Opinions Eric NuttallA Comment -- General Comments From an ExpertA CommentaryCOMMENTAug 23, 2023
Eric NuttallYou might be interested:
It's a great day to be a boring, Canadian, dividend investor ;) Futures were down last night, but now they're up. Defense is bad today with the Democratic win, renewables are good. She read that the win may slow down AI investment with a possible moratorium on data centres, which could be good for AI capex.
At the end of the day, does the capex spend make sense and will it lead to monetization? Yes or no?
Politics and short-term market reactions are great for short-term investors. But at her shop, they're long-term investors and keep their focus on the horizon. Do the long-term fundamentals make sense, yes or no?
Her firm hasn't changed its investment philosophy at all. They continue to be boring dividend investors. The more volatility they see, the better it usually is for their portfolios. Money flows came out of riskier trades in October and into the boring stuff (pipes, utilities).
They don't try to time their investments, but dividend stocks came down in September when rates went up. They added to positions, and now those stocks are performing well again. While they don't make investment decisions based on short-term moves, they take advantage and add when volatility hits.
Her team is defensive on a good day, and even more during times like these. There are signs of a weakening, or K-shaped, economy. Signs of a consumer being more careful. In Canada, job numbers aren't looking so great. The US has a deficit problem. Geopolitical risks. Plus, markets are very close to all-time highs.
Lots of potential for risk right now.
While they wait for more clarity in the markets, she and her team are happy to keep their heads down, not participate in all the chaos, and collect dividend income. They have cash on the side ready to deploy if there's a correction.
That's exactly what happened in September. Her firm has a higher weighting to these sectors, so the underperformance actually made her happy because they could add to positions at better valuations.
Some came off more than others. TRP and ENB were down 18-20%. But PPL, which is a growthier pipeline, came off less (only 12-13%); same with ALA. FTS barely came off, while EMA came down 16%.
Higher interest rates usually aren't a long-term hit to earnings, as they can quickly apply for a rate reset from the regulator.
With all the volatility going on in markets right now, if a company misses earnings or revenues then it'll take a hit. That's why we've seen some stocks fall upwards of 15-20% in a day.
His team believes that the proper exposure is from 10-20% in tech. That would avoid a meltdown similar to 2000, or even 2022. Important to look not just at the individual tech stocks, but also at the broader picture in the world. Make sure you have global exposure, different sectors. Some sectors are less risky or less volatile.
Nice to have a mix, because that's how you avoid losing $$ in the market.
For Canadian stocks, you want to be in the infrastructure play. Federal and provincial governments want to build roads, bridges, data centres, hospitals, etc. Examples include STN, TIH, and BDT.
After that, you want exposure to commodities. Stocks have been hurt this year due to the rising US dollar, as all commodities are priced in USD. If the USD falls in the long term, commodity prices should rise.
A third way to play would be through utilities. He has TRP and EMA in client TFSAs. You want exposure to the banks, as the federal government has gone to the banks to ask them to release more capital for business lending.
These types of plans aren't short term. They're the kind that will take 10-15 years.
Outside Canada you want healthcare, Asia, and robotics.
Extremely volatile! Anytime you double your $$, you should be selling half. PANW trades at 255x PE, CRWD is at 200x. Rising interest rates could have an outsized negative impact.
FTNT had bad earnings the other day, got crushed by 25%. CRWD and PANW have had decent earnings. If no guardrails put on AI, important for these companies to step up and start to protect network systems.
Oil is high right now simply because of what's going on in Iran. Supply is starting to become available. If oil starts to come down, shorting the major oil companies would be an idea. If oil gets back to $160, the shorts will pay off; if it doesn't, then they won't. They don't do shorts at his firm; long positioning only.
Longer term, it's a long way down to $60 a barrel. In the near term, there will still be M&A going on in the sector (especially in Canada).
Stock buyer at present. Natural resources has been falling but it has a great future. The primary driver for the drop is higher interest rates. Precious metals in particular reflects the level of real interest rates. In the US questions about credit quality affected the availability capital to the natural resources industry making growth concern appear. Operating results in the sector has been impacted by higher energy costs. Gold is very attractive at this level. The purchasing power of the USD and CAD is deteriorating at a higher pace than CPI suggest and that is going to be accentuated in the next 5 years. He likes uranium and think that the uranium companies don't reflect the underlying strength in the uranium price. Market is mispricing uranium equities in a big way.
Tremendous run. Valuations are not great, so he wouldn't be adding new $$. Don't worry about the quality at all. But he remembers in 2000, when the dot-com bubble burst and markets collapsed, a lot of the great Canadian banks fell 50%.
He thinks a broader market correction is inevitable (sometime in the next year or two). At that time, you can buy the dip. Great long-term investments.
Right now, the obvious outcome seems to be that Washington will be facing gridlock. Gridlock in Year 3 of a presidential cycle, historically (50 years), is very bullish for stocks. He's not sure we'll get that this time around, but not sure you want to be against that at this point.
If we get a fiscal cliff, there will be a lot less government spending to boost economic growth. A lot of the earnings momentum would come out of the market. A lot of the names that have been beaten up and forgotten would benefit. If the global economy slows, market multiples would come down and $$ would rotate into the defensive sector. He'd favour value over growth.
US Spending
When you look at the projections from the US Congressional Budget Office, the picture keeps getting worse and worse. So it almost doesn't matter who wins in Congress. They all do a really bad job at balancing the books.
Which part of the deficit is really causing the biggest stress right now? With interest rates rising, it's the cost of financing the debt.
As of now, the US debt sits at $40T. The US Treasury just put out a report detailing how it will pay for that debt, by issuing a certain number of T-bills and bonds. The cost for each new issuance of debt just keeps increasing. It needs to be controlled and it's not up to Treasury, it's up to Congress.
His last graph shows charts for ZTL.F (hedged) and TLT. They have the same volatility as the S&P 500, so it's not risk-free. But if the US economy and equities are going to falter, long bonds are still the best pick out there.
A lot of production has come on. The biggest one this year is Iran, where the US government has turned a willful blind eye because if the price of oil goes up, gasoline goes up, inflation goes up, interest rates go up, and then they're voted out of office.
Focus on what matters. Inventories are going to end the year at an 8+ year low, and that will put upwards pressure on oil prices.