WEBVTT

1
00:00:08.070 --> 00:00:11.010
<v 0>Financial markets in both Canada and the United States have seen quite a</v>

2
00:00:11.010 --> 00:00:14.190
resurgence through the second quarter of 2020,

3
00:00:14.910 --> 00:00:18.030
which we talk about quite a bit in the latest edition of the Canso Market

4
00:00:18.030 --> 00:00:20.370
Observer. To touch on a couple of highlights, though,

5
00:00:20.370 --> 00:00:22.770
I'm joined by my friend and colleague, Brian Carney,

6
00:00:23.040 --> 00:00:26.910
portfolio manager here at Canso Investment Counsel. Brian, good to have you.

7
00:00:27.450 --> 00:00:29.220
<v 1>Thanks for having me back, Jhordan. Good to be with you.</v>

8
00:00:29.940 --> 00:00:34.140
<v 0>Brian, I wanted to dive right in with equity first. Again,</v>

9
00:00:34.260 --> 00:00:39.000
we've seen quite a recovery in equity prices through Q2 in no small part

10
00:00:39.000 --> 00:00:41.100
because of the Fed stimulus measures.

11
00:00:41.100 --> 00:00:44.940
But we've also seen a rise in the popularity of what I'll call the DIY

12
00:00:44.940 --> 00:00:44.940
investor.

13
00:00:44.940 --> 00:00:49.800
And with apps and web platforms that make accessing financial markets a

14
00:00:49.800 --> 00:00:50.633
lot easier,

15
00:00:50.730 --> 00:00:55.530
I wonder if part of this resurgence can be explained by market speculation and

16
00:00:55.530 --> 00:00:58.350
what kind of impact that would have on equity prices.

17
00:00:58.950 --> 00:01:00.120
<v 1>It's a great question, Jhordan,</v>

18
00:01:00.180 --> 00:01:04.860
and I would say individuals have been speculated in financial markets

19
00:01:05.160 --> 00:01:07.530
since there've been financial markets,

20
00:01:07.530 --> 00:01:11.400
and today it is true that technology makes transacting in

21
00:01:11.400 --> 00:01:14.370
stocks a lot simpler than it used to be.

22
00:01:15.300 --> 00:01:19.320
It is instructive that during something called the "technology bubble" twenty

23
00:01:20.100 --> 00:01:20.730
years ago,

24
00:01:20.730 --> 00:01:25.260
investors both big and small first made and then lost trillions of

25
00:01:25.260 --> 00:01:29.910
dollars, placing orders over something called a telephone.

26
00:01:30.630 --> 00:01:34.080
And so I would say the internet provides an amazing amount of

27
00:01:34.080 --> 00:01:38.520
information, some of it's accurate and very helpful,

28
00:01:38.520 --> 00:01:41.880
some of it's well-intentioned but inaccurate, and some of it,

29
00:01:41.910 --> 00:01:46.890
like an old-fashioned boiler room, is designed to deceive and to con.

30
00:01:47.430 --> 00:01:51.510
And the challenge is figuring out what to believe. So you're exactly right,

31
00:01:51.600 --> 00:01:56.400
valuations in financial markets have come roaring back in part

32
00:01:56.400 --> 00:01:57.360
thanks to the Fed,

33
00:01:57.990 --> 00:02:02.580
and in part because people want to believe things will get better and, in fact,

34
00:02:02.910 --> 00:02:07.170
are getting better.
But I would say time will tell whether markets have jumped

35
00:02:07.170 --> 00:02:11.430
the gun. But suffice to say, there's a lot of optimism built in at the moment.

36
00:02:12.030 --> 00:02:16.770
So our focus at Canso is on selecting individual companies that are

37
00:02:16.770 --> 00:02:20.940
solvent and that will survive. And to do this,

38
00:02:20.970 --> 00:02:23.970
there is no substitute for hard work and analysis.

39
00:02:24.360 --> 00:02:26.790
And no matter what someone says,

40
00:02:26.790 --> 00:02:31.650
analysis is not a point-and-click exercise. So, it takes time,

41
00:02:31.650 --> 00:02:34.260
and while people don't like to admit they need assistance,

42
00:02:34.560 --> 00:02:36.900
sometimes a professional is just what you need.

43
00:02:37.440 --> 00:02:41.280
And so I would say if your motivation is "get rich quick", then,

44
00:02:41.280 --> 00:02:46.140
like diet pills and "get a new bathroom in a day", I hope it works out for you,

45
00:02:46.590 --> 00:02:48.060
but I think the odds are against you.

46
00:02:48.360 --> 00:02:52.260
<v 0>The odds indeed. Brian, switching gears specifically to credit,</v>

47
00:02:53.310 --> 00:02:58.020
in Q2 the Bank of America Merrill Lynch Corporate Bond Index was up over 8%

48
00:02:58.620 --> 00:03:02.410
in the quarter alone, and are now approaching their March highs. I wonder then,

49
00:03:02.410 --> 00:03:07.210
does that mean that the window has closed to find value in corporate

50
00:03:07.210 --> 00:03:08.043
debt?

51
00:03:08.410 --> 00:03:11.980
<v 1>That's another great question, Jhordan, and the short answer is no,</v>

52
00:03:11.980 --> 00:03:14.620
but I'll give you a longer answer, as you might expect.

53
00:03:14.830 --> 00:03:18.940
There has been a huge rally in both investment-grade and non-investment-grade

54
00:03:18.940 --> 00:03:19.810
credit generally,

55
00:03:20.350 --> 00:03:24.190
but I would say it's still very early days in the corporate carnage. And,

56
00:03:24.700 --> 00:03:29.620
as more bankruptcies and restructurings occur and recoveries to lenders prove

57
00:03:29.620 --> 00:03:34.060
to be less than previous downturns, we think markets are likely to take a pause.

58
00:03:34.600 --> 00:03:35.433
And so, at Canso,

59
00:03:35.740 --> 00:03:39.640
we've been doing a number of deals with companies with pandemic-related

60
00:03:39.640 --> 00:03:40.473
challenges,

61
00:03:40.720 --> 00:03:45.250
some of them very severe (Air Canada and American Airlines are a couple of

62
00:03:45.250 --> 00:03:47.320
examples). In those deals,

63
00:03:47.320 --> 00:03:51.790
we have a priority position in the capital structure and we receive appropriate

64
00:03:51.790 --> 00:03:56.620
compensation, in fact, equity-like returns. So to us,

65
00:03:56.620 --> 00:03:58.990
these are not DIY situations.

66
00:03:59.560 --> 00:04:02.050
There are still many value opportunities out there,

67
00:04:02.320 --> 00:04:04.990
but the risk needs to be appropriately priced and structured.

68
00:04:05.740 --> 00:04:08.170
<v 0>And as we've said many times before here at Canso,</v>

69
00:04:08.170 --> 00:04:11.680
we only take risk when we're compensated to do so. I have that right?

70
00:04:12.610 --> 00:04:13.443
<v 1>Absolutely.</v>

71
00:04:13.960 --> 00:04:17.080
<v 0>Very good. Well, Brian, thanks a lot for your time. Appreciate having you.</v>

72
00:04:17.680 --> 00:04:19.450
<v 1>Thanks again for having me, Jhordan. Be safe.</v>

73
00:04:19.960 --> 00:04:21.460
<v 0>And if you'd like some more information,</v>

74
00:04:21.700 --> 00:04:26.110
head to the Canso website and check out the July edition of the Canso Market

75
00:04:26.110 --> 00:04:26.530
Observer.