Mawer Investment Management Q3 2025 Quarterly Update

Market Overview - The third quarter of 2025 saw strong corporate earnings, resilient economic growth, and falling interest rates, positively impacting stock markets globally [2] - The S&P 500 Index achieved 23 record closes and had its best September in 15 years, driven by investor optimism from strong earnings and AI enthusiasm [2] - Canadian equities outperformed many global peers, particularly in the metal and mining sectors, with gold producers benefiting from a bullion rally [3] Central Bank Actions - Global central banks, including the Federal Reserve and the Bank of Canada, took cautious steps toward monetary easing, with the Fed cutting rates for the first time in 2025 [4] - The Bank of Canada reduced its overnight rate to 2.5%, while the European Central Bank maintained steady rates amid concerns over inflation [4] Market Dynamics - Despite global trade disruptions, inflationary impacts have been less severe than anticipated, aided by companies pre-buying inventory and diversifying supply chains [5] - AI-related stocks have significantly contributed to the S&P 500's returns since the launch of ChatGPT, raising concerns about market concentration and potential bubbles [6] Company Performance - TSMC and semiconductor equipment companies like ASML performed well due to the AI backdrop, while Tencent's shares rose on improved advertising returns attributed to AI [11] - Companies with software-related business models, such as RELX and Wolters Kluwer, faced declines due to AI-related concerns, although their core businesses remained resilient [12] - In Canada, Shopify reported a 30% annual growth in gross merchandise value, and major banks posted strong earnings, benefiting from expanding net interest margins [16] Fixed Income and Bonds - Canadian bonds posted positive returns, supported by a Bank of Canada rate cut and tightening corporate credit spreads [8] - Longer-dated bond yields remained elevated compared to pre-pandemic levels, reflecting investor caution regarding government debt issuance [8] Future Outlook - Equity markets are expected to remain strong, with AI-related sectors continuing to dominate earnings growth, although there are risks of a bubble forming [19] - The U.S. business cycle appears distorted by government spending, with traditional macroeconomic signals indicating ongoing weakness [20] - The company remains focused on fundamentals, preferring firms with competitive advantages and sustainable cash flows [21]