Monthly commentary - Mackenzie Bluewater Team

Written by the Mackenzie Bluewater Team

In the wake of the global pandemic, the global economy has gradually transitioned back to normal. However, the lingering after-effects of Covid-19 continue to exert a significant impact on the investment world, as Covid related distortions continue to gradually normalize.  This has presented both challenges and opportunities for individual industries and companies.

Over the past three years, the global investment landscape has been heavily influenced by the trajectory of interest rates and inflation. The pandemic triggered an unprecedented response in fiscal and monetary policies worldwide, leading to a highly unusual scenario where consumers significantly improved their financial positions amidst restrictions on what they could spend their disposable income on.

As the world gradually emerged from pandemic-induced lockdowns, pent-up consumer demand surged, setting the stage for a robust economic recovery. However, this recovery faced unexpected challenges, including the exogenous shock of a war in Ukraine and persisting disruptions in supply chains due to the fluctuating imposition and lifting of lockdowns globally. These factors, combined with tight labour markets culminated in a historic upswing in inflation and, in response, higher interest rates throughout 2022 and 2023.

While inflation reached its peak in mid-2022, monetary policy continued to tighten even as inflation began to fall in order to bring price level changes back to a rate deemed acceptable by Central Banks. This led to a significant shift in the macro narrative in 2023, focusing on the extent and duration of policy rate increases. The prevailing question became how high policy rates would climb and how long would they stay there.

As we move forward into 2024, our investment strategy remains anchored in focusing on industry leaders that can enable these changes. This approach allows us to participate in the transformative trends while mitigating exposure to more speculative areas.  As the after-effects of COVID gradually wane, our investment strategy is anchored in the belief that companies positioned as best-in-class leaders in resilient and healthy industries will once again assert themselves. In an environment marked by macroeconomic uncertainty, these companies are poised to thrive as they are positioned to capitalize on emerging opportunities.

CAE is an example of a business that has undergone significant shifts through the pandemic.  The company is a global leader in pilot training for civil aviation and over the past decade they have benefitted from the continued outsourcing of pilot training by airlines.  This trend accelerated through the pandemic as airlines contended with a material contraction of revenues and re-evaluated their cost base.  Notably, CAE now has training contracts with every single US airline with the exception of Southwest Airlines, which is a seismic shift in their approach to pilot training.  Combined with the significant pilot shortages and a more comprehensive product offering that now includes training for flight crew and ground staff and labor management software, there are significant growth opportunities at CAE’s disposal which should drive growth rates above historical levels. 

Within their defense business, the pandemic posed significant challenges.  The defense industry is characterized by long term, firm, fixed price contracts that offer minimal price escalation clauses.  While these are sufficient in a low inflationary environment, as was the case pre-pandemic, they proved to be materially inadequate in a highly inflationary environment.  This impacted the profitability of defense contractors, including CAE.  Today, the industry is moving away from legacy pricing mechanisms, shifting the burden of inflation and commodity price risk to the customer.  These legacy programs will continue to be a material drag on the profitability of the defense business for several quarters.  As newly awarded contracts, which are higher margin, ramp up, the margin profile should return to pre-pandemic levels. 


We anticipate the onset of a more challenging economic landscape as central bank tightening gradually takes full effect. With the extraordinary savings from Covid stimulus programs nearing depletion, consumers are displaying increasing signs of financial strain. Bluewater has delivered value to investors by concentrating on a select group of companies that stand as leaders in their respective industries. These companies are spearheaded by best-in-class management teams and exhibit growth rates surpassing those of the overall economy. Their resilient business models enable them to navigate uncertain environments adeptly and enhance their competitive advantages. All our businesses boast high profitability, generate substantial free cash flow, and maintain robust balance sheets. We anticipate that the earnings resilience of our companies will be significantly more resilient compared to the broader market, positioning them well in the face of economic headwinds.

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