Greg Bonnell and Rob Tetrault
Greg: As Fiat faces allegations of cheating on emissions tests, our next guest says this could be a buy opportunity for investors. Joining us from Winnipeg is Rob Tetrault, Portfolio Manager at National Bank. Thanks for joining us, Rob.
Rob: Thanks for having me, Greg.
Greg: All right, so we saw a similar thing when the allegations came out against VW. There was a hefty crash. But you think perhaps this could be an opportunity for people to get into Fiat-Chrysler and make a little bit of money.
Rob: Well, I certainly feel that we need to monitor the situation closely. Remember, when VW fell, it fell from 250, the stock, to $100, so that’s a 60% correction. So that was a big, big move. And it didn’t happen in 1 day or 2 days. It happened over the course of a month or several months while the story played out. Here what we saw today was a training halt on a stock that had dropped almost 20%, and give it a bit of a breather for people to react and swallow this news, and then it’s come back a bit since then. I do not think the short-term story is over however, because there will be more news, there will be more press conferences, there will be more data, there’s going to be more information. And as you know, the market is largely efficient. So as that information comes out, we’re going to see potentially more correction. Now, catch a falling knife is not the easiest thing to do, but there could be an opportunity here, just like with VW. VW is now back at 150, so if you bought at anywhere kind of after the downturn, you’re up and you made quite a bit of money there. So I see a lot of comparables.
Greg: All right, let’s stick with the theme of opportunity. There might be some opportunity there, but as you say, catching a falling knife is hard. What about the broader market? When I take a look at what happened after the election up until yesterday, pretty much a solid rally on the fact that a president like Donald Trump is going to be a friend to Wall Street, that he was going to deregulate the banks, he was going to grow the economy, he was going to be pro inflationary, but then yesterday, we get the first news conference. We don’t get a lot of fine detail. I’m seeing money move out of those places that had benefitted from Donald Trump. What’s happening?
Rob: That was a very interesting press conference, Greg. We watched it closely in the office. And it’s funny, because you’re expecting him to talk about economy and instead, we got a lot of, it was almost a circus show. And we heard a lot of protectionism. And what worries me a little bit, you know, I believe in being fully invested and I believe that most of the time, we need to own quality companies. And long term, you’ll do better doing that way, but there a hint of me that it’s almost like it’s a little too quiet on the western front here, like a Clint Eastwood movie. Volatility is at a low right now. We’re seeing the VIX trading down every day. There’s no movement. We haven’t had a 200 or a 300 point down day in a long time and I just feel like there will be a time in my opinion where some news will come out from Trump where he’s going to impose some sort of tax or something that is going to not be well received by the market and we’re going to potentially see some sort of correction that is likely needed in the next while, in the next month or 2, I feel that.
Greg: That’s going to leave a lot of investors very uncertain about what they should do with their money, particularly if we see the correction, but then again, if we get that correction and for that big run up after the November election, I would imagine another buying opportunity if you pick your places.
Rob: Absolutely. So, every time that there’s a correction, so we believe that if you are sitting on cash, if you have do have a bit of cash, perhaps instead of fixed income, now that the interest rates have come effectively close to 0, if you are sitting on cash, instead of fixed income, that might present a buying opportunity for you, absolutely, Greg.
Greg: Now I know that some of the sectors you’re focused on for 2017 include REITs and energy. The energy story makes sense on the surface, because we see a recovery and some sustainability in oil, but the REITs space in interesting to me, given the fact that the conventional wisdom is, in a rising rate environment, which we have in the States, the REITs should be punished. Why do you like them?
Rob: I like them because they got punished. That’s exactly why I like them. So, I saw an opportunity there when the REITs fell almost 10%. We did a sector rotating into REITs in late 2016 for a large portion of our, most of our clients for a small portion of their assets for the simple reason that news is usually overplayed in the market, bad news and good news. This was a bit of bad news, rising interest rates. We saw, you know, 50 beeps rise and we saw REITs get hammered. Now, these REITs have very strong balance sheets. This isn’t 2007, 2008 when they’re paying out 98-99% of their AFFO or maybe even 105% of their AFFO. Their funds from operations, they’re low. They’re in the high 80s to low 90s range. A lot of these REITs are very healthy. And I believe there’s going to be appreciation on the value of the REITs. And in the meantime, let’s get our 8% or 7 or 9 or whatever you’re getting on some of these REITs. Now, with respect to the interest rates, Greg, you raise a great point and it’s always what’s brought up every time there’s REITs. But a good quality REIT will have their costs managed over a long period of time. So, usually they have a string of maturities coming up. And as some are locked in longer, some are shorter, it matches their leases generally. So, if there is rising interest rates, generally that means there’s a bit more inflation. And if there’s more inflation, generally that means more jobs, healthier economy, likely higher lease prices. So, I believe a REIT is a perfectly, naturally built in hedge inside of itself with the leases coming up due to maturity to protect against the rising interest rates
Greg: Definitely a very interesting play. I want to talk to you a bit about the Canadian dollar as well. We’ve had some strength on the back of US dollar weakness, also something that we didn’t really plan on. We thought that president Trump would be pro-growth, he would strengthen the US dollar, the rate hikes would strengthen the US dollar. What’s your outlook for the Canadian dollar? Is this going to be a short lived little rally for us?
Rob: I think we’re going to see, I think it is going to be a short lived rally. I think the dollars are going to continue to go to the States for the short period of time, so I think there’s going to be kind of a bump there on the US side. So, specifically 2 reasons why I think we might see the US dollar strengthen or the Canadian dollar pull back a bit to maybe the 73-72c range. Specifically is potential taxes, boarder taxes, which might impact, what would impact our exports and therefore our GDP and therefore Canadian dollar. And there could potentially be. We’ve had a bit of a frothy run energy side, so very short term, there could potentially be an energy pull back, which would pull the dollar back, but I do believe long-term, our Canadian dollar, long-term I’m talking 2-5 years will appreciate long-term and we will see it back at some point above 80 and even higher as well comes back.
Greg: Well, thanks for your time and insight today, Rob.
Rob: It’s my pleasure, Greg. Always fun to be on.
Greg: That was Rob Tetrault, Portfolio Manager at National Bank.