FidelityConnects: Are consumers ready for takeoff? Inside travel and leisure trends

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<b>Subtitles are AI Generated</b>

 

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Hello and welcome to Fidelity Connects.

 

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I'm Pamela Ritchie. Higher gas prices, sticky inflation, and shifting consumer

 

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habits have kept markets focused on one question.

 

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Is the U.S. Consumer finally starting to crack?

 

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But our next guest says the real story isn't about whether consumers are

 

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spending less, it's about where they're spending differently in

 

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many cases. From the surprising battle between pizza and tacos

 

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to why customer service is back in focus.

 

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And what travel demand is revealing about household resilience.

 

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Joining us here today to discuss the trends shaping consumer behaviour is

 

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David Cochran. He is equity research analyst and associate portfolio

 

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manager. Warm welcome to you, David. Good to see you again.

 

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Thank you for having me.

 

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It's time to check in on what we're all going to do this summer and what it

 

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means for investments so far.

 

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So let's begin there. Let's begin ultimately with what we've all been dealing

 

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with, which is higher oil prices.

 

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The obvious question is, how is that crimping everything else?

 

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And first of all, is it crimping everything else?

 

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Well that's exactly right. That's the big question from a macro perspective

 

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in consumer right now is you know as I'm sure you've noticed prices

 

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of the pump are up over 30% in recent months and whether

 

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that is going to weigh on consumer spending in other areas because

 

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they've spent all their money on gas.

 

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So maybe just a little context around it and then we can go into what we've

 

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seen. Sure. So.

 

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For reference, consumers in the U.S.

 

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Spend approximately 3% of their after-tax income on gas.

 

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It doesn't sound like that much.

 

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It doesn' sound like much, right? And so you go, OK, it's up 30%, so

 

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maybe that's a 1% headwind, but that's not exactly the way to look at

 

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it because the issue is, I guess, lower income consumers

 

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spend higher percent of their income on gas.

 

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And that's 3% of your total income, but you still have to pay rent, you

 

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still to pay for insurance. You have a bunch of non-discretionary expenses.

 

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So if you looked at the wallet of a lower income consumer and just the

 

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discretionary piece of that, the impact can actually be multiples bigger.

 

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And let's just layer in there to what extent, I mean, of course, you're

 

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looking at sentiment measures. That's part of what you're going to do.

 

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But it's very interesting because everyone's grumpy, everyone's unhappy,

 

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everyone has, sentiment is poor if you sort of anecdotally

 

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look at it. But how do you look at that?

 

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And do you put it to one side when you're measuring?

 

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Well, that's right. So we like to, I mean, first, we're

 

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certainly bottom-up stock pickers, but when I'm looking at the macro picture, I

 

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like to look at sentiment indicators, but I also like to look the data.

 

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So people can be grumpy, but are they still spending?

 

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And so what we've seen so far is really a limited impact.

 

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US household spending on non-gas and non-autos

 

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was up four or five percent in March and April, despite the higher oil

 

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prices. We have access at Fidelity to some more real-time

 

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credit card data, which shows things have slowed a little bit in May, but

 

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are still running at close to 4%.

 

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Canada, we have the data on a leg, but Canadian consumption

 

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was up 4-ish percent in March as well.

 

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So we really haven't seen a fall off, particularly in the U.S.

 

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Now there's a nuance around this, and the nuance is the consumer

 

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in the US has been benefiting from a tailwind.

 

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That it was driven by higher tax refunds.

 

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And that's the month of May, really.

 

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Sorry, the story of the month and the anticipation of it.

 

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Well, so certainly in March and April, you saw,

 

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I've seen an estimate that the US consumer had a $45 billion tailwind

 

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from higher tax refunds year over year.

 

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And so you can look at the data and say, well, the consumer hasn't really

 

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slowed till this point, or maybe slowed only

 

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marginally in certain pockets, but you were benefiting from this

 

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tax refund tailwind. So what happens if gas prices stay

 

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high? And then does that eventually start to show up more in

 

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consumer spending, particularly for this low-income consumer.

 

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Okay, so we'll talk about that. We might also talk about what if gas prices

 

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actually come down quite a lot, which apparently could

 

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be.

 

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I think it's all within the spectrum of possibilities, right?

 

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And so our job at Fidelity is to understand, OK,

 

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basically deeply understand our companies and their exposures, who are their

 

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customers, how sensitive are their customer, how sensitive from

 

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a macro perspective or discretionary are the goods you're actually selling.

 

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And then what does it mean if your consumer pulls back what's

 

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priced into the stock, What does that mean for earnings and ultimately the

 

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stock price? And so we're trying to understand those macro sensitivities.

 

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That's the first piece of it. But we're also trying to understand which

 

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companies are winning and losing regardless of the macro,

 

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right?

And have pricing power. And so.

 

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And so you need to be able to understand the company-specific drivers, because

 

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if a company comes out with a weaker set of results and says, hey,

 

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we're seeing a macro impact, maybe they are, but maybe there's something

 

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else going on. And maybe there are companies that can just thrive, even if

 

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the lower income consumer is weak, because they're winning a lot of share with

 

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that consumer. And so we're trying to separate all that out and find the best

 

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stocks within it.

