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

At least it's over, this miserable month of April where the Nasdaq dove 13.3%, the worst since 2008. Normally, April is a good month for markets, like 2000. Today, shares sank 3-4%. You couldn't get excited to buy anything. Next week should be better, though he doesn't expect Monday to be good. Next week, fewer big companies will report. This was one of the worst days he's ever seen. Warren Buffett would say this is a buying opportunity.

Volatility's impact on real estate. There's certainly a wall of worry out there. The public market's already priced in a lot of the risk. He looks to the private markets to see what's really going on. And what he sees is that in those sectors where there is pricing power, fundamentals and pricing are still robust. Yesterday, the CRE reported that cap rates in Canada are lower in nearly every single sector in real estate; the lower the cap rate, the higher the value.

Will Canadian REITs catch up to US ones soon? Yes. For a while, he's been positive on industrial warehouse REITs globally. Looking to US earnings, they've been quite strong, a nice outperformance. He expects the same for Canada, especially in the tightest markets in Canada, namely Toronto and Montreal.

Vancouver also has high real estate prices. Indeed. It's all about supply and demand, and Vancouver is a supply-constrained market across every kind of property type. You're seeing demand in multi-family, industrial, and even office. Unfortunately on the public side, there isn't always a great REIT to take advantage of that strength.

How do high interest rates affect real estate valuations? No one single answer. During times of high interest rates, you can find opportunities to buy buildings. During times of low interest rates, you can find value traps and terrible ideas to buy properties. It depends on the economy and the sector. For example, you could have low interest rates and a booming economy, yet you wouldn't want to buy an office building in Calgary, because there's way too much supply, no demand, and vacancies are at 30%. It's all about supply and demand, as in any business. Too much focus in real estate on interest rates. Valuation equation is Net Operating Income (rent minus expenses) divided by the Cap Rate. Cap rate is influenced by interest rates, but there's a spread to it. We can't do anything about the denominator, only the numerator. Best hedge with rising rates is to invest in those sectors where income will increase because the REITs can capture inflation. Think apartments, self-storage, industrial warehouses. Not office buildings today. Make sure debt is fixed, with not much exposure to variable rates. He's a bottom-up investor, cares about discount to NAV, and has a long-term view.

US homebuilders. When the market turns, buying US homebuilders is like catching a falling knife. The prices have looked better and better over the last 4 weeks. The risk/reward looks in your favour. These stocks do trade below book value, producing 30% ROE. A great setup. Housing shortage in the US. Many of them have great business models. The easy thing to do is to buy the ITB ETF, a great way to not have to make a big bet one way or the other. He also likes the business model of DHI. There's even value in some of the small names. But you're fighting the macro of mortgage rates at 10 to 15-year highs. Not a great setup from a sentiment perspective. As long as builders can sell homes, and they continue to be affordable, they have great earnings power.

Markets. Nice change to see a positive day or two, especially after last week and Monday. We're in for volatility for some time. War in Ukraine has exacerbated problems that were already becoming evident coming out of the pandemic. Real pressures on inflation, shortages in commodities whether energy or materials or agriculture. Global supply chain issues are not fixed. It really questions globalization of businesses, because it means we don't have strategic assets available when they're needed. We're in for a period of adjustment for a while. Investors are focusing on areas that are perhaps more receptive to inflation. Renewed focus on security of energy supply. All these things are good for those in the Canadian market.

Where to invest? He's tried to focus on the longer game. As a value investor, he buys stocks that aren't quite as exciting in growth markets, but can withstand the forces of volatility that descend. Canadian market is a good place to be looking right now, given our exposure to resources with energy and materials. Financial sector is fairly strong, so not a bad place to look. Globally, you want to find companies that can pass through inflationary trends. A lot of companies will have trouble doing that, especially as they have to restructure their business lines to access supply. We're really coming into a stock picker's market.

Metrics to evaluate P&C insurance companies? Evaluate P&C companies much differently than lifecos, which have longer-term liabilities. P&Cs operate on a yearly renewable term, benefits can get repriced annually. on't get caught up in the year-to-year combined ratio. That ratio will fluctuate. Look at how good they are over time at investing the float, which is where they make their money. Look at the payment-to-claims ratio. Inexpensive premiums often mean it's hard to collect when you have a claim.

It's a nervous time for all investors: removing the monetary stimulus (free money) that has fueled the bull market. Suddenly, central banks are boosting rates to tame hot inflation, and throw in the Russian war. Is this all being discounted already in the market? He doesn't see a recession this year, there will be a slowdown. Consumers remain pretty flush from money saved up during the pandemic. They're still buying cars (inventories can't keep up), for example, and jobs are plenty. Consumer discretionary stocks are now priced like there is a recession. He still like energy stocks and financials are getting interesting. Semis, cars and tech payment stocks look interesting, too. The market has corrected a lot so that valuations have declined to reasonable levels. The few exceptions are megatech, which have fallen, but when they completely capitulate, then we could see the market turn a corner.

Educational Segment. Looking at fixed income and considering whether it is time to buy them again or look for an alternative. AGG is the broad bond market, and it is down 9%, year to date. People are probably looking at returns and saying it is terrible. "What else can you buy?" is probably on their mind. Private credit could be an alternative. Publicly traded private mortgage funds ETF are volatile. The private credit funds that are not necessarily open to the public returns much more stable returns.

Tech ETF suggestions. The tech sector in Canada (XIT) is dominated by SHOP. Any company is limited to 25% in the fund, however. In tech, Canada does not have much to offer. Chinese internet names (KWEB) could be an option too. XLK or QQQ could be for the US market. Would not buy the dip at the moment. Thinks it has not yet bottomed.

It's clear that the market did not want to believe how the hawkish the Feds would be. Now that Powell has now confirmed considering multiple rate hikes, we are probably going to test March lows. Feds will be taking away the punchbowl. Inflation is a real problem now, which it has not been for decades. It is sticky and the source where issues are coming from will not be fixed by central banks raising interest rates. Markets will probably have a rocky couple quarters.

Tech earnings will be a sort of saviour. They are earning, but what do you pay for it? Earnings are not likely to grow that much more. Prices should come back to better value. Vast majority of big tech names will report this week. Good earnings does not necessarily mean that they will go up. Writing puts on Apple and Microsoft to generate some income.