Paul Tepsich A Comment -- General Comments From an Expert A Commentary N/A Apr 25, 2016

The publicly traded real estate space absolutely is a beneficiary of this. When you look across equities today, real estate stocks have been largely underweight ever since interest rates went higher. As the uncertainty continues, people will be looking for more defensive equities to invest in.

In contrast, when you look at the private markets, fundamentals in the commercial real estate space have been quite strong. Seeing internal growth of 3-4%, balance sheets in check. Given the interest rate backdrop, transactions should pick up at quite a pace in the back half of this year. That will shed light on the valuation disconnect in the public market.

So he's actually quite bullish on the outlook of the sector for the rest of this year.

He's foreseeing a pickup in both, but definitely a difference between the two. People seem to be translating slowdown in the US into a recession, but he doesn't think this is necessarily the case because there's a stronger economic backdrop there. 

The backdrop in Canada is tougher, and tariffs do not help. Recession could be a reality. What that means is that the central bank here in Canada is going to be cutting at the fastest rate of any country globally. That type of backdrop in interest rates can be quite positive for the valuation of real estate. It's particularly positive for those that have a better cost of capital. 

This is an environment where people can take advantage, not necessarily of broken assets but of broken owners, and buy great assets. If assets continue to trade at such a wide discount in the public market, we could definitely see M&A pick up and REIT privatizations across Canada.

As a stock picker, it's really important to get the top-down correct, and then do your bottom-up research. Looking across the sectors, if you're thinking bullish and recession, you want to think defensive. Grocery-anchored shopping centres across Canada are very defensive. Seniors housing is enjoying secular tailwinds, where demand is far going to outpace any new supply. 

Shy away from office space, which has a secular headwind with high vacancies. Doesn't expect any rent uplifts in that space anytime soon.

Everything about this economy is good, except one thing: the president who is angry at everything except Putin (maybe him too) and his wrath has made investors so negative that they want nothing to do with stocks, sure that Trump will keep issuing tariffs that wipe out our wealth. April 2 could be liberation day when US investors are liberated if Trump gets his tariffs out of the way. Maybe.

Someone who really understands the value of a security can really find a lot of bargains on days like these. You can make a case that the overall market is expensive. But at the same time, some of the individual securities underneath are at panic-level pricing, even high-quality ones.

There's been quite a selloff already. Some stocks are down 20, 30, even 40%. Even if you apply the worst-case scenario on the tariff front, many securities are at very attractive buying levels at this time.

Every day in Canada you hear about tariffs, and the concern is well warranted. Businesses and stocks will be impacted. As well, consumer confidence and business confidence are at all-time lows. 

At the same time, some stocks are not impacted by tariffs at all. The underlying businesses are doing really well and the business prospects are good. Yet they've been caught in the fund-flow dynamics, where nobody wants to invest in Canada. At some point, that will reverse in the opposite direction.

So it's a really good time to buy those securities.

Based on all the geopolitical and economic news, at some point fatigue settles in. Usually takes several months to do that. Eventually, investors will be able to dissect securities based on whether or not they're impacted by tariffs and by how much. 

Even if the news flow changes from the White House on a daily basis, big money managers will have picked their spots to buy Canadian stocks, and the fund flow dynamics will become increasingly positive. He likes to focus on investments that aren't impacted by things outside his control, like tariffs.

If you're looking for stable dividend stocks, it's a good place to put capital to work. You can feel safe with those dividends, but don't expect to generate outsized returns over the investment cycle. 

You need to sort stock candidates into categories: true long-term compounders, trading stocks, or somewhere in between. Canadian telcos are somewhere in between. Buy them, but slowly, if you're happy to only get the dividend. He wouldn't accumulate aggressively. If competition pops up in Canada, that would not be good.

He likes technology companies, as they're capital-light businesses. Agile business models. Revenues are usually sticky. High recurring revenue. With a great management team, you're often looking at margin expansion as well. 

Be careful not to overpay for this type of business. That's been hard over the last few years, but the current environment brings good opportunities.

We're finally waking up as a country. It's amazing to see everybody coming together and talking about working together. Dropping barriers, like crazy taxes, to move products from one province to another. Those make no economic sense. Dropping them will unleash a lot of GDP right there. 

Great to hear the talk. He would like to see some action, which will probably come after the election. When it comes to Canadian infrastructure investment, there are some good companies out there and already trading at attractive multiples. And that's before accounting for any additional investments.

You really have to pick your spots. Have to make sure companies don't take on any fixed-price contract risk. Many have smartened up over the years and now structure contracts differently. Take a look at ARE. And ATRL, in consulting, is probably an even safer way to play in the space.