Summary:
International Fixed Income Market
As many of our clients are unaware, we would like to draw attention to our international bond trading capabilities in predominantly in GBP, EUR, CHF and AUD.
We can trade international treasury and corporate markets with investment-grade yields in excess of 6% for your foreign currency holdings. Furthermore, as Bank of England and ECB (European Central Bank) are likely to cut rates before the FED, we see some capital appreciation opportunities in these bond holdings too.
Buy Pullback in High-Quality Artificial Intelligence Names
Addressing the AI Hype Narrative
It is inevitable that we will see pull backs in major AI names considering their outperformance over the last 12 months. Companies such as Salesforce and Dell pulled back over 20% from their all-time highs on recent earnings announcements of weaker forward AI related sales than expected. It’s likely that NVIDA, that’s already up 154% this year will also experience some pull back as competitors grow and hype normalizes. The weakening economic backdrop of high rates and cooling labor markets can also be the catalyst for some short-term underperformance. Ultimately, I view these dips as buying opportunities as this is the next wave of computing technology that should provide secular growth for years to come.
I receive a lot of questions from clients asking me to explain what AI is. I will break down the AI terms and provide more clarity on how to invest in the industry and more specifically the areas with that we believe will provide the best value. Some AI names have cooled, while others are powering higher. Regardless, it is a good time to investigate further.
In simple terms, AI (artificial intelligence) is about the next generation of intelligent computational power that can simulate human intelligence. These processes include learning, reasoning and self-correction. Pre-AI computing technologies lacked the ability to operate autonomously and were more rules-based in their output.
AI demand is likely to surge as it allows companies to more quickly and efficiently organize and interpret the vast amount of data they have been collecting on their customers and industry over the years. “Data is the new Oil!”.
Below are a few examples of how AI can disrupt industries, drive chip demand and deliver shareholder value:
“The Global AI Chip Market is projected to increase by 1,036% between 2024 to 2033, or 31.2% CAGR (Compound Annual Growth Rate)”
A company that had flown under the radar for many investors until recently has seen a staggering surge of over 3000% in the last five years. Nvidia (NVDA US), a leading manufacturer of semi-conductor chips, has been at the forefront of meeting the escalating computational demands of artificial intelligence. Their technology has cemented a significant lead over the competition, setting a new standard in the industry.
Nvidia’s recent share price appreciation has not been a bubble as revenue has equally grown exponentially:
Nvidia still holds a very dominant position in the data center market compared to closest competitors ADM and Intel:
“Nvidia’s chips play a vital role in the ecosystem supporting AI computing in data centers. AI data centers are specialized facilities designed to handle the immense computing and storage requirements of artificial intelligence model training.
Investors can gain exposure to various AI themes each with their own risk-reward profiles:
These opportunities cater to different investment strategies, allowing investors to tap into the growing demand for AI infrastructure.”
Infrastructure Build Out
ASML (ASML US) is a crucial player in the semiconductor manufacturing equipment industry, specializing in advanced lithography machines essential for chip production. ASML holds an exclusive position as the sole provider of extreme ultraviolet (EUV) lithography machines, vital for producing advanced chips.
Taiwan Semiconductor Manufacturing Company (TSM US) is a leading semiconductor manufacturer, producing cutting-edge chips for various electronic devices. The company is at the forefront of developing and implementing innovative technologies like 5nanometer and 3nanometer1 process nodes, enabling the production of smaller, faster, and more power-efficient chips.
Risk: The high upfront capital cost and long payback periods are the main risks for investors.
Energy Supply
NextEra Energy (NEE US), a leader in renewable energy, is well-positioned to provide clean energy to AI data centers. The rapid expansion of AI data centers drives significant energy demand, and fossil fuels alone cannot meet this demand.
Risk: Energy price fluctuations and regulatory changes are the risks.
Data Centers are taking an ever increasing share of Electricity Consumption:
Chat GPT (AI Powered Chat-Bot) Energy requirements are much more than a Google Search highlighting the vast increase in computational needs:
Materials like copper and aluminum are essential to the AI boom due to their critical roles in technology infrastructure. Copper’s superior electrical conductivity makes it crucial for manufacturing semiconductors, circuit boards, and electrical wiring, all fundamental components of AI hardware. Aluminum, valued for its lightweight and strong properties, is used in AI-related devices and cooling systems. As AI applications expand, the demand for these materials will increase to support data centers, IoT devices, and advanced computing systems, driving innovation and infrastructure development. Large miners such as Rio Tinto (RIO US) and Freeport McMoRan (FCX US) are likely to benefit from growing demand for these materials.
Risk: Supply chain and commodity price fluctuations should be monitored. Annual copper demand will be greater than all copper consumed from 1900 – 2022.
Nvidia (NVDA US) is a leading chip designer, specializing in creating advanced graphics processing units (GPUs) and AI chips integral to high-performance applications and AI data centers. As AI adoption grows, Nvidia continues to invest in R&D to maintain its leadership position. Their latest next-generation GPU, Blackwell, (also Rubin) AI model training to be four times faster and improves AI inferencing performance by 30 times, while being up to 25 times more energy efficient than the previous Hopper architecture.