 

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I mean, I wonder if you can just sort of put it into perspective.

 

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If you look at the United States, Canada as well, I mean most so-called

 

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developed nations are highly dependent for their economy on

 

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the consumer, right? I mean the consumer has to spend or the economy doesn't

 

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work essentially. I mean there are other, lots of other components obviously.

 

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But this is incredibly important to the functioning of an economy.

 

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So I'm just sort of wondering if you can.

 

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Put that in place of where we are, you know, compared to coming out of

 

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COVID. What is this moment for consumer spending, even though we're grumpy, and

 

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we're not grumpy.

 

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I think the analogy people like to make is looking

 

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at the 1970s oil shock.

 

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But I think one of the important things to remember is consumers were

 

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spending a much higher percentage of their income on gasoline at that point.

 

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And so we're less sensitive today to this, but you're right,

 

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it is still an important piece of the picture.

 

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I think what you need to look at again is just the consumer

 

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spend curve will up in flow.

 

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You have headwinds and tailwinds. Last year we were talking about government

 

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shutdowns, slowing wage growth for the

 

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low income consumer.

 

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You had ICE, which had impacts in certain populations.

 

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So, you had all kinds of headwinds last year as well.

 

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And there's always something going on, so it's really, okay, how does this

 

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compare to last year? Is this transitory?

 

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Is this gonna ebb and flow versus a big structural issue?

 

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So there's probably more to understand on the exposures to various headwinds,

 

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essentially. And we can ask you about that. I wonder if you can throw out an

 

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example or two of where you see this.

 

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So across the consumer story, where are people spending on

 

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services, on stuff?

 

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Well, I think it's, it comes back, I'll give you the example of, you

 

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know, competition within restaurants and restaurants.

 

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In the restaurant company. Restaurant companies.

 

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And so restaurant companies, I mean, they have a broad exposure,

 

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especially quick service restaurants, including low income consumers, right?

 

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So there's kind of an interesting example of the pizza category

 

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versus the taco category.

 

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And I'll give you the example where pizza is really struggling.

 

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And if you looked at the first quarter results,

 

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Domino's reported 1% same store sales growth.

 

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Their delivery business was actually down, their competitors,

 

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Pizza Hut and Papa John's, their same-store sales were down mid-single digits

 

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in the US.

 

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And Domino's will talk on their call about how, yes, we're seeing some macro

 

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impact in the low-income consumer.

 

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And so you go, okay, is this just macro?

 

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But I think when you step back, you realise competition has massively

 

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increased for the pizza category.

 

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When I was a kid, and look, I still love pizza.

 

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If I wanted to have something delivered, the only option was really pizza.

 

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And with the rise of DoorDash and Uber Eats, you have all kinds of different

 

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delivery options now.

 

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Unless Pizza Player's even at that point.

 

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And so you're starting to see, I guess, just competition within

 

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the category and the category mature and promotionality increase.

 

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So you can look at it and the explanation will be partially macro,

 

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but part of it's just something that's company or subsector specific.

 

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And you can contrast that with Taco Bell, which is owned by Yum.

 

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Taco Bell in the first quarter grew their same-star sales in the US

 

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8%, and that's against 9% compare last year.

 

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And out.

 

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What are they doing?

 

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I mean, they have a tremendous combination of menu innovation,

 

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value, a growing digital business and the brand is just really resonating

 

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with consumers. And so I think that's a contrast where we can talk

 

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about low income consumer, we can talk about macro, but the Taco

 

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Bell customer and the Domino's customer are not necessarily that different

 

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and one of them is thriving or one of the companies is

 

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growing quickly and one is kind of battling amongst smaller competitors.

 

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And I think that's the important contrast.

 

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And so we're trying to figure out what's macro, what's company specific,

 

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what does it mean for what the companies will earn and what does that

 

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ultimately mean for the stocks.

 

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That's incredible in terms of get into just sort of the valuation

 

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story a little bit. I mean, how are these being treated by investors at

 

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this point?

 

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So consumer discretionary is a subsector

 

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where, or is a sector rather, where there's high intra-sector dispersion.

 

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So you have these big winners and these big losers almost

 

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regardless of the macro backdrop.

 

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And I think what you're seeing is companies that have

 

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any sign of a structural type competitive

 

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headwind, get punished very quickly, and companies were

 

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trans-inflect. The valuations re-rate very quickly.

 

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And so it's important for us to pay attention to these inflexion points

 

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and, you know, try and own the winners before you see

 

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this growth show up. And so you can capitalise on the higher earnings growth

 

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and the re-rating and valuation.

 

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For some time, they would look at, for instance, the luxury

 

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segment of that being kind of recession proof.

 

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I mean, I don't know to what extent any of that stuff holds, but it has shifted

 

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within what we used to think of as the consumer being OK through

 

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this economic situation, untouchable here.

 

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The disruption of technology, delivery, I guess, is a good example within food.

 

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How has that shifted? What? What is or isn't holding pricing power?

 

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Is it the higher segment, the lower segment, or is it innovation?

 

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I think it is that higher segment has pricing power and

 

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it's innovation. And I'll give you an example of another, this

 

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is another area within restaurants, but I think it's a broader consumer

 

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trend, which I believe the era of customer service

 

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is back. And you're seeing this show up within the beverage

 

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segment. So in restaurants, one of the fastest growing

 

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segments is cold beverages, then cold customizable sweet coffee.

