Transcript: In shifting market, players are waiting for the new rules

Macroeconomic trends

VT: Well, there are three key trends that the market is watching. First and foremost, it is the global trade war and tariffs, especially this game of chicken between the two largest economic superpowers, China and the U.S., and how that could reshape economic trade flow and the economic outlook. And related to that is this big question of whether the trade war is that domino that tips us into a recession. The second is AI, which has consumed a lot of air time, and the focus is on the impact of AI on the economy, how it is impacting and changing businesses and business models, and for the equity market, it is the focus on the valuation. Third, there is an emerging question of U.S. exceptionalism, whether it’s appropriate to be concentrated in the U.S. and U.S. growth sector in particular, or should you be rebalancing your portfolio to ensure that it’s diversified and resilient. There are some themes that we think are critical to investing in the current environment. I think the first is a focus on pricing power, and the second is just to find resilient moats or franchises with a strong balance sheet and also really astute management teams to take advantage of the crisis and strengthen the earnings power coming out.

Names he likes

CT: I can absolutely highlight two names. One is a Canadian industrial company, and one is a U.S. consumer business. The key is that they are both high-quality franchises, and we see an opportunity when you look at normalized earnings and cash flow, looking out three to five years. The first is Kimberly Clark, which is a global health and hygiene company that has leading brands like Huggies and Kleenex. We believe this company can continue to grow at a GDP-plus type of growth rate, entering a more growth-oriented chapter with premiumization and pricing power. And they have room to expand their margins about 300 to 500 basis points, which should drive mid-single, high-single digit EPS growth and a revaluation of the company. The second company is CN Rail in the Canadian industrial space. This company has irreplaceable assets, it’s critical to the economy, and it has tremendous pricing power. The market is naturally worried about a freight recession. But we believe there will be a normalization in volume and RTM growth and we believe margins can improve. And the market is also likely concerned about the operational turnaround story at CN Rail. This was one of the best-run railroads, but the story got derailed a bit with some previous management actions, so the market is skeptical on their ability to execute. We believe the stock is trading at a discount to its intrinsic value, reflecting this skepticism.

And finally, what’s the bottom line on North American equities in the current moment?

VT: There is a high level of uncertainty in the market, and the market wants clarity around the rules of the game. There is absolutely no question about that. Especially with global trade. But let’s also remember this is not the first time for a market shock or scare. In recent years, we have gone through the pandemic, two wars, inflation spikes, a U.S. regional banking crisis and much more. Like all those past events, this too will pass over time. We think the worst thing you can do is try to time the market and fall to emotion, causing you to do the wrong thing at the wrong time. We think it’s really important to stay invested, be selective and have a diversified and resilient portfolio. Playing the long game is the right approach. We believe investors should continue to be disciplined, be calm in the storm and take advantage of others’ emotions in the market, focusing on what we can control, which is our actions.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Vim Thasan of Beutel Goodman. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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