Pandora (1881), Sir Lawrence Alma-Tadema
In our previous quarterly letter we began the year by sharing our perspective on the opportunities for Canada to move forward economically in what has become an increasingly fraught geopolitical environment. The importance of this trend has been further enhanced by geopolitical events that have occurred during the first quarter of 2026.
U.S. military actions in Venezuela in January, along with U.S. threats to seize Greenland the same month, provided some foreshadowing that 2026 could be a year driven by geopolitical headlines.
Further to these events as we all watched in real time, the United States launched pre-emptive military attacks against the Islamic Republic of Iran beginning on February 28th, 2026. In the first 40 days of the campaign the United States alongside Israel have carried out more than 13,000 strikes against Iran and have killed Ayatollah Khamenei and many top Iranian officials.
Despite the U.S. and Israeli military onslaught, Iran has shown the capability and willingness to attack its regional neighbours’ energy infrastructure assets, and to inflict grave harm against the global economy by closing the Strait of Hormuz and restricting the flow of oil and gas from the Middle East, plus other critical materials.
As of the writing of this letter there is a tenuous cease-fire in place that may, or may not, last for the next 2 weeks. After an initial weekend of negotiations between the United States and Iran in Pakistan, the US Navy has established a blockade in the Strait of Hormuz. The pace of events, the daily conflicting headlines, and subsequent market reactions can create a disorienting environment for investors.
In uncertain times like these, we believe our Avenue investment philosophy creates the best road map for successful investment outcomes. The Avenue portfolio has had a good start to the year by remaining focused on owning quality investments.
The objective for our Q1 update is to highlight the 3 main topics that will continue to shape the markets for the balance of 2026. These topics are the U.S. Iran War, the impact of Artificial Intelligence on the software and technology sector, and the growing risks around private credit.
We will finish our letter with highlighting a few of our individual investments and why we believe they are well suited for this current environment.
U.S. Iran War
It could be argued that the United States and Iran have been building up to this moment since the Iranian Revolution in 1979. The subsequent Iranian Hostage Crisis, when U.S. diplomats were taken hostage in Iran for over 400 days, created a diplomatic crisis for President Jimmy Carter.
The United States has maintained economic sanctions on Iran in some form since the 1979 Revolution. U.S. and Iran foreign relations became an important focus for President Obama in 2015 when efforts were made to limit Iran’s nuclear ambitions. The resulting Joint Comprehensive Plan of Action (JCPOA) gave Iran relief from financial sanctions in exchange for limits to their holdings of enriched uranium and ongoing monitoring of their activities from the International Energy Agency. This agreement was torn up by the first Trump Administration in 2018, and U.S. Iran relations have been steadily deteriorating since then.
Last June the U.S. and Israel launched the so called ‘Twelve-Day War’ where the U.S. performed precision bombing strikes against Iran’s nuclear facilities. The military hostilities last summer remained contained and the economic consequences proved to be minor.
As of February 2026, we have witnessed the transition towards a full-scale war between the United States and Iran. The economic and financial consequences of this event are still in the early stages, but we see this as an alarming glimpse into Pandora’s Box for the global economy.
Despite the overwhelming military damage being done to Iran by both the United States and Israel, the Iranians have played their position as best they can by taking aim at the global economy through restricting traffic in the Strait of Hormuz.
The Strait of Hormuz is a geographic pinch-point connecting the Persian Gulf to the rest of the world. This area is a vital trade route for the global economy which during normal times experiences close to 20 million barrels per day of oil and petroleum products transiting this waterway. This amounts to approximately 20% of global oil supply.
Since the beginning of hostilities in February the number of ships transiting the Strait has reached a fraction of the normal level of traffic. The disruption in energy markets has been felt most severely in the countries who are most reliant on exports from the Middle East, particularly in Asia.
Artificial Intelligence Risks to Software
Throughout the last year the market has been very focused on the technology sector and the Artificial Intelligence capital cycle. The substantial physical investment required in A.I. has created the conditions for an investment boom as technology companies are in competition with each other to develop the best A.I. platforms and stay ahead of their competitors.
The resulting proliferation of A.I. produced software systems have begun to compete with existing software that may be easily replicated. This means that existing software business models are being threatened, and the outlook for software profits is far less certain than a few years ago.
This uncertainty was reflected in the performance of the software sector during the first quarter, with the S&P 500 software sector down over 20%.
At Avenue, we have maintained a minimal exposure to the technology sector over the past few years as we could not justify the valuations and the uncertainty caused by Artificial Intelligence. That being said, we are now spending time in our research process to examine the technology sector to identify investment opportunities that have emerged over the past few months.
Distress in Private Credit
A major concern of the Avenue investment team over the past few years was the growth in the private asset space, particularly private credit. The private credit sector is where investors make loans to private companies. The private credit sector grew substantially after the financial crisis in 2009 as low interest rates encouraged investors to seek higher but riskier returns.
The concern with private credit has long been that the underlying credit quality of the loans is low, and the loans being made are very illiquid. This means that during times of distress investors are not able to get their money back.
Asset growth in the private credit space increased substantially after the pandemic as low interest rates and fiscal spending helped support the economy. This support for the economy provided a buffer to protect against a down credit cycle.
In the last 6 months private credit firms have seen an increase in redemption requests as investors have become concerned about the underlying quality of their investments. In response to this, several high-profile investment funds have restricted investor redemptions.
Should a further deterioration occur in the economy we would expect further redemption problems to emerge in the private credit market which could have further spillover effects into the economy.
Avenue’s Quality Investing
At Avenue, we are always focused on identifying and owning high quality investments. During periods of market uncertainty, we rely on the underlying quality of our different companies to shine through. This has been the case so far in 2026.
We define quality businesses as those who have an underlying inherent stability to their profitability. This results in consistent returns on invested capital and gives us higher confidence in the company’s ability to reinvest in themselves. Avoiding over-valued sectors also helps buffer our portfolio of investments against sudden shifts in investor sentiment.
We apply our method of analysis to each sector in the economy and our resulting investment process filters for the highest quality companies in each sector.
One investment that has benefited from the rise in oil prices is Calgary-based Canadian Natural Resources (CNQ). This is an investment we have owned in the Avenue portfolio since 2014. CNQ is one of the highest quality energy producers in the world with an extremely low-cost profile. This means that the business can earn consistent profits in almost any oil price environment.
Another company that is in a strong position to provide value to their customers in the current oil price environment is Murphy’s (MUSA). We have owned shares in Murphy’s since 2022, and they are an Arkansas-based gas station chain. The vast majority of Murphy’s locations are situated near Walmart parking lots which provide a steady base of customers. Murphy’s provides discount gas to its customers and in a rising gas price environment we expect the business to provide an essential price advantage to their customers.
We continue to be on the lookout for investments that meet our quality criteria. We expect the current geopolitical turmoil to provide us with some solid opportunities through the balance of 2026.
Bryden Teich
April 2026
