A Comment -- General Comments From an Expert (A Commentary)

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.

Yes, we really saw that in the apartment markets. Upon seeing the immigration numbers dip, a lot of American investors fled. His team actually likes apartments a lot here. The immigration blip will normalize, and residentials are a really great entry point here.

They tend to be more stable. Especially the case with Canadian REITs, as our very large grocer brands provide that stability.

Not a surprise, we all knew it was going to happen. HBC paid very low rent in its legacy spaces, sometimes according to 100-year leases. There is upside if you can remove HBC as a tenant. REI.UN and PMZ.UN are the two most affected; especially REI.UN, due to the structure it put in place years ago.

There has been news that some 28 of these leases may be purchased. Lease conditions do say that if you purchase the lease, you have to operate the same kind of store. Canadian Tire has shown interest. Might be like a painful surgery that you have to go through, but end up being in better shape when it's all done.

The thing about The Bay space is that it's fine when it's on 2 floors. Once it gets to 3 floors, especially when that third floor isn't connected to the rest of the mall, it becomes challenging. In those cases, the real value may be in tearing it down and building something else.

Right now, he's excited about the apartment market again. The reduction in immigration and international students has put pressure on this segment. But in a way, things were too high. It's all lovely as a landlord when you can charge $4-5k a month for an apartment, but it's not really sustainable. 

There will be a refreshing change here as rents come down, because people can breathe a sigh of relief and finally be able to get rid of their roomates :)  Or get their own place. Or move out of their parents' basement. The secret, especially in rent-controlled markets such as Ontario, is that the rent value is one thing, but to raise rents you need people to move. And people stopped moving. They just hunkered down because they couldn't afford to move. So rents that may have been below market get to reset to the market price.

That's why he's bullish on apartment REITs right now, especially on the more affordable zones across Canada.

For a while, people thought that condo values only went up. We're seeing now that that's not the case. People got a bit greedy. If you're buying something as an investment, it's important to know that investments can go down. As interest rates started to turn and the low trend ended, you could lose.

There's a saying that if you can't lose 30-50%, then you shouldn't be invested. But when you're buying real estate, and it's 90% leveraged, that 30-50% correction would wipe you out completely. Unfortunately, some people are going to go through that. Normalization will return to the market and, hopefully, a lot of new product. He knows a lot of young people who would like to be able to rent at a reasonable rate so they can save for a future down payment.

The EU is so bureaucratic and slow that he doubts they can reach a trade deal by then. Trump slapping then withdrawing tariffs is his bargaining chip while markets get whipped around. The bottom line though comes from the C-suite who won't make any deals until this all ends. This will eventually matter, but now the markets don't care. Right before Covid hit, markets were at all-time highs, though the Covid news was out there, percolating. Markets didn't care. Will we see another AHA! moment when we see notable weakness in the US economy, especially jobs? He thinks so, but nobody knows when. Another jolt like April 2 will happen in early July. Expect uncertainty and a lot of good coming, too. But he doesn't see the market going up a lot from here. In fact, markets shouldn't be ripping higher now.

Only if there's a strong Canadian economy, which he doesn't see. Canada has longer-term structural weakness. Lighten up your Canadian holdings. Then again, money is flowing out of the US into other places. Canada is cheap compared to the US large-cap market. 

If you're worried that economy is fragile in the face of tariffs, then the Canadian banks will take a harder hit than other sectors as the economy slows down. He's cautious the Canadian banks and added on April's weakness--but sold those positions already to be tactical and cautious.

Multiples Needed to Breakeven from Drawdowns

One of the most often misunderstood concepts in investing is the difference in percentages from a drawdown against an increase. For example, if a stock declines by 10%, a subsequent increase of 10% will not bring the investor back to breakeven, but rather an 11% increase in the price is required to break even. For example, a $10 stock declines by 10% to $9, a subsequent 10% rise from $9 brings the stock up to only $9.9. Below we have listed various drawdown percentages in increments of 10%, and the subsequent percentage increases needed to break even, along with their respective ‘multiples. For example, a 90% drawdown in the price of a $10 stock requires a 10X to bring the stock back up to $10.
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It's difficult to tune out, as it's pervasive, loud, and global. His team doesn't exactly tune it out, but they're resolute in their commitment not to trade in a knee-jerk fashion to executive orders, tweets, and threats. Time and again, we've come to learn that the playbook is to start with big/bully/bluff bets and then to walk back.

The risk as an investor to trading on a steady stream of reliably unreliable information is the risk of being whipsawed. Market action in the wake of liberation day (aka liquidation day) is a great case in point. His firm has made some fine-tuning and some tweaks within portfolios, but no radical changes. 

It is probably a buy-ahead-of-tariffs situation. In fact the US had a negative print for GDP in Q1, and a lot of that was due to a massive surge in imports. The US recorded its largest trade deficit in history in the months coming into the tariffs taking effect. 

Households were stocking the pantry and corporates were stocking the warehouses, getting products onshore before whatever tariffs were imposed. We're still seeing the tail end of that.

Looking pretty good, and that's the real conundrum for investors. There's the hard data (measured efficiently), such as employment, retail sales, and GDP. For the most part, the hard data is coming in just fine. 

On the other hand, that's backward looking, so investors often rely on soft data from surveys of households or corporate executives. Purchasing manager indices are another good example. Those are coming in very squishy, not surprising given the noise surrounding trade, tariff, and policy confusion.

But as these relate to earnings specifically, in both Canada and the US we've seen the bulk of earnings reports come in. Just waiting for the banks, which we'll see next week. Most earnings are decent, showing growth YOY in high single digits or sometimes low double digits. So far, so good. Have to see what Q2 looks like.

Seeing analysts for both Canadian and US companies really ratcheting down growth expectations for remainder of the year. Now seeing consensus estimates of 6-7% earnings growth for the S&P 500 and the TSX, which has really come down a lot from the earlier estimates of 12-13%.

Hitting record highs, and his firm thinks it's going higher. There's been an American exceptionalism trade on for more than a decade, and some of the lustre's coming off. Capital is returning to other regions of the world, including Canada. 

Canada's uniquely advantaged by having one of the largest index weights in gold of any developed market in the world, and gold's been doing very well. That and a number of other factors under the hood advantage Canada, not the least of which is still a wide valuation disparity between our market and the US market.

Investing 101: Think in terms of years, not months or quarters

This one is so important and probably the one that gets ignored most often by investors. No one wants to wait 5 or 10 years to see their portfolio providegainss. We want it all now. Unfortunately, patience is key in a portfolio. Set up a structure that makes sense for the long-term and don't change it unless your situation sees a material change (or if it was inappropriate to begin with). 

Markets take time to generate returns and compounding takes decades to have the true power of compounding returns felt. It will be worth it though. 

Similarly, companies do not execute a strategy in three month periods. It takes years to change a large company and for its strategy to be fully rolled-out, so an investment in a company should in-turn be viewed in a matter of years and not quarters.
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