Good morning,
He finally did it ! The Trump administration imposed tariffs on Canada and Mexico.
As a first economic salvo, let's admit two things. First, it's extremely disappointing this economic war has been started against one's own allies. Second, just like a bully, Trump is going after two countries that can't really hurt him in the long term. In other words, it's always easy to strike those smaller than you... Militarily, diplomatically, scientifically and economically, in the long run, the United States has little to fear from its two continental partners.
So, yes, this is bad economic news for us, and it will have financial consequences for many people and companies.
But let’s not go overboard. This weekend, I heard people talking about depression. Someone even asked me if I was afraid of losing all my savings!
You feel nervous based on the full on press coverage. Simply remember that it's Christmas morning for the media (traditional and otherwise). 100% coverage, rising ratings and above all content that doesn't cost much to produce since a panel of experts is always cheaper to produce than a TV series. I don't mean to minimize the situation in any way, but this reminds me of the weather industry, who invented new terms like weather bomb and polar vortex to alarm us and make us recheck weather sites several times a day. As a result, advertising on these sites (i.e., based on traffic) sells very well.
At this point, you may well be thinking: "Our Charles is in denial!”
No, it's just that a trade war with 9/11-style media coverage is bound to worry investors. What we have are several days, weeks, if not months, of volatility ahead of us and probably a recession in Canada and maybe in the USA.
However, this financial turbulence masks certain fundamentals.
In a well-constructed portfolio, diversification, financial strength and valuation are important.
Some sectors/asset classes will be more affected than others. Canadian oil companies (CNQ and Imperial Oil), Toromont, Métro and Canadian Pacific come to mind. However, others will be less affected, such as Dollarama, Fortis, Waste Connection and Westshore Terminal. The solidity of such companies should reassure you.
Take a simple example.
Everyone knows Canadian banks have been paying a dividend for years. But did you know just how long? Since the 19th century. Scotiabank, for example, has paid a dividend continuously since July 1, 1833. CIBC? Since 1868… So goes it for the Big 5 banks (National Bank is more recent, the result of a merger between BNC and Banque Provinciale in the early 70’s) To sum it up, the Big 5 banks have paid a dividend despite the First World War, the Depression of 1929, the Second World War and hyperinflation of the 1970s. And it's not just the Canadian banks, many companies, such as Coca-Cola, Colgate-Palmolive, Eli Lilly and Exxon Mobil, also began paying dividends in the 19th century.
What about companies with little or no debt? Westshore Terminal, Richelieu Hardware and Novo Nordisk, to name but a few. Their financial strength will enable them to navigate the troubled waters ahead. None of our companies (and many others) will suddenly close their doors like Lion Electric just did. They have the financial strength to face the coming months/years.
Finally, valuation. Many companies are very good, but the asking price is simply too high. That's where Canada is well positioned. Our companies don't currently have the same multiple as those in the United States. Take two companies in our Global 35, Costco and Dollarama. Both have had revenue growth of just over 10% a year for the past 5 years. Both have excellent management teams and both have a clear competitive advantage over their rivals. Both are increasing their number of stores every year (+/-24 per year for Costco and +/-65 per year for Dollarama in Canada and another +/-50 in Latin America). In short, two good businesses, but Costco has a P/E multiple of 58, while Dollarama has a P/E of 35. That’s a big difference for two business’ growing at roughly the same rate over the past 5 years.
In short, the risk of recession in Canada, and perhaps even in the United States, has just increased. Which tells me we're in for a tougher time, but one that will offer opportunities for investors with three characteristics. Patience, nerves and financial capacity. For the vast majority of you, we will deploy these characteristics and take advantage of the situation.
Please feel free to share this memo with your more nervous friends, and if we can be of assistance and reassure them, please feel free to refer them to us.
Thank you for your trust and we're in the office if you'd like to talk to us.
Charles F. Lasnier, MBA - CIM
Senior Portfolio Manager & Wealth Advisor | RBC Dominion Securities