CLIMATE IS KING

What is the biggest long-term threat to the global economy? An increasing number of prominent players are making clear their belief that it’s climate change.

Swiss Re Group is a global provider of insurance and reinsurance. In April, they released an estimate that the world economy will lose a devastating 18% of its GDP by 2050 if no action is taken on climate. Even the best-case scenario they describe – if all Paris Agreement targets are met – would lead to a 4% drop.

Just last week, Exxon was dealt a remarkable defeat when its shareholders elected to its board two activist shareholders who pledged to steer the company toward cleaner energy and away from oil and gas.

Also last week, a Dutch court ordered Royal Dutch Shell to cut its carbon emissions by 45 per cent by 2030, in a landmark case brought by climate activism groups. The Hague District Court ruled that the energy giant has a duty of care to reduce emissions and that its current reduction plans were not concrete enough. The decision could set a precedent for similar cases against multinationals around the world.

What does this mean for our portfolios? It means that we are very much on track with our strategy of making renewable energy companies, which are becoming increasingly climate-friendly, a central component of our investments – companies including Brookfield Renewable, Algonquin Power and Capital Power. Canadian fossil-fuel-based energy companies have been a key driver of increases in the domestic stock market this year, but we choose not to own any of them – because they do not meet our long-time criteria of stable and predictable revenues. Fundamentally they are investing in developing a product for which they don't know the sale price in advance. Not just that, but increasingly they must deal with negative public sentiment, which will result in higher costs of capital longer-term, as lenders shift away from lending to these types of businesses.

We are avoiding that risk, and we are still performing better than the market. Partly because we have a way of taking advantage of Western Canada’s oil-based strength by investing in other vehicles we are comfortable with, including Canadian banks that meet our investment criteria (more on that below).

We will continue to opportunistically gain exposure to renewable energy companies because they are going to be more profitable than fossil-fuel based companies longer term. These companies are big on following ESG (Environmental, Social and Governance) standards. Historically such companies have a lower cost of capital, higher valuations and are less vulnerable to systemic risks.

I think of the trip my family and I took to North Sea cities including Copenhagen, Helsinki and Stockholm. There were giant windfarms in the water, as far as the eye could see. The pandemic has since changed our lives and renewable energy will do the same, just in a better way.

We are fortunate to work with multiple generations of many families. Especially when I speak with the younger generations, their support for things like clean renewable energy, plant-based protein and electric vehicles really shines through. This injection of fresh thinking into our decision-making process is a competitive advantage that benefits us and all of our clients.

The more we understand the full range of your family’s views, the more value we can create – so we welcome these multi-generational conversations at any time.

BANK BOOSTS

We have always been invested in the Canadian banks. We have been expecting very strong Q1 earnings from them, and have not been disappointed. RBC issued its first quarter results last week – reporting a more-than doubling of profit, to $4 billion, from Q1 the previous year. TD’s profit was $3.7 billion for the quarter, up 144% from 2020, BMO’s profit more than doubled to $1.3 billion and CIBC’s more than quadrupled to $1.6 billion.

Much of the profit boosts come from far fewer loan losses than the banks had set aside money for. We like Canadian banks as a proxy for the Canadian economy overall, since their success is so intertwined with that of Canadian individuals and companies – including the success of the traditional energy companies.

ARE YOU COVERED?

The cottage owners among our clients will be hoping for family time spent on the water or in the woods this summer. Here’s something new to consider: is your cottage adequately insured, in light of major increases in the cost of lumber, plumbing, electrical and more? Your policy will cover the cottage’s replacement value – but the replacement value of these components has recently gone up significantly. What about your principal residence and other assets? We want to protect their increase in value – so your existing property and casualty (P&C) insurance may require review.

We work closely with RBC’s top experts. Call us if you would like us to facilitate a discussion with our P&C specialist, Teresa Anastasopoulos.

Another area of cottage coverage is very topical these days: rising cottage prices have resulted in a higher capital gains tax liability. If you were to sell, are you or your family prepared for the now higher tax bill? Life insurance can be used to fund that cost, and you may have it in place now. However, like the lumber example above, your policy was likely designed to cover the capital gains tax that was expected before the recent run-up in prices. If you would like to ensure your existing coverage is sufficient in this or any other area including life, critical illness and disability, please do not hesitate to contact us.

BUYING CANADIAN

A Canada focus – vacationing at home or closer to it – may very well be the story of this summer. We also have a Canada focus in our portfolios, as we touched upon in the July 2020 edition of Marche Monthly. To summarize, our client portfolios have more Canadian companies in them than they’ve had in over a decade – and it’s not about patriotism, but straight-up economics, as reflected in the Canadian dollar’s rise of more than 12% in the past 12 months, a very strong performance.

I was buying Canadian because I believed that compared to ours, the US market was significantly overvalued. It has always been a pillar of our strategy to own companies that consistently pay dividends and have strong balance sheets along with defensive business models. Compared to the United States, we continue to own more of those companies.

ALWAYS READY

Back to inflation for a moment: as we mentioned in the April edition of Marche Monthly, the United States is on track to grow its economy this year at its highest rate since 1984, which gives us concern that higher inflation and interest rates may take over. That said, our portfolios continue to be positioned for the possibility of higher interest rates and inflation, both for stocks and bonds.

Our timeless investing strategy – own high-quality, predominantly dividend-paying companies with strong balance sheets in mainly regulated industries – is designed to weather any situation that may arise. And our philosophy on fixed income – preservation of capital, emphasis on risk relative to return, and strict management of credit quality – is a common-sense approach that avoids the unnecessarily complicated path too often followed by others.

CLEAR PROGRESS

I am so pleased to know that our clients have been getting vaccinated at a very high rate. It is a sign that overall, we are making major progress in the fight against Covid. In Ontario last week, the seven-day average for daily cases was at 1100, down from 4300 a month earlier and the best we have done since March. For Canada as a whole, the drop was from 8700 to 3700. Although Manitoba and Alberta are still struggling, overall it is clear that vaccinations are working.

We can be hopeful that the end of the pandemic is near. I know that I would appreciate a change of scenery and I’m sure you would as well. Our family has been making travel plans for a big trip next year and those visualizations are almost as fun as the actual

adventure. Almost.

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.

Tyler Marche, MBA, CFP, FCSI

Your life, uncomplicated

tyler.marche@rbc.com

1-416-974-4810

www.tylermarche.com