 

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Even in January.

 

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It's just unbelievable. But really you don't want a hot drink?

 

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Nope.

No, that's it. And so those are, I guess, that

 

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that's the fast growing category. And you've seen a couple players in the US,

 

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the two notable ones are Dutch Brothers and Seven Brew, which is a private

 

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company, grow very rapidly.

 

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And part of the magic is, yes, we're operating in this category, which

 

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is great. But part of that magic is they're bringing back customer service.

 

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They're friendly with a smile on their face.

 

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They'll come out, chat you up, and it sounds like a small thing, but relative

 

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to your average quick service restaurant experience, it's

 

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differentiated and resonating.

 

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And these are no longer small players.

 

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These two companies are up to approximately 2,000 units in

 

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the US. And so what you've seen is some of the bigger companies take notice and

 

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try to do the same thing.

 

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And the best example of that is Starbucks.

 

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So Starbucks has a new CEO.

 

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They've been trying a lot of new things lately.

 

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They've been trying a lot of new things.

 

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And I think you'll remember Starbucks in the 2010s, it was friendly

 

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service, write your name on the cup.

 

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And they kind of lost their way a little bit, have brought back a new, or

 

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have brought in a new CEO, Brian Nicol, who's the former CEO of Chipotle.

 

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And his plan is all about this customer service aspect.

 

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So he's reinvested hundreds of millions of dollars in

 

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store labour. They have new training programmes and measurement programmes

 

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to try to increase hospitality.

 

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They're bringing furniture back to Starbucks.

 

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And what you've seen is the same store sales growth start to

 

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turn the corner. And so this hospitality element is working.

 

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This isn't a comment on Starbucks stock.

 

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I think you could argue a high degree of continued success is priced in or

 

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expected at this point. But certainly, it's hard to argue with the idea that

 

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bringing back hospitality is making a difference.

 

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And I think that's a broader consumer trend.

 

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Is that still like hangover from COVID where people had

 

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to be very sort of dined and dashed type feeling where you had to

 

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take off with your mask?

 

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I think it's part of that and the temptation certainly to lean in very

 

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aggressively to order ahead and the pickup lanes and use the

 

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app and you come in, as you mentioned, and pop in, grab it, pop

 

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out. But what do people really want?

 

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I think they're looking for more than just the beverage itself.

 

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They're looking for a smile, positive interaction.

 

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Especially when there were seven or eight dollars.

 

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Exactly. And that's part of it.

 

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So if you have that kind of hospitality, you can charge a higher price

 

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and you hold pricing power to your original question.

 

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That's so interesting.

 

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But yeah, that's an element of it.

 

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They, you know, I didn't think we'd be talking about necessarily, but we're

 

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seeing it, we're seeing it work.

 

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Manners matter.

 

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Matters matter.

 

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Manor's Manor. That's nice to hear, actually.

 

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It's a nice new development. Let's take it into sort of the summer travel

 

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season. So probably restaurants are part of that and drinks along with it.

 

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But this goes to hotels where people will stay.

 

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They're expensive, but which ones hold the pricing power?

 

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The bigger the better? Is that still the case?

 

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The bigger the better is for sure still the case.

 

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I'll run you through maybe just to compare to where we were last fall.

 

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So when I was on the programme last fall, I think we were talking about

 

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how revenue per available room night, which is what a hotel on

 

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average gets per room they have per night.

 

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That was falling and actually running negative last

 

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year. And what we've seen to start 2026

 

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is particularly in the US, revenue per available.

 

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Has accelerated. That growth has accelerated, it's now positive.

 

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And interestingly, the biggest change was in that low-income consumer.

 

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That economy segment, that RevPAR acceleration has

 

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been the most dramatic of any of the chain scales.

 

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So the chain scales will have their luxury version and then

 

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they're more economy.

 

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And that's where they've seen a lot of growth.

 

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Yeah and so you've seen that really turn around which is interesting and

 

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you know I was speaking with our industrials analysts who cover the airlines.

 

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They were talking about Canadian Airlines and what they're seeing because if

 

16:02.561 --> 16:06.065

you've tried to book a flight recently certainly they're trying to pass on

 

16:06.065 --> 16:10.102

these higher jet fuel prices and they really it sounds like haven't

 

16:10.102 --> 16:14.473

seen much of a fall off in demand and we certainly have a great data

 

16:14.473 --> 16:17.977

set in the US, which shows passenger traffic.

 

16:17.977 --> 16:21.981

And it's the same thing. It's tracking right in line with normal seasonality,

 

16:21.981 --> 16:23.182

despite higher prices.

 

16:23.182 --> 16:26.852

That is a classic everyone's complaining but still spending, isn't it?

 

16:26.852 --> 16:27.953

I mean, that's right there.

 

16:27.953 --> 16:30.022

It's one of those examples, right?

 

16:30.022 --> 16:33.258

And so you're seeing it in travel. And so what does it mean for the stocks?

 

16:33.258 --> 16:37.396

I mean, when we were on or when I was on in the fall,

 

16:37.396 --> 16:41.367

we talked a little bit about how the big get bigger in hotels.

