Full episode: Market Call for Monday, October 19, 2020
Rob Lauzon, managing director and deputy chief investment officer, Middlefield Capital Corp.
Focus: Global stocks
While we may see higher market volatility heading into the election, there are multiple reasons to remain invested in equities. Monetary policy is extremely accommodative and will remain so until the middle of the current decade.
Fiscal policy has also been very supportive and we expect more stimulus to come. While negotiations between the White House and Congress have stalled, both sides will eventually reach a compromise on a new stimulus bill for up to $5 trillion post-election. In addition, we are positive on the progress on various healthcare initiatives. We have seen a significant ramp-up in Canada, the U.S. and the WHO signing deals to purchase and deploy hundreds of millions of rapid tests. Furthermore, multiple companies are undergoing late-stage vaccine trials and will likely present Phase III data in Q4 2020.
Joe Biden is far ahead going into the final stretch. While a Democratic sweep could have a negative impact on equity market sentiment short-term, with likely higher taxes and regulation, we do not believe this outcome should cause a major move out of equities. This, given the Democratic party’s plan to significantly offset higher taxes with increased fiscal spending in the coming years.
In terms of allocation, we see highly attractive opportunities within the real estate sector. Industrial REITs are well positioned to continue benefitting from rising e-commerce adoption. In addition, we have identified multiple high quality, “long-term value” REITs that are trading at extreme discounts to their net asset values. While we acknowledge that there are near-term challenges facing the sector, we believe the current valuation discount will narrow in the months ahead as the economy gradually recovers.
WPT Industrial REIT (WIR/U TSX) - Purchased at $12.90 USD, Sept 2020
WPT is a Canadian-listed, U.S.-focused REIT with an institutional-quality portfolio of industrial properties that are tailored to e-commerce and logistics. The exponential growth of e-commerce has driven demand for warehouse space for the last 10 years; the pandemic has only accelerated that demand. WPT is a high-quality industrial REIT trading at a discount, especially compared to its U.S. peer group. The company has been collecting over 99 per vent of its rent throughout the pandemic and has been able to re-lease space at 8 to 10 per cent spreads.
Canadian Apartment Properties REIT (CAR/U TSX) - Purchased at $44.25, October 2020
CAPREIT is Canada’s largest publicly-traded apartment REIT with over 50,000 fully occupied apartments across Canada. It’s largest concentration of properties is in the GTA (32 per cent) where the market for affordable living is still significantly undersupplied. CAPREIT is trading at a 10 per cent discount to its net asset value which compares to the 10-15 per cent premium it traded at prior to the pandemic. We are seeing apartment transactions in the private real estate market at valuations that are comparable, or even higher than pre-pandemic levels in Toronto which supports our view that this REIT should not be trading where it is. The company has a very clean balan0ce sheet and should continue to expand its footprint thanks to a low cost of capital, its scale and strong operating platform.
SmartCentres REIT (SRU/U TSX) - Purchased at $20.98, October 2020
SmartCentres is a Canadian retail REIT with 166 properties across Canada comprising 34 million square feet of gross leasable land. Today, Walmart accounts for 26 per cent of the REITs net operating income and is an anchor tenant in over 70 per cent of its properties. Walmart continues to be a key tenet to our investment thesis as they attract customers and drive foot traffic for neighboring stores. Walmart recently announced a massive $3.5 billion investment in its Canadian operations, solidifying them as an anchor tenant in retail locations. Recently, SmartCentre’s diversified its portfolio into more urban and mixed-use properties which we think can deliver long-term NOI growth as these development projects are completed. Our viewers in the GTA may be familiar with the Vaughan Metropolitan Centre (VMC).
PAST PICKS: OCT. 25, 2019
Westshore Terminals (WTE TSX)
- Then: $21.36
- Now: $14.24
- Return: -33%
- Total return: -31%
Boardwalk REIT (BEI-U TSX)
- Then: $44.78
- Now: $27.47
- Return: -39%
- Total return: -37%
Walt Disney (DIS NYSE)
- Then: $130.90
- Now: $125.92
- Return: -4%
- Total return: -3%
Total return average: -24%