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This has been one of his long-standing positions. Had lightened up earlier in the year, because it had had a pretty decent run. It has now sold off dramatically with a lot of the consumer staples as an interest play. There has also been some weakness in their earnings growth rate, particularly their top line growth rate. He is positive on them, because they have a new, very well respected CEO coming in. For the 1st time in about 100 years, it is an outsider, and will come in and make some changes, which he thinks will be positive.
Generics are not his favourite in healthcare. Prefers looking for innovators, and would rather own companies with strong Intellectual Property. He prefers things like Roche, one of the leaders in oncology, Novartis which has a very strong IP in both cardiology and oncology, Shire in orphan drugs where they are the leaders in IP. When you buy a stock like Teva, you have to pick the right time to get in and that is not his style of investing.
Telecommunication stocks have sold off as interest plays. High dividend yielders, so people use them as proxies for interest. The prospects for some of these companies is brighter. There is less regulation, and it is an unloved sector right now. Potentially this could have a nice rebound in 2017.
A great company and a solid one. He has reduced his exposure to consumer staples. Also prefers Nestlé (NSRGY-OTC). For the last 7 years, consumer staples have been doing very, very well. Feels the cash flow multiples are on the high end right now. If we start to see the growth in the US economy start to pick up, there are other places he would rather be.
India just took all their 500 and 1,000 rupee notes out of circulation. They have de-monetized the system, which has created havoc. There were a lot of positive reasons for the PM to do this. It created a big deterioration in the economy, so the market has commensurately gone down. If Modi is successful, it will be a very strong positive for the economy. Most stocks dropped because of this. If you wait 3-6 months, things should start to improve dramatically. He is quite positive on India’s outlook.
Looking at the 10-year bond market, we are getting a steeper yield curve, which is good for banks. There was a tremendous run in US bank shares, and that is starting to show up in international markets. Bank stocks have been very, very cheap and unloved. Regulation, in particular, has been swinging harder and harder towards banks, and is now starting to swing back. Earnings are starting to improve. This company has very big exposure to Latin America, but ultimately that should be a good thing. A very well-run bank, but trades at valuations that are close to where it was during the sovereign debt and the financial crisis.
In his opinion, this is the best run bank in all of Europe. Nordics have the highest capital adequacy ratio of any banks globally. They went through a financial crisis in the 90s, and the regulator made them bring up their capital adequacy ratios to very high levels, so all we have to do is worry about them growing their business. This bank has a very strong network in Sweden, but has a good growth platform in the UK and Holland.
He doesn’t want to own just European banks. Japanese banks could also have a very strong recovery. To him, this is the best run of the major Japanese banks. There is starting to be an acceleration in earnings. Loan growth is starting to pick up in Japan. Hopefully the strengthening of the Yen will translate into positive momentum in the Japanese economy. This trust is well structured and is known as a reflation play, because they have a lot of exposure to real estate lending.
His weighting in China is reasonably low. For the next 12-24 months, there is going to be a lot of back-and-forth between the US and China. It probably doesn’t put China in the best position from a negotiation point of view, given that they have such a large trade surplus with the US. He would be a little wary, but the China economy looks very strong right now. He would have a look at Tencent (TCEHY-5) instead, which he owns.
He is taking a harder look at this sector. His favourite of all the oil majors is Total (TOT-N). It has the best growth profile. Fully integrated, as it has refining as well as the retail business, which has been a saviour during the difficult period. As we enter into a period where we think oil prices are going to start to normalize, this has exposure being fully integrated with both upstream and downstream. Shell also has a full integrated model, so it too should be well positioned.
This would be in his top 10. An advertising company, and a global leader. Great management. He likes their exposure to the US, whose economy is accelerating. Their strategy for the last several years has been focused on moving more and more digital. They have a really good understanding of digital advertising. Very attractive valuation.
Financials have had a great run. This has been one of the better performing banks. The financial pendulum is starting to move back. French banks have pretty good exposure to the European continent. If his theory on an improving European economy works out, companies like this should do well. However, much of that is priced in now, and he thinks it is going to pause for a bit, but there is still upside.
Feels this is fairly valued. A great bank and a really well run organization. They have had a lack of interest rate sensitivity, which has been very good for them for the last several years. If interest rates start going back up, he is looking for banks that have interest rate sensitivity.
Market. We have had a really good run in the US market since Trump won the election. The international markets haven’t participated nearly as well, and more importantly, the currencies have been very, very weak. There are 2 things working in the US$’s favour. 1) Trump and his pro-growth strategy and 2) the Fed, which has changed the picture a little by saying there are 3 interest rate hikes coming up next year. The market has been fully anticipating 2 hikes, and by saying there was going to be a 3rd, that added to strength to the US$. Global currencies will be weaker than the US$. Ultimately that helps international and Canadian companies that are exporting into the US as it makes us more competitive. That is a positive momentum that will build for foreign companies selling into the US. The market has been anticipating pro-growth. We are seeing the moves in resources, financials, and in the bond market. He doesn’t think it is in anyone’s interest to have a trade war, so is doubtful if Trump will introduce 45% trade tariffs with China. Expects he will backtrack on more of his promises, and things will quiet down. He is optimistic on what he is seeing out of Europe. There is no flow of funds into Europe, so investors are really ignoring what is going on. However, he sees a lot of positives. Leading indicators have been turning up and lagging indicators look reasonably good. The best thing about Europe is the base affect, with very, very low earnings and growth, which provides a base to grow from. The election outcome in France is going to be benign, and thinks Merkel in Germany will be able to form another coalition government, so he thinks the risk is on the upside for European politics.