 

16:41.367 --> 16:45.304

The two examples being Hilton and Marriott, who grow rooms that call

 

16:45.304 --> 16:48.207

it two to four times the rate of the market.

 

16:48.207 --> 16:50.876

And that has really continued.

 

16:50.876 --> 16:52.811

The big keep getting bigger.

 

16:52.811 --> 16:57.383

And with this turn in revenue per available room night growth,

 

16:57.383 --> 17:01.520

You know, the earnings outlook has improved and the stocks have

 

17:01.520 --> 17:05.657

done very well and re-rated and that's been kind of the story

 

17:05.657 --> 17:07.960

of travel to start 2026.

 

17:07.960 --> 17:11.530

I mean, that's very positive and really interesting and for investors,

 

17:11.530 --> 17:15.067

extremely important place to look. What's the why behind it?

 

17:15.067 --> 17:19.204

I mean you could argue last year and in the last little while

 

17:19.204 --> 17:22.741

in the US in particular, we keep hearing that foreigners are not spending their

 

17:22.741 --> 17:24.610

tourism dollars going to certain places.

 

17:24.610 --> 17:26.879

People are being more domestically focused.

 

17:26.879 --> 17:30.916

I mean does it matter if that, it clearly doesn't matter if it's true or

 

17:30.916 --> 17:33.952

not. But what is the why, behind seeing this rise?

 

17:33.952 --> 17:38.257

I think particularly if you look at the economy segment

 

17:38.257 --> 17:42.594

within hotels, so that lower income consumer in

 

17:42.594 --> 17:46.532

the lower chain scale hotels, they had a lot of

 

17:46.532 --> 17:48.400

headwinds last year as well.

 

17:48.400 --> 17:52.137

I mean, democratic consumer sentiment was in the tank.

 

17:52.137 --> 17:56.141

Lowest quartile wage growth had slowed more dramatically

 

17:56.141 --> 17:58.010

than other quartiles.

 

17:58.010 --> 18:01.880

You had a government shutdown, which.

 

18:01.880 --> 18:05.818

You know, there's disruption to government paychecks as part

 

18:05.818 --> 18:09.555

of that, but also just government themselves for business purposes.

 

18:09.555 --> 18:11.957

There's a bunch of travel related to that.

 

18:11.957 --> 18:15.427

So you did have a bunch of headwinds last year.

 

18:15.427 --> 18:19.064

And as you start to lap those, yes, gas prices are higher, but the summer

 

18:19.064 --> 18:21.400

travel impulse is kind of back.

 

18:21.400 --> 18:25.704

And you've seen just as you're lapping a softer period,

 

18:25.704 --> 18:29.208

yes, we have some headwind now, but we had headwind last year and rep par was

 

18:29.208 --> 18:33.212

negative last year and. You've seen kind of a mechanical flip

 

18:33.212 --> 18:34.413

to positive rep part growth.

 

18:34.413 --> 18:38.016

So it was troughing, for all of those reasons, but it was a bit of a trough

 

18:38.016 --> 18:39.017

from the client's back.

 

18:40.018 --> 18:43.255

Let's ask you a little bit about many of the companies that you would take a

 

18:43.255 --> 18:47.326

look at, how they are reacting or maybe no longer reacting to the

 

18:47.326 --> 18:50.462

story of tariffs. That was a huge headwind.

 

18:50.462 --> 18:54.533

Everyone was scrambling, and Fidelia did an incredible job of figuring

 

18:54.533 --> 18:58.470

out what the exposure was to various tariffs.

 

18:58.470 --> 19:00.906

They kind of been cancelled. There's new ones being put in.

 

19:00.906 --> 19:03.075

Where do some of the companies you follow sit?

 

19:03.075 --> 19:07.146

I mean, it feels like the Iran war dominates the headlines

 

19:07.146 --> 19:11.750

every day, but there is plenty going on with tariffs still.

 

19:11.750 --> 19:13.719

Yeah, you don't really hear about it, actually.

 

19:13.719 --> 19:14.086

It's not.

 

19:14.086 --> 19:17.689

It's not the first article now versus it was the first article, but that

 

19:17.689 --> 19:21.360

doesn't mean that there's not change in news.

 

19:21.360 --> 19:24.062

So a quick update versus last fall.

 

19:24.062 --> 19:25.931

Actually, I'll take you to last April.

 

19:25.931 --> 19:30.035

So that was President Trump Liberation Day holding up

 

19:30.035 --> 19:30.669

his tariff.

 

19:30.669 --> 19:32.337

The announcements. Right side.

 

19:32.337 --> 19:37.509

So those tariffs moved around a little bit in a negotiation.

 

19:37.509 --> 19:41.113

But those tariffs were known as IEPA tariffs.

 

19:41.113 --> 19:45.450

And in February, the US Supreme Court ruled that

 

19:45.450 --> 19:49.855

President Trump does not have the authority to impose IEPa tariffs.

 

19:49.855 --> 19:53.158

And they ended up actually being turned off.

 

19:53.158 --> 19:55.761

And companies are pursuing refunds for those.

 

19:55.761 --> 19:58.664

Because they were emergency tariffs that were meant to fight the emergency.

