek Hebb
Thanks, Michael. It's great to hear your insights, especially in light of current events. I should note that you and your team are accessible to me and my clients. On that note, if anyone has questions about the material that Michael discussed, please contact me.
[00:08:27.950] - Derek Hebb
In the interest of time, this will conclude today's call. Thanks to everyone for listening in, and Michael, thank you again for joining us on this month's call.