Dean Orrico A Comment -- General Comments From an Expert A Commentary N/A Oct 11, 2016

As we all know markets in general have seen a lot of volatility, a lot of which is due to our friends down south. But we've noticed a normalization over the last little while, and REITs are becoming normal again ;)  

It was nice when interest rates were almost at zero and the value of real estate was spiking. But that's not what you really want. Real estate is supposed to be a store of income; you get your monthly rent cheques passed through and the REITs manage the real estate for you. You get 6-7% yield and a couple percent of growth, bringing you close to 10%, and you can count on that year over year.

With the correction and repricing that's happened, yields are now back to normalized levels. In spite of the things that are happening in the economy, he's seeing things being quite stable in the real estate market at this time.

He's always monitoring the sub-sectors. The retail space was very challenged during Covid. There's been a purge, where the weakest tenants have gone. Everything's back open and running, and filled with better tenants. There hasn't been any new retail built, yet we added a huge population boom to the country through immigration. So we're seeing things actually doing quite well in that sector, and it's showing up in the numbers.

The TSX keeps creating highs. He's been asked, Why own the TSX instead of the U.S. during tariffs? People were getting fear fatigue over tariffs, getting used to them and moving on with their lives. But we will still see pain and uncertainty in Canadian employment and mortgages. That said, markets still bounce or fall over what Trump says on a given day. US consumers will have to pay more for things made around the world, given tariffs and drive inflation. His greatest concern is that companies are not hiring because of uncertainty caused by tariffs. We're probably already in a recession. GDP per capita is flat at best, and the rest of this year could be tough for Canada.

Look at cybersecurity because quantum will be able to crack encrypted data that is everywhere now. Can't choose a single company (Palantir's PE is 200x), but consider an ETF.

Fundamentals in Canada are starting to look a little bit brighter than we had thought 3 months ago when we were heading into the tariff maelstrom. Also seeing definite signs of a rotation out of USD-domiciled assets into other currencies and asset classes. Canada is benefiting from that and, being a relatively small share of the global equity space, it doesn't take a lot to move the needle.

Absolutely. Coming into 2025, his team figured that Trump 2.0 would be a different playbook. They really wanted to look outside the US, and even outside North America. They started putting money to work in Europe, developed Asia, and also emerging markets. All this is an effort to mitigate some of the US-centred risk coming into this year.

We don't want to get caught in a head fake. All the tariff drama really doesn't inject a lot of confidence amongst businesses or investors. He's going to maintain the course to look for opportunities outside the States. 

Doesn't mean he's getting out of the US wholesale. Just look at the number of analysts today who are on the same ship in terms of the USD heading lower, but who weren't on that ship 6 months ago. That tells you the story, that we're going to be in for some troubling times for US-domiciled securities. Need to be careful in the US, and look for opportunities outside it.

Still likes tech. Now we're looking at the monetization phase of AI in terms of companies and users. We're getting NVDA earnings later today. It's not that NVDA won't be a driving force in this market, but the breadth is spreading out and that's where the opportunities will be. E-commerce and other areas will benefit from the implementation of AI for the end user.

Still likes energy. Canadian energy patch has a shot in the arm from pipeline development and diversifying energy export markets. He's sticking with the larger-cap names that have the balance sheet and the ability to weather any type of storm.

This is the next phase. We've been in this AI growth patch for a while now, which won't end, but quantum is the next level. It answers a lot of the problems that we deal with in the world such as medical issues and cybersecurity.

Problem is, not a lot of developed companies in the space. The industry is quite immature, but sometimes (if you have a longer time horizon) that's where you find opportunities for decent, long-term growth. Unlike AI, quantum needs a lot of space (perhaps it could solve office realty issues). IBM is starting to look more prominent in that space.

The long end of the bond market in many countries has really pushed beyond where we thought we'd be at this time. We're looking at a credibly fiscal threat coming out of the US, which is impacting bonds. But we're also seeing increased deficit spending globally. 

Investors should be mindful of this. You need to be looking more at the short-to-medium term. The long end is delivering fantastic yields right now, but you need to be cautious. Hopefully we cap out soon, but we're getting close to some dangerous tentacle levels on US long bonds.

At the end of the day, the bond market has more clout in response to policy than the equity market. The bond market's not in the mood for countries to be running reckless fiscal policies, and it's prepared to respond.