 

19:58.664 --> 20:01.500

Emergency economic tariffs.

 

20:01.500 --> 20:05.204

And they were shut off. Companies are pursuing refunds.

 

20:05.204 --> 20:09.408

What President Trump and his administration ended up doing is

 

20:09.408 --> 20:13.545

imposing something called Section 122 tariffs, which fall

 

20:13.545 --> 20:16.114

under the Trade Act of 1974.

 

20:16.114 --> 20:18.917

These tariffs actually were a step down.

 

20:18.917 --> 20:22.988

Big round numbers call IEPA tariffs 20%,

 

20:22.988 --> 20:24.823

122 tariff 10%.

 

20:24.823 --> 20:29.027

So tariffs actually stepped down and we're currently under this

 

20:29.027 --> 20:33.265

122 tariff construct and

 

20:33.265 --> 20:37.202

the nuance with them is 122 tariffs only last for

 

20:37.202 --> 20:40.539

150 days and so they expire in July.

 

20:40.539 --> 20:40.872

Wow.

 

20:40.872 --> 20:44.409

So the big question is, OK, what's going to happen in July?

 

20:44.443 --> 20:48.580

The expectation is that 122 tariffs will be replaced

 

20:48.580 --> 20:52.517

with something called section 301 tariffs, also fall under

 

20:52.517 --> 20:54.353

the Trade Act of 1974.

 

20:54.353 --> 20:58.323

There are some, I guess, complications with how you need to impose them.

 

20:58.323 --> 21:01.493

But the question is OK, what rate are those going to come in at?

 

21:01.493 --> 21:03.328

Is it the 122 rate?

 

21:03.328 --> 21:06.732

Is it IEPA rate? Is it something lower, higher?

 

21:06.732 --> 21:08.500

Do they come in right away? Is there a brave?

 

21:08.500 --> 21:10.936

Can companies swallow them? Do they need to pass them on?

 

21:10.936 --> 21:14.873

Well, that's it. And so what we're doing here at Fidelity is we'd like

 

21:14.873 --> 21:17.876

to understand, okay, how exposed are our companies?

 

21:17.876 --> 21:22.014

Where are their supply? Where do they procure their goods from?

 

21:22.014 --> 21:24.616

What do their supply chains look like?

 

21:24.616 --> 21:28.620

What is their pricing power and ability to pass on tariffs?

 

21:28.620 --> 21:31.290

What have they built into their guidance?

 

21:31.290 --> 21:35.560

And this is all in an effort to understand, okay, when we

 

21:35.560 --> 21:40.465

understand what happens when Section 122 tariffs roll off,

 

21:40.465 --> 21:43.235

What are the earnings going to look like? What does it mean for the stock?

 

21:43.235 --> 21:45.937

And we want to have done all that work ahead of time.

 

21:45.937 --> 21:50.208

And it's labour intensive, but the part about Fidelity is we have

 

21:50.208 --> 21:54.279

a big team of people, we have phenomenal access, and

 

21:54.279 --> 21:58.317

we're all doing our work, doing our modelling to understand basically where are

 

21:58.317 --> 22:01.053

the exposures and what does it means in terms of what we should own.

 

22:01.053 --> 22:03.188

And you can limit the surprises that come along.

 

22:03.188 --> 22:06.858

Yeah, you want to understand your exposure ahead of time and you want to be in

 

22:06.858 --> 22:10.128

a position to pounce if it creates any opportunities.

 

22:10.128 --> 22:13.932

It's really, really interesting how all of this kind of comes together.

 

22:13.932 --> 22:17.869

And July, of course, is when we think in Canada, KUSMA,

 

22:17.869 --> 22:22.074

USMCA is going to, I mean, we don't know if it's going to be renegotiated.

 

22:22.074 --> 22:24.576

Everyone keeps saying July 1st is not going to happen.

 

22:24.576 --> 22:28.814

But in any case, the timing dovetails with a new era of

 

22:28.814 --> 22:32.884

tariffs. And now we need to know what you know about

 

22:32.884 --> 22:36.321

some of these being slipped into an actual trade deal or to what extent that's

 

22:36.321 --> 22:38.056

going affect the overall story.

 

22:38.056 --> 22:40.792

July should certainly be exciting.

 

22:40.792 --> 22:45.197

So the USMCA is currently up for renegotiation.

 

22:45.197 --> 22:49.234

In theory, the three countries need to settle on an agreement

 

22:49.234 --> 22:53.271

in July. And they have three options, which are

 

22:53.271 --> 22:57.709

extend the agreement under its current construct for another 16 years.

 

22:57.743 --> 22:58.410

Which we'd like.

 

22:58.410 --> 23:01.613

Which, hey, wouldn't be bad. But apparently isn't going to happen.

 

23:01.613 --> 23:06.084

They could move to in a basically annual

 

23:06.084 --> 23:10.122

review for the next 10 years, or they can elect to

 

23:10.122 --> 23:14.259

walk away with a six month notice period.

 

23:14.259 --> 23:18.563

Now, Trade Representative Greer has suggested

 

23:18.563 --> 23:22.801

they don't want to basically blow up this deal in its entirety, but

 

23:22.801 --> 23:27.038

it'll be a negotiation. And so if you look at the U.S.'s goal...