Risk: Due to the high up front R&D spend this theme has the highest risk but also one of the highest growth trajectories due to the latest designs being critical to the overall industry.
While chip production and infrastructure build-out are the initial beneficiaries of AI growth, companies that can effectively harness increased compute power to develop new products and services for consumers and businesses are likely to be the long-term winners in the AI era Risk: There is intense competition on this space but also lessened by the barriers to entry on R&D.
The following list highlights end point software/hardware companies that are leveraging AI technology and integrating it into their business strategies:
Currently, big tech companies dominate the AI landscape due to their substantial cash flows and capacity to finance future research and growth. These industry leaders are:
The ongoing AI rollout is likely to benefit numerous large tech companies, leading to incremental improvements in their products and services. This trajectory is similar to the incremental benefits brought by cloud computing. While AI will enhance existing technologies, there is also a possibility that one or two revolutionary new products or services will emerge from AI advancements that we would like to invest in.
Such breakthroughs could be full Self-Driving or Apple’s Immersive Vision Pro technology. However, we are very still early in the cycle, and it’s equally possible that the next revolutionary product or service for AI capabilities has not yet been created. Given the significant R&D costs involved however, any breakthroughs are likely to come from Big Tech companies, which is why I remain bullish on the sector
If you would like to understand more how this secular theme can benefit your portfolio, please reach out for a discussion.
Bank of Nova Scotia (BNS US) 6.6% Yield
The Bank of Nova Scotia (Scotiabank) presents a compelling investment opportunity for retail investors. Here are key reasons why you should consider adding BNS to your income portfolio:
High Dividend Yield
Scotiabank offers an attractive dividend yield of 6.6%, which is among the highest in the Canadian banking sector.
Consistently Growing Dividend:
Under the leadership of its new CEO, Scotiabank has initiated a comprehensive turnaround plan. The focus is on improving operations in Canada, the United States, and Mexico, enhancing productivity, and growing capital-light businesses such as wealth management. The plan also includes exiting or turning around underperforming operations in Colombia and Central America. This strategic shift aims to boost profitability and shareholder value.
Scotiabank trades at a low price-to-earnings (P/E) multiple of 9.3x based on expected 2025 earnings, making it one of the cheapest among Canada’s major banks. Additionally, it has a low price-to-book (P/B) ratio of 1.1x, further underscoring its attractive valuation. These metrics indicate that the stock is undervalued relative to its peers, providing potential for price appreciation.
With a rich history dating back to 1832, Scotiabank is one of the oldest financial institutions globally. Despite recent underperformance, due to poor sentiment around Latin American markets and currency depreciation, the bank has a long track record of stability and resilience. Its diversified operations span across Canada, the United States, Mexico, and Latin America, offering a balanced revenue stream.
The Stock has underperformed its peers in terms of share price performance over the last 5 years.
NAME / 5 year annualized return inclusive of dividends
BANK OF NOVA SCOTIA / 4.1%
CAN IMPERIAL BK OF COMMERCE / 11.5%
NATIONAL BANK OF CANADA / 18.6%
BANK OF MONTREAL / 8.9%
TORONTO-DOMINION BANK / 4.9%
ROYAL BANK OF CANADA / 12.1%
Commitment to Growth
Scotiabank’s new focus on North American markets and capital-light businesses is expected to improve its return on equity (ROE), a key measure of profitability. The bank aims to leverage its strengths in these regions to drive growth and enhance shareholder returns.
Risks and Considerations
However, the bank’s strategic shift towards more stable markets should mitigate some of these risks.
Scotiabank offers a blend of high dividend yield, attractive valuation, an A+ credit rating and strategic growth potential. While the turnaround plan may take time to fully materialize, patient investors can benefit from the generous dividend. With a strong capital position, diversified operations. and its quality historical performance and robust operations, Scotiabank is well-positioned to deliver solid returns in the long run.
2 Year Bearish S&P 500 Index Principal Protected Note
This investment product allows you to potentially profit if the S&P 500 Index goes down over the next two years. You will earn 136% of the index’s decline, while your initial investment is protected if the index goes up, as long as Citigroup remains creditworthy. In other words, you can make money if the market falls, but you won’t lose your initial investment if the market rises.
2 Year Meta Platforms Inc. Class A (META) Quarterly Autocallable (Phoenix Autocall) Note
This 2-year investment, issued by the Bank of Montreal, is linked to Meta Platforms Inc. (META) and offers an annual return of 11.56% if META stays at or above 60% of its initial level on quarterly observation dates. After six months, the note can be automatically called if META is at or above its initial level on these dates, ending the investment early with full returns. If META drops below 60% by the end of the term, you may receive shares instead of cash, potentially resulting in a loss. This product is suitable for investors seeking high yield with some equity exposure to META.
Navigating the complex world of AI investments and finding reliable income stocks can be challenging. Our expertise can help you:
Don’t miss out on the next wave of investment opportunities. Contact us today to learn how we can help you achieve your financial goals.
