The world in 2017: Simple adjustment or major transformation?

We are coming out of a turbulent year, the effects of which are still difficult to measure.

From the failed coup in Turkey, the Syrian refugee crisis, and terrorist attacks, to the Brexit vote and the election of the Trump administration, we will look back on 2016 as a year of surprises, the impact of which we are still struggling to measure. At the same time, we need take a step back to better understand what happened on the economic front.

The United States is hovering around full employment with the creation of 15 million jobs since the lows of 2010.

Europe is finally coming up for air, with the Euro zone budget deficit dropping and real GDP now above its 2009 levels, before the crisis hit. There too we’re seeing significant job creation: 4.5 million since 2013.

China’s economy may have slowed down in 2016, but it still achieved 7% growth rate. With 13 million new jobs in its urban centres, job creation in China was three times that of developed countries. And let’s not forget the whirlwind growth of Chinese cities.

Brazil seems to be dusting itself off after a period marred by political crises and corruption. Its economic forecasts are more encouraging. Inflation has dipped from 11% in January 2016 to 6% in December 2016.

As for India, it seems to have the wind in its sails, carried by domestic consumption. Growth was at 7% last year in India, and the outlook is just as favourable for the coming years.

The economic situation is, therefore, not be so bad, but uncertainty is high.

In this unpredictable world, there are two possible scenarios: 1) a simple adjustment, or 2) a major transformation.

In this context, with all this uncertainty, what are our options as investors?  Do we recoil in fear or forge ahead? The best answer is neither. What we really need to do is prepare ourselves with rigour and discipline.

The best way to shelter ourselves from volatility is to create value where it really counts: in the real economy, one that is rooted in people’s daily lives.

To move forward in a world of uncertainty, CDPQ relies on its principles and levers to create value that is more resistant to market fluctuations. Our bottom line is to think like a business owner.

We focus on the long term. It’s the foundation of everything we do at CDPQ. We plan our portfolios, our research, our teams and our compensation with long-term investments in mind, looking beyond market volatility. 

Our business-owner mindset is what steers us towards our long-term goals. It means placing value on innovation, research and development, moving above and beyond quarterly results. We adhere to principles of responsible investment, taking into account the environmental, social and governance aspects of our investments. It is not the mindset of a simple financier or investor. 

We build real value. The best way to shelter ourselves from volatility is to create value where it really counts: in the real economy, one that is rooted in people’s daily lives. That means focusing on companies that provide services or make products that we need every day, such as dish soap and toothpaste.

Building real value also means investing in infrastructure that is used every day, the kind that supports economic activity, like as roads, pipelines, water distribution systems and public transit.

Creating lasting value also entails developing and operating buildings where people live, work and shop. Ivanhoé Cambridge, our real estate subsidiary, has made major investments in New York, Chicago, Los Angeles, Boston, Denver and in Québec.

To create even more value, we are developing new ways of undertaking projects, ensuring their operational efficiency. Our subsidiary CDPQ Infra is a case in point, working to build and run the Réseau électrique métropolitain. The light rail project will become a model of how to design, manage, build and operate in an integrated way, to create more value — not merely financial, but economic, with direct and indirect effects on the productivity and well-being of people. 

Instead of trying to predict the unpredictable, we should prepare for it.

We go where there is growth. Our recent investments in India is one example. The same can be said for promising sectors such as biotechnology, green energy and logistics. We work to identify trends that allow us to prioritize certain sectors and businesses. 

We aim for thorough understanding. We believe it begins with in-house expertise. For that reason, we have strengthened our teams with engineers, health and technology specialists, and people with operational experience who know their sectors and industries. This allows us to make investment decisions based on a deep understanding of an asset or business — from its industry to its markets to its production. It’s an effective way of managing risk that is much more reliable than market indices.

To gain deep understanding, it’s important to be on the ground. It begins at home, in Québec, the field we know best. Here, we can watch a business grow from small, to medium to large, and we can have a meaningful impact on growth and expansion. It’s more meaningful than one company’s results. Investing in a small company doesn’t tend to boost numbers. However, it can have a profound impact, building the next generation of successful Québec businesses.

Of course, we have also established CDPQ teams, local branches, and are now in Mumbai, Mexico, Singapore, Sydney, London, Washington and New York City.

Finally, when we are far from home, we find knowledgeable partners with a clear picture of their local markets. For many years, we have put a lot of effort into finding the best partners. We look for those who share our long-term vision and can help us identify the right opportunities. This is precisely how our partnerships have come about with CKD in Mexico, Plenary Group in Australia and Edelweiss Group in India. 

To conclude, I would say this: I think it’s too early to determine whether we are facing a simple adjustment or a major transformation. Brexit, Trump’s election and many other events have shown us that, now more than ever, prediction is impossible. What we need to remember is this: rather than trying to predict the unpredictable, we should prepare for it.

Adapted from a speech in Québec City, on February 2, 2017.