 

23:27.038 --> 23:30.208

Is to increase manufacturing in the U.S.

 

23:30.208 --> 23:31.610

You just start there.

 

23:31.610 --> 23:35.580

You start there, and then Canada and Mexico's

 

23:35.580 --> 23:39.718

goal is to keep free trade open,

 

23:39.718 --> 23:43.922

but also to perhaps lower the sectoral tariffs

 

23:43.922 --> 23:48.160

that have been imposed on certain areas, steel, aluminium,

 

23:48.160 --> 23:50.929

copper, forest products.

 

23:50.929 --> 23:55.233

And so that is basically the starting point for the negotiation.

 

23:55.233 --> 23:59.304

I think, you know, trade representative Greer

 

23:59.304 --> 24:04.009

has maybe, or there's been some indications in the news just that

 

24:04.009 --> 24:08.313

the US would basically like to

 

24:08.313 --> 24:12.784

increase the restrictions around content

 

24:12.784 --> 24:16.922

origination rules, which is basically, hey, you can't ship something

 

24:16.922 --> 24:18.490

from China to Mexico.

 

24:18.490 --> 24:21.493

Right. And then put it into a better product.

 

24:21.493 --> 24:25.530

The US and say, hey, this is from Mexico, no tariffs, and keep

 

24:25.530 --> 24:28.700

those manufacturing jobs in North America.

 

24:28.700 --> 24:31.369

But this will be an evolving negotiations.

 

24:31.369 --> 24:35.407

And so how do you approach it? You do the same thing you do with tariffs,

 

24:35.407 --> 24:39.945

right? Which is understand your exposures, understand the early sensitivities,

 

24:39.945 --> 24:42.147

know where you are, know how to react.

 

24:42.147 --> 24:46.151

So to what extent from tariffs and now in anticipation of, we don't know

 

24:46.151 --> 24:50.922

on the trade front exactly, have supply chains, have companies shifted?

 

24:50.922 --> 24:54.893

I mean, they're getting kind of used to shifting out of COVID, more robust

 

24:54.893 --> 24:58.263

in that sense to deal with new shocks coming along.

 

24:58.263 --> 25:00.365

But you imagine there's some real preparations.

 

25:00.365 --> 25:04.269

Can you give us a little bit of an example of what that has looked like?

 

25:04.269 --> 25:06.371

Sure.

 

25:06.371 --> 25:10.909

So you're right. I think companies have built a muscle around

 

25:10.909 --> 25:15.146

being able to adapt their supply chains more quickly than,

 

25:15.146 --> 25:18.917

you know, it's really not something they necessarily faced in the past.

 

25:18.917 --> 25:23.522

A great example of a company that's done a good job of this is Aritzia.

 

25:23.522 --> 25:27.392

So Aritzie has figured out this is a women's apparel retailer.

 

25:27.392 --> 25:29.361

Oh, we know. You're familiar.

 

25:29.361 --> 25:32.397

I've talked about it on this show before.

 

25:32.397 --> 25:34.499

Beautiful new store in the Eaton Centre, by the way.

 

25:34.499 --> 25:36.234

Oh, is it? Okay, I'll try not to visit.

 

25:36.234 --> 25:39.004

Must check it out.

 

25:39.004 --> 25:44.242

And they've done a great job at basically figuring out how to procure

 

25:44.242 --> 25:47.712

goods from a number of different countries, working with a number of different

 

25:47.712 --> 25:52.284

suppliers and ultimately mitigate some of this tariff impact.

 

25:52.284 --> 25:56.321

They've also the brand themselves and a more everyday luxury

 

25:56.321 --> 26:00.158

is a brand with pricing power and so they've did a good job, I guess,

 

26:00.158 --> 26:02.594

navigating tariffs. That'd be an example.

 

26:02.594 --> 26:05.430

That's a great example.

 

26:05.430 --> 26:09.501

Let's talk a little bit about those that are homeowners,

 

26:09.501 --> 26:11.970

just like gas prices and what you do.

 

26:11.970 --> 26:13.905

These are costs that stick with you.

 

26:13.905 --> 26:15.974

Your mortgage in the US.

 

26:15.974 --> 26:19.878

Talking a little about the consumer for home builders.

 

26:19.878 --> 26:22.681

You're thinking of where you're going to buy a new faucet if you're gonna be

 

26:22.681 --> 26:25.550

renovating your house one way or the other. They're all connected within the

 

26:25.550 --> 26:29.154

housing story and can be quite cyclical.

 

26:29.154 --> 26:31.556

Do you like those areas of consumer?

 

26:31.556 --> 26:33.291

Buying or not?

 

26:33.291 --> 26:35.327

What are the headwinds slash tailwinds?

 

26:35.327 --> 26:39.331

I mean this story, so some of the larger companies in

 

26:39.331 --> 26:43.535

the U.S. Are kind of home improvement retailers, at least within

 

26:43.535 --> 26:46.071

the consumer discretionary space.

 

26:46.071 --> 26:48.373

We have cheap cleaning products, too, I've noticed.

 

26:48.373 --> 26:51.409

Cheap cleaning products there. Yeah, it's a good place to go for your bleach

 

26:51.409 --> 26:54.145

things.

