Paul TepsichA Comment -- General Comments From an ExpertA CommentaryN/AApr 25, 2016

The Chinese character for "crisis" also means "opportunity". So with any crisis, you'd be remiss not to look at the opportunity ahead. 

Long-term investors should focus exclusively on business quality, not on things that are beyond our control (interest rates, inflation, geopolitical risk, extramarital affairs). When your time horizon is 5-10 years, you accept that you're going to encounter all sorts of these macro conditions.

Companies with low debt and consistently high ROIC will generally be on their front foot during periods of economic weakness. Economic weakness plus a price disconnect from a stock's intrinsic value are friends to the long-term investor.

Generally, yes. All things being equal, the discount rate will depress the price of risk assets -- real estate, bonds, stocks. He was 6 years old during 1982, when interest rates were 20%. In the early 1990s, interest rates were pushing double digits. So current times are not without precedent.

He'd urge all Canadians to tighten their purse strings on budgets, as more capital will need to go to mortgage payments, etc. But over the very long term, companies that aren't indebted are less affected by the ups and downs of interest rates.

Great question. His firm uses National Bank, which lets them directly access 35 markets around the globe. Many of the companies also have fairly liquid ADRs that trade over the counter in the US. However, OTC stocks can't be held in registered accounts.

An investor might check out Interactive Brokers (though a TFSA might have challenges) and TD's online discount brokerage.

Your forward rate of return when investing in any security is:  Earnings yield + Growth in those earnings +/- Expansion or contraction of the multiple. Starting valuations matter a lot.

For Canadian investors, dividends paid by UK companies and Hong Kong companies are not subject to withholding tax (though the dividends themselves are taxed in Canada).

Volatile since US midterm elections. US economy still growing, corporate earnings are very solid. 10-year Treasury yields reapproaching and going above 5% has been an issue for stocks.

If you look at the history (going back to 1950) of the 12 months right after midterm elections, you've had 19/19 positive runs for those years. Average return is 15.1%. Next year is the third year of the presidential cycle, and that's the best year for stock markets. Again, back to 1950, the market's been positive every single time with an average return of 20.9%.

He remains pretty constructive.

With the Democrats in Congress, it doesn't mean that AI or the infrastructure buildouts are disappearing. We certainly know that demand isn't disappearing, as the use of tokens is increasing exponentially. 

Investors need to separate fundamentals from the fear in the market, and try to take advantage of that.

Room for growth, but also lots of potential speedbumps along the way. He tends not to be in names that are overly focused on that sector.

General uncertainty around the commodity, as there's been for the last 9 months. Not going to see the end anytime soon. Even if we did, we're still in a higher-price era. Lots of damage done to infrastructure in the Gulf, which will take months (if not years) to repair. That puts a premium on oil for many years.

As well, this has shown Iran that it can control global oil prices. Even if peace breaks out, that risk premium will remain. Favourable geography allows them to close the Strait. Every time prices spike, the whole world is on edge. 

The whole region is vulnerable. No one contemplated the type of attacks on facilities, so they weren't built to withstand that. So much of the world's production and reserves are concentrated in that one narrow region, yet many of those countries don't have robust military forces in place to protect themselves.

Iranians have learned what they can do. Now their goal is to push America out of the region. Many places that have been housing US bases have been coming under attack from Iran.

A very smart way to go. You get diversity, and don't have to worry about company-specific risk. 

However, you do have to worry about concentration. A broad analogy is that if you buy the SPY, you think you're getting a broad basket of S&P 500 companies. But all the growth has actually come down to 7 (maybe 10) tech companies.

If you don't spend the time looking under the hood, you don't really know what you're getting.

WCS is the Canadian benchmark, and could be displaced in the future by production from Venezuela. Infrastructure in Venezuela is quite bad, so he's not sure how quickly it can ramp up.

If Canada didn't pursue pipelines to the West Coast, it would really leave the Canadian industry in a very bad spot. That's well understood in both Ottawa and Alberta. So Venezuelan production is a potential threat.

The spread is ridiculously high at this point, but it does highlight how we need to move beyond exporting primarily to the US. All future growth in energy, whether nat gas or oil, is not in America; it's in Asia.

October was an interesting month. Prior to that the market was very narrow, led by large-cap tech stocks.

In October, the S&P 500 (market-cap weighted) was down about 1%. But the equal-weight index was actually up almost 5%. Quite a gap in performance. That tells her that the breadth is broadening, stocks in sectors other than large tech are doing quite well. 

So there was a rotation in the market. Investors didn't necessarily sell the market, they just rotated away from tech and semiconductors toward healthcare and even utilities. Toward things that are more defensive.

That's encouraging. Historically, a bull market is healthier if it's more broad-based.

Exactly. A lot of the industrial names that supply the data centre buildout have pulled back on fears that the buildout will slow, product demand won't be as great, and profits will suffer.

Pullback is healthy, as a lot of those names were trading at very high multiples.

Very strong last year, decent performers this year. Higher rates bring concerns about the housing market. Reserve provisioning for loan losses has likely peaked, so reserves may be released.

If you think Canadian economy will improve in 2027 under all the nation-building initiatives, along with trade flows, then the banks will benefit. That said, yields are lower. RY and TD are now below 3%, which is a reflection of how well share prices have done. Dividends are still being increased at a moderate pace.

For clients who need $$ and whose weighting has gone above target, she's been using the banks as a source of funds. Otherwise, still holding for the long term. Don't chase to add new money at these levels, wait for a pullback.