 

26:54.145 --> 26:58.750

The story really of housing in the US has been a continued depressed

 

26:58.750 --> 27:00.652

environment for housing turnover.

 

27:00.652 --> 27:05.557

So in the U.S., housing turnovers are running at about four million homes.

 

27:05.557 --> 27:08.159

Pre-COVID, for reference, that was 5.5.

 

27:08.159 --> 27:10.161

In COVID, it went to over six.

 

27:10.161 --> 27:13.098

And the issue really has been rates, right?

 

27:13.098 --> 27:17.669

And in the us, you have this contract of the 30-year fixed mortgage.

 

27:17.669 --> 27:21.640

And in Canada, we can have longer amortisation periods, but you

 

27:21.640 --> 27:23.908

can't lock in a rate for 30 years.

 

27:23.908 --> 27:27.412

Which means people can move. Which means, people can't move, but also if rates

 

27:27.412 --> 27:29.581

go up, you feel the impact sooner.

 

27:29.581 --> 27:32.083

So mortgage rates have remained high in the U.S.

 

27:32.083 --> 27:36.121

And part of it is this inflation concern and does

 

27:36.121 --> 27:40.258

that mean rates need to stay high, which is also a function

 

27:40.258 --> 27:44.262

of energy prices. But the I

 

27:44.262 --> 27:48.366

guess higher mortgage rates have prevented housing turnover

 

27:48.366 --> 27:52.570

from picking up, and what it's meant for the stocks is the stocks were actually

 

27:52.570 --> 27:56.374

trading at healthy multiples in anticipation of a bit of a recovery.

 

27:56.374 --> 27:59.444

Right. Because rates were projected to come down.

 

27:59.444 --> 28:00.879

Exactly. Now this was the time.

 

28:00.879 --> 28:02.714

Recovery has not showed up.

 

28:02.714 --> 28:06.384

I mean, activity is low, the recovery has been pushed out, earnings estimates

 

28:06.384 --> 28:09.354

have been cut, and the stocks have come off.

 

28:09.354 --> 28:14.092

And, you know, I think where we are now is, hey, when is this going to happen?

 

28:14.092 --> 28:15.927

So that's basically the story of home improvement.

 

28:15.927 --> 28:18.496

So what do you do with that? I think we were speaking with one of your

 

28:18.496 --> 28:23.168

colleagues recently and sort of trying to get a handle that if there is

 

28:23.168 --> 28:27.372

to be hikes or holds or we're not sure in the US, nobody really knows, in

 

28:27.372 --> 28:31.309

reaction to inflation, is it a cycle or is it just sort

 

28:31.309 --> 28:34.212

of a hike or two? Nobody really knows.

 

28:34.212 --> 28:37.782

But I guess the question is what's the impact about not knowing for these types

 

28:37.782 --> 28:39.017

of companies?

 

28:39.017 --> 28:43.054

I think what you're trying to do is assess the risk reward in

 

28:43.054 --> 28:44.656

any scenario.

 

28:44.656 --> 28:45.690

Right. Yeah.

 

28:45.690 --> 28:50.161

Back in the fall, these stocks were trading at elevated multiples

 

28:50.161 --> 28:53.031

with anticipation of recovery.

 

28:53.031 --> 28:56.201

And you say, well, if there is a recovery, how much upside is there to the

 

28:56.201 --> 29:00.872

stocks? And if there's not, what does it mean and what if it takes longer?

 

29:00.872 --> 29:04.809

And so I guess being careful from a compliance perspective, but you'll see we

 

29:04.809 --> 29:06.511

haven't owned the stocks.

 

29:06.511 --> 29:08.379

So that's what you do.

 

29:08.379 --> 29:10.148

That is the expression of how we feel about that.

 

29:10.148 --> 29:12.050

Just trying to understand the risk reward.

 

29:12.050 --> 29:14.486

Yeah. Okay. It's interesting.

 

29:14.486 --> 29:18.490

Is one of the trends, if people have house turnover, then they renovate

 

29:18.490 --> 29:20.458

and spend big bucks at places like that?

 

29:20.458 --> 29:23.762

Exactly. And if they don't, because then there was also the argument, I think,

 

29:23.762 --> 29:26.598

during COVID or other times where, no, we're going to stay here, but we'll put

 

29:26.598 --> 29:29.367

a new bathroom in or whatever it was. That's also the case.

 

29:29.367 --> 29:30.368

You're right.

 

29:31.035 --> 29:35.140

But rates are still one of the pieces that go into that calculation.

 

29:35.140 --> 29:37.142

You have a new job, actually.

 

29:37.142 --> 29:40.311

You're still doing exactly what we're talking about, but you have also,

 

29:40.311 --> 29:42.380

congrats, been named to a new position.

 

29:42.380 --> 29:43.214

Want to tell us about that?

 

29:43.214 --> 29:47.285

Sure. Yes. So I've been named as the associate portfolio manager on

 

29:47.285 --> 29:49.320

the American Equity Fund.

 

29:49.320 --> 29:53.491

So I'll be working with Darren, who was recently named the lead portfolio

 

29:53.491 --> 29:57.629

manager on the fund. And I'm absolutely thrilled for the opportunity and

 

29:57.629 --> 30:01.933

to work with Darren. I think we have very complimentary

 

30:01.933 --> 30:05.537

styles. Both look at the world in a similar way.

 

30:05.537 --> 30:09.607

You know, we're trying to own higher quality businesses with durable growth

 

30:09.607 --> 30:13.912

runways who win market share, expand margins, earn high returns on capital.

 

30:13.912 --> 30:17.882

And we're to own those companies in periods where

 

30:17.882 --> 30:21.853

things are inflecting and there's upside to the earnings

 

30:21.853 --> 30:25.957

estimates over kind of medium and longer term basis, and the risk rewards are

 

30:25.957 --> 30:29.961

attractive. And so I think we both look at the world in a very similar way.

 

30:29.961 --> 30:32.263

You know my role will be to be.

 

30:32.263 --> 30:36.534

Basically, another funnel for him for ideas and for portfolio

 

30:36.534 --> 30:40.738

position monitoring, and particularly focus

 

30:40.738 --> 30:42.473

on the areas of consumer, of course.

 

30:42.473 --> 30:44.309

Yeah, I was going to ask you which area.

 

30:44.309 --> 30:47.779

So this is currently where you're at, but you've also done...

 

30:47.779 --> 30:52.116

Yeah, so I've previously covered tech, communication services,

 

30:52.116 --> 30:56.421

internet, a bit of media. And so within that area as well,

 

30:56.421 --> 30:59.991

I just hope to help Darren out and, you know, we've worked together for a long

 

30:59.991 --> 31:03.962

time in my capacity as an analyst, but excited to work even more closely

 

31:03.962 --> 31:05.496

with him in this role.

 

31:05.496 --> 31:07.565

That's great. When did it begin? How long ago?

 

31:07.565 --> 31:10.034

It was announced two weeks ago.

 

31:10.034 --> 31:13.371

Oh, so it's brand new. OK, well, thrilled for you, and that's great.

 

31:13.371 --> 31:17.308

Good luck in your new role. Thank you for talking us through some of the pieces

 

31:17.308 --> 31:20.545

of what's going into investments across the consumer space.

 

31:20.545 --> 31:24.082

What would you like to sort of leave investors with on this note, that either

 

31:24.082 --> 31:27.352

you're watching or the pieces that come together in the next little bit?

 

31:27.352 --> 31:28.753

What's a final thought from you?

 

31:28.753 --> 31:33.558

I think the important thing to remember is that the consumer will

 

31:33.558 --> 31:35.660

ebb and flow in terms of health.

 

31:35.660 --> 31:40.899

But what we're looking to find is those companies that are underappreciated,

 

31:40.899 --> 31:45.069

that are winners regardless of the backdrop and trying to

 

31:45.069 --> 31:49.340

separate what's happening from a macro perspective versus what's

 

31:49.340 --> 31:53.278

happened from a company specific perspective and own the right

 

31:53.278 --> 31:55.914

stocks that kind of winners there.

 

31:55.914 --> 31:59.384

Pizza or tacos, what would you spend your money on?

 

31:59.384 --> 32:02.620

You know, I love both and I need to spend more money on salad.

 

32:02.620 --> 32:04.289

Okay, cool.

 

32:04.289 --> 32:06.658

I'm going to find the investment for that, too. David Cocker, thanks for

 

32:06.658 --> 32:07.191

joining us.

 

32:07.191 --> 32:08.493

Thank you for having me.

 

32:08.493 --> 32:11.129

Thanks for watching or listening to the Fidelity Connects

 

32:11.129 --> 32:15.433

podcast. Now if you haven't done so already, please subscribe to Fidelity

 

32:15.433 --> 32:18.803

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32:18.803 --> 32:21.639

And if you like what you're hearing, please leave a review or a five-star

 

32:21.639 --> 32:25.610

rating. Fidelity Mutual Funds and ETFs are available by working with

 

32:25.610 --> 32:28.980

a financial advisor or through an online brokerage account.

 

32:28.980 --> 32:32.684

Visit fidelity.ca/howtobuy for more information.

 

32:32.684 --> 32:36.521

While on Fidelity.ca, you can also find more information on future live

 

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32:40.658 --> 32:41.960

and Instagram.

 

32:41.960 --> 32:44.829

We'll end today's show with a short disclaimer.

 

32:44.829 --> 32:48.666

The views and opinions expressed on this podcast are those of the participants,

 

32:48.666 --> 32:52.603

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

32:52.603 --> 32:56.607

its affiliates. This podcast is for informational purposes only, and should not

 

32:56.607 --> 32:59.143

be construed as investment, tax, or legal advice.

 

32:59.143 --> 33:01.446

It is not an offer to sell or buy.

 

33:01.446 --> 33:05.783

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

33:05.783 --> 33:10.588

cited. Read a fund's prospectus before investing, funds are not guaranteed.

 

33:10.588 --> 33:14.158

Their values change frequently, and past performance may not be repeated.

 

33:14.158 --> 33:16.494

Fees, expenses, and commissions are all associated

 

33:16.494 --> 33:18.296

with fund investments.

 

33:18.296 --> 33:20.898

Thanks again. We'll